The COVID-19 pandemic revealed problems with the resilience of the supply chains that provide critical inputs into the provision of goods and services in Australia. The extent of the vulnerability laid bare by a health emergency also raised the prospect that Australia’s critical national systems as a whole – the key assets and industries that underpin our national sovereignty – could be exposed to risk in other types of emergencies, such as a threat to national security. This reality has shown the need for a methodology to assess risk more broadly and identify where vulnerability exists. This chapter discusses the need for a national sovereign resilience analytical framework to provide a basis on which to make decisions about areas of vulnerability in critical national systems as a whole.
The chapter discusses:
the need for analysis of vulnerability in Australia’s critical national systems;
existing analysis on vulnerability and critical needs; and
the need for an expanded whole-of-government analytical framework for future crises that:
defines categories of risk in the economy;
identifies areas needing sovereign capability; and
identifies areas needing trusted supply chains.
Need for analysis of vulnerability in Australia’s critical national systems
The Committee received broad-ranging evidence attesting to the fact that there is limited knowledge about where Australia’s critical national systems are exposed to the risk of supply chain disruption.
Not only did the COVID-19 pandemic reveal vulnerability, but problems in the supply of goods and services were often unanticipated. Many witnesses argued that COVID-19 had exposed a need for both public and private sector organisations to develop a better understanding of their supply chains in order to make the economy more resilient in the event of disruptions to supply.
The Institute for Integrated Economic Research (IIER) put the view that ‘resilience needs to be addressed by individuals, communities, businesses and at all levels of Government’.
In relation to small and medium enterprises (SMEs), the Export Council of Australia submitted that ‘there is limited understanding of the participation of Australian SMEs in global supply chains and their involvement in international linkages’.
The Commission for the Human Future submitted that ‘the sudden onset of the pandemic crisis demonstrated that for critically needed supplies, reliance cannot be placed upon international ‘just-in-time’ delivery systems’ and that Australia’s trading partners would be examining ways to modify their supplies. The submission proposed that ‘we would urge that such an examination take place from the viewpoint of Australia’s future resilience…’
DMTC, a not-for-profit company operating in the defence field, drew the following conclusion:
…one lesson from the COVID-19 experience is the need for more comprehensive understanding and mapping of supply chains, with a focus on lower tiers of supply chains and even the supply of raw materials - in order to achieve the dual aims of supply chain assurance and resilience.
Similarly, the Defence Teaming Centre (DTC) argued:
COVID-19 has highlighted Australia’s dependency and exposure to overseas markets and events. The collated risk of this dependency has never been contemplated by industry or governments, prompting significant reactions and fast-thinking during the COVID-19 isolation period. Supply chain analysis, management and interrogation will need to become critical activities for Australian industry, changing the way industry have traditionally approached and managed supply chains to date.
Existing analysis on vulnerability and critical needs
Evidence to the Committee showed that some analytical work has been undertaken to give rigour to basic concepts–such as criticality–and how to apply them to supply chains within Australia’s domestic economic structure and as part of international relationships.
Work to date has focused on particular sectors of the economy and in relation to specific vulnerabilities, including critical minerals, critical infrastructure, disaster management and defence industries. These are discussed further below.
The Critical Minerals Consortium told the Committee a critical mineral is ‘one for which the supply risk and the impact of a supply disruption are both high’. The Consortium reported that a ‘critical minerals assessment (CMA) is concerned with the mineral inputs to a system, the risks of a disruption of supply occurring, and the impacts that such a disruption would have’.
The Consortium’s submission noted that CMAs had been conducted by the governments of ‘U.S. Japan, U.K. and other countries’, and recommended the Australian Government ‘conduct a scoping study to determine the need for CMA from an Australian economic (import) perspective’.
In 2013 Geoscience Australia produced a report on critical minerals in Australia. The objective of the report was not to survey the risks to the supply chains for critical minerals for the Australian economy, but to present an ‘appraisal of the resource potential for critical commodities in Australia’. The report was designed to attract investment by detailing critical mineral resources in Australia and their potential to supply global demand. It did not aim to provide an assessment of how those resources related to the sovereign resilience of the economy as a whole.
The report noted that ‘the terminology and use of 'critical' in the context of raw materials, chemical elements, and minerals is problematic’, but referred to two broadly accepted definitions. Firstly, the US National Academy of Sciences:
…proposed that ‘a mineral can be regarded as critical only if it performs an essential function for which few or no satisfactory substitutes exist’, and ‘in addition, a mineral can be regarded as critical only if an assessment also indicates a high probability that its supply may become restricted, leading either to physical unavailability or to significantly higher prices for that mineral in key applications.’
Secondly, the EU Commission put forward the definition that ‘a raw material is labelled critical when the risks of supply shortage and their impacts on the economy are higher than for most of the other raw materials’.
The submission from Dr Andrew Dowse from Edith Cowan University and Dr Sascha Dov Bachmann from the University of Canberra recommended that the Committee:
…examine our supply chains in more detail, to identify those supplies that are associated with critical capabilities, both economically and societally. The concept of critical infrastructure should be expanded to encompass such supply chains, and the dependencies on foreign supplies should be analysed to determine the level of risk...
The IIER drew the Committee’s attention to the report by the Henry Jackson Society into the dependency of ‘Five-Eyes’ nations on China. The report begins with a definition of strategic industries:
…‘strategic industries’ are those that support critical infrastructure including communications, energy, healthcare / public health, transportation systems and water. The report also identifies areas that should be afforded protection; these include artificial intelligence, autonomous robotics, computing hardware, cryptographic technology, materials and manufacturing science, nanotechnologies, networking and data communication, quantum technology and synthetic biology.
The Australian Government is currently introducing a range of activities with the objective of protecting Australia’s critical infrastructure from threats from foreign sources, to be achieved by obliging:
…an uplift in security and resilience in all critical infrastructure sectors, combined with better identification of threats in order to make Australia’s critical infrastructure – whether industry or government owned and operated – more resilient and secure.
In 2015, the Critical Infrastructure Resilience Strategy was published, consisting of a Policy Statement and Plan. The Policy Statement defined the aim of the Strategy as the:
…continued operation of critical infrastructure in the face of all hazards. More resilient critical infrastructure will also help to support the continued provision of essential services (provided by critical infrastructure) to businesses, governments and the community, as well as to other critical infrastructure sectors.
The Plan ‘outlined the core activities that will [be] undertaken at a national level in pursuit of these objectives’.
To this end, the Critical Infrastructure Centre (CIC) was established in January 2017 to ‘safeguard Australia’s critical infrastructure from the increasingly complex national security risks of sabotage, espionage and coercion’.
The Centre is designed to enhance cooperation and information-sharing on risk assessment and risk management between all levels of government and the owners and operators of critical infrastructure. The Centre’s key functions include:
identifying Australia’s most critical infrastructure;
conducting national security risk assessments;
developing risk management strategies; and
One of the functions of the CIC is to administer the Security of Critical Infrastructure Act 2018 whose role is ‘to provide a risk-based regulatory framework to manage national security risks from foreign involvement in Australia’s critical infrastructure’. The Act requires owners and operators of critical infrastructure ‘to ensure they have a more detailed understanding of the national security risks posed by foreign involvement in critical infrastructure.’ This includes reporting information about their relevant assets to the Register of Critical Infrastructure Assets ‘to build a clearer picture of critical infrastructure ownership and control in high-risk sectors, and support more proactive management of the risks these assets face’.
The Centre describes its focus as:
…helping owners and operators better understand and manage risk, and build resilience. The Centre does this by conducting risk assessments and providing advice to reduce the potential for malicious actors to gain access to, and control of, Australia’s critical infrastructure through ownership, offshoring, outsourcing and supply chain arrangements.
The risk assessments conducted by CIC ‘identify and outline ways to manage national security risks from foreign involvement in Australia’s critical infrastructure, to ensure its security and continuity’.
The Centre’s definition of critical infrastructure is:
Those physical facilities, supply chains, information technologies and communication networks which, if destroyed, degraded or rendered unavailable for an extended period, would significantly impact the social or economic wellbeing of the nation or affect Australia’s ability to conduct national defence and ensure national security.
Beyond the above general definition, the Centre does not elaborate a methodology for determining which infrastructure assets fit the criteria of criticality. To establish what a critical asset is for the purposes of reporting to the Register of Critical Infrastructure Assets, the Act describes the physical specifications of certain assets in the electricity, gas, ports and water sectors. For example, in the electricity sector, generations stations of particular megawatt thresholds (one separate threshold for each of the six states and the Northern Territory) are named as critical assets.
Modern manufacturing strategy
On 6 October 2020, the Australian Government announced the Modern Manufacturing Strategy, designed to ‘help Australian manufacturers to scale up, improve competitiveness and build more resilient supply chains’.
One element of the strategy is the Supply Chain Resilience Initiative, with the objective of enhancing ‘understanding supply chains’. The Department of Industry, Science, Energy and Resources (DISER) announced that:
To build a comprehensive understanding of critical supply chains, the government will work with industry to:
identify the essential goods and services critical to Australians at times of crisis
map industry supply chains and Australia’s manufacturing capabilities
evaluate supply chain resilience under normal circumstances and in possible crisis situations
We will work with industry to identify supply options to address vulnerabilities in domestic and international supply chains for identified critical products. The outcomes of this work will be published in Sovereign Manufacturing Capability Plans.
Having identified domestic and international supply vulnerabilities, the Government ‘will work with industry to identify supply options for critical products to address vulnerabilities’.
At the time of writing, the Government has not provided a definition of critical supply chains or a methodology to determine which supply chains would be classified as critical.
Disaster risk management
The National Resilience Taskforce, part of the Home Affairs portfolio, has conducted analytical work on Australia’s vulnerability to disaster. The 2018 Taskforce report Profiling Australia’s Vulnerability, assesses the ‘interconnected causes and cascading effects of systemic disaster risk’. The report notes:
Disruption to one part of a system can trigger cascading effects across society, testing the limits of highly integrated supply chains and exposing vulnerabilities and inequities throughout society.
The Report points out that:
…if we stop to consider the consequences for society if we were to lose access to any one or more of these critical services (like the ability to use electricity, buy food or fuel, flush the toilet or communicate with family members), we immediately become aware of our vulnerability… Critical to making progress on this is building understanding of these complex systems so that we are able to identify points of leverage that can be targeted to increase resilience. … To understand these complex systems requires us to distil complexity into something which people are able to engage with. Mapping the elements of a system (i.e. the people and organisations and how they are connected), and the flow between these elements, provides a way to critically diagnose the causes and effects of vulnerability and identify key points of intervention.
The report’s emphasis on the connections between different parts of society was commended to the Committee by Mr John Blackburn from the IIER, who commented that the report:
…talks about the biggest vulnerabilities in our society, the intersections and interdependencies between systems that support us. So it goes beyond the stovepipe and looks at the connections. It actually says that unfortunately a series of decisions we’ve made over years have actually made us more vulnerable.
In 2018–19, the National Resilience Taskforce led national reforms to reduce the impact of natural hazards on Australian communities and the economy. The Taskforce engaged with stakeholders to develop national disaster risk information capability, progress guidance on disaster risk assessment and management, and explore options for targeted investment in reducing disaster risk and vulnerabilities. As a result, the Taskforce released the National Disaster Risk Reduction Framework on 5 April 2019.
The work of the Taskforce has been focused on surveying disaster vulnerability and responses to risk. Its assessments have not extended to developing methodologies to apply definitions of criticality or to consider the implications for other sectors.
Defence industry sovereign capability
The most extensive investigation into defining sovereign capability has been conducted under the Defence portfolio in relation to defence industries.
In 2016, the Defence Industry Policy Statement (DIPS) was published, drawing on the 2015 report of this committee Principles and Practice - Australian Defence Industry and Exports, in parallel with the production of the Defence White Paper of the same year. The objective of the policy is to:
…deliver the Defence capability necessary to achieve the strategy set out in the Defence White Paper, supported by an internationally competitive and innovative Australian defence industrial base.
Having observed that some capabilities are so essential that they should be supported ‘as sovereign industrial capabilities’ , the Statement announced that a Sovereign Industrial Capability Framework has been developed to provide:
…a repeatable methodology to identify and manage the industrial capabilities that are critical to Australian Defence missions. These industrial capabilities have been identified as those that must be developed and supported by Australian industry because overseas sources do not provide the required security or assurances.
The Framework will ‘improve the identification and management of the sovereign industrial capabilities that develop and support our ADF [Australian Defence Force] capabilities’.
The Framework identifies six assessment criteria as a starting point to identify sovereign industrial capabilities:
Protection of intent: in employing military capability without divulging military intent;
Independence of action: in unimpeded use of military capability for the purpose of achieving a strategic objective;
Interoperability limits and benefits: in the conduct of missions with and alongside allies and coalition forces;
Assurance of supply: in access to industrial capability without unacceptable risks to security or guarantees of supply;
Essential skills retention: in terms of skills that are core to delivering industrial capability and that must be resident in-country for reasons of security and supply assurance;
Leveraging competitive advantage: acknowledging that while Defence is the priority customer, a company with a competitive advantage offers scales in production that can be leveraged locally and globally, and potentially for both defence and civil application.
The Framework has been taken forward and applied in the 2018 Defence Industrial Capability Plan. The Plan focuses on ten Sovereign Industrial Capability Priorities:
Collins Class submarine maintenance and technology.
Land combat vehicle and technology upgrade.
Enhanced active and passive phased array radar capability.
Combat clothing survivability and signature reduction technologies.
Advanced signal processing capability in electronic warfare, cyber and information security, and signature management technologies and operations.
Surveillance and intelligence data collection, analysis, dissemination and complex systems integration.
Test, evaluation, certification and systems assurance.
Munitions and small arms research, design, development and manufacture.
Aerospace platform deep maintenance.
Northrup Grumman expressed the view that the ‘Australian government’s identification of 10 sovereign industrial capability priorities within the defence sector is an important first step in building local industry capacity’.
A whole of government framework for future crises
The analytical work cited above on supply chain vulnerability and critical inputs in critical minerals, disaster management, critical infrastructure, manufacturing and defence industries has focused on a range of individual sectors. But there has yet to be a comprehensive identification of the areas of risk and resilience across the Australian economy as a whole and how to asses them.
Dr Jeffrey Wilson of the Perth USAsia Centre proposed that the Australian Government should undertake research to survey future risks to the full range of critical inputs to which the country is exposed:
…interruptions to global value chains can expose Australia to shortages of critical inputs. Given the complexity of these value chains, there is very little data on where such risks could originate in future. The Australian Government should undertake or commission research to better understand the geography of value chains for critical inputs, identify potential risks, and develop policy to build resilience in areas where identified risks are found to be significant.
Dr Wilson highlighted the fact that any research into supply chain risks and resilience must first identify the critical areas where resilient sovereign Australia capability is most important. He told the Committee:
…the careful consideration will be to focus on that which is critical. …a way to functionally operationalise that concept of ‘critical’ … is the piece of work that we really need to focus on much more. Indeed, the COVID crisis has drawn all our attention to this quite clearly.
There is a need for an analytical framework that can go beyond sectoral analysis and be applied to all sectors of the economy in anticipation of future risk.
The analytical thinking conducted by Defence on defence industries was designed to be ‘repeatable’ in the sense that it could be carried out on multiple occasions in the future and could be applied to all aspects of defence industrial capability. This approach can be expanded beyond defence industries and applied to the various sectors of the Australian economy in its entirety.
The Department of Foreign Affairs and Trade (DFAT) emphasised the need for a cross-sectoral and whole-of-government approach:
The crisis has underscored the nexus between foreign, security, development and trade policy-related activities and the importance of a cohesive whole-of-government approach in managing a crisis of this magnitude.
In relation to the report on natural disasters prepared by the National Resilience Taskforce and discussed above, Mr Blackburn proposed that the methodology used in that report should be replicated in other areas:
…the terms of reference of that particular study were limited to natural disasters. So what we’re saying is: let’s add on this idea of unnatural disasters, whether it’s a pandemic or a cyberattack, something intentional happening to us or a mere accident. If that framework were applied, it is our view that that model—which is in existence but needs to be adapted—would have helped us to identify where these interdependencies and risks were and may have left us in a position to be better prepared.
The Institute informed the Committee it is working on a:
National Resilience Project … to offer constructive suggestions on where we, as a nation, need to head when we emerge from the pandemic crisis and face the challenge of building the next generation economy, more resilient societal systems and thus improved sovereignty and security.
Key themes emerging from the project include the need to:
Conduct a comprehensive risk and vulnerabilities analysis using an expanded version of the framework produced by the Home Affairs report, Profiling Australia’s Vulnerability. This should include:
The sovereign capabilities, knowledge and skills on which we must be self-reliant in times of crisis and where it is prudent to guarantee domestic supply.
The critical supply chains which must be trusted, i.e. transparent and verifiable.
Those capabilities, services and goods for which open, global supply chains should be maintained and encouraged.
Develop an integrated national sovereignty / resilience framework, strategy and action plan, based on the risk and vulnerabilities analysis, that address what is critical to the Australian way of life and the functioning of our society, and then determines how to build such a sovereign capability.
Implement the plan utilising an integrated team model; i.e. collaboration across all levels of government, industry, public and private sector enterprises and community organisations.
Key elements of a national resilience framework
The purpose of a national resilience framework is twofold:
To establish a mechanism to identify and map national level systems that are essential to Australia’s ability to function as a secure, prosperous, first-world nation; and
To categorise how parts of each mapped critical national system (CNS) should be classified according to its degree of vulnerability to, and consequence of, supply chain disruption.
The key elements of a framework should:
Define critical national systems (CNS);
Assess levels of risk to Australian CNS;
Identify CNS enablers requiring sovereign capability; and
Identify CNS enablers that can be sourced from trusted supply chains.
The following sections discuss each of these elements in turn.
Define critical national systems
Submissions to the Committee made the case that there needs to be a methodology to determine what systems of services, infrastructure and supply Australia needs to function as an independent first-world nation, and which inputs to those systems are critical.
Dr Wilson described a line of reasoning to define whether or not a particular element of supply is critical:
In general, criticality means measuring two different aspects. One is the economic importance of a particular product and the other is the supply risk of that product. So there are things that would be economically important that are not under particular supply risk and things that might be under a lot of supply risk but not particularly economically important.
Dr Wilson elaborated on this point in a supplementary submission:
Conceptually speaking, ‘critical’ has a specific definition when it comes to economic sectors. It refers to a product, service or asset that has two features:
It is of significant if not essential economic importance; and
It is subject to some form of ‘supply’ or ‘accessibility’ risk.
Importantly, for something to be critical it has to satisfy both conditions. Providing an illustration:
Medical supplies are critical for Australia. They are essential for society, and recent months have revealed them to be subject to supply risk.
Food supplies are not critical for Australia. They are economically essential, but not subject to supply risk in aggregate (as we are a net food exporter).
Jewellery diamonds are not critical for Australia. They are arguably subject to supply risk, but are not economically essential.
In a study focusing on critical minerals, but which has general applicability, Dr Wilson added:
Many factors affect whether a particular material should be classified as ‘critical’ or not. In terms of economic importance, this includes whether a material is essential for the industries that use it, the existence of substitutes with similar or near-similar properties, and the extent to which resulting products are used across the industrial ecosystem. For supply risk, factors include whether a material is locally-produced or imported from abroad, the extent to which it is subject to monopoly or oligopoly by a small number of producers, and the prospect of political conflicts leading to an interruption of supply.
For products, services or assets which are not economically essential, where there is no consequence of national significance to supply chain disruption, market-based solutions are fully adequate. The supply chain might be entirely domestic or there might be a mixture of domestic and international suppliers – the mix can largely be determined by market conditions.
In the case of products, services or assets which are both economically essential and subject to supply risks, and thus classified as critical, there is an argument for at least some degree of sovereign domestic capability. In most circumstances this would require government involvement, whether in the form of direct or indirect support to sovereign capability, or some form of government oversight or regulatory control.
The main material for the analysis of vulnerability and resilience by a national resilience framework would therefore be products, services or assets that combine the features of being economically essential and subject to supply risk.
Defining risk in Australian critical national systems
Dr Dowse put the view that the areas of criticality facing Australia can be classified into three types. Dr Dowse argued:
I think we should have a framework in which we understand the level of risks and consequences and are able to classify that in terms of things that absolutely need to be sovereign for whatever reason—which I think would be a small list—and, secondly, those things that are really not that critical and can remain part of a global supply chain, through which we seek efficiencies. The third area, which is the critical one, is where we make certain elements either trusted or sovereign. In some cases, there may be just small elements that need to be sovereign or some sort of oversight that needs to be sovereign. I think that that’s the area that we need to focus on.
The IIER told the Committee that the National Resilience Project being led by his Institute saw a need to ‘conduct a comprehensive risk and vulnerabilities analysis’, focusing on a distinction between:
The sovereign capabilities, knowledge and skills on which we must be self-reliant in times of crisis and where it is prudent to guarantee domestic supply.
The critical supply chains which must be trusted, i.e. transparent and verifiable.
Those capabilities, services and goods for which open, global supply chains should be maintained and encouraged.
Using this three-category approach, an economy-wide, whole-of-government national resilience framework would, first of all, explain the rationale for categorising the supply chains for products, services and assets into the three types.
This would then provide a logical foundation for arguing that the framework would probably not concern itself with those areas where ‘open global supply chains should be maintained and encouraged’. It would concentrate instead on the two other categories:
the small number of areas that ‘absolutely need to be sovereign’, and
the larger category of things where supply chains, or key elements of them, need to be ‘either trusted or sovereign’.
The key concept for the final category mentioned above is that of trusted supply chains and trusted sources. It may be safe to have a critical element of a market supplied by a non-sovereign source, but only if the source can be trusted to maintain supply. The supplier should not be subject to major commercial or financial risk or the risk of supply interruptions due to factors such as political insecurity, armed conflict, corruption, administrative malpractice, government intervention, arbitrary policy or regulatory enforcement or vulnerability to natural and environmental disasters.
The next step would be to establish a range of criteria and features of supply chains to determine whether a particular product, service or asset should be classified as requiring sovereign capability or needing trusted suppliers.
Identify areas needing sovereign capability
The framework would identify which areas are sufficiently critical to require the creation and maintenance of sovereign capability. To borrow from DIPS:
The industrial capabilities have been identified as those that must be developed and supported by Australian industry because overseas sources do not provide the required security or assurances.
Defence industry is the place where the strongest case can be made for such capability. Not all aspects of defence supply need sovereign capability, but resilient capacity to respond to threats to national security is essential in certain areas such as engineering, advanced manufacturing, cybersecurity and information technology.
Quickstep Holdings, an aerospace-grade advanced composite manufacturer, submitted that:
The pandemic has also seen a push to develop national security and resilience frameworks that support critical infrastructure and sectors to ensure these can continue to operate amid a global crisis. As these frameworks are developed, Australia’s defence industry should be considered a strategic national asset and central pillar to any resilience strategy, allowing it to continue to function smoothly and contribute to national resilience during a time of crisis.
The South Australian Government argued:
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. Defining what activities constitute sovereign industry capability is both a complicated and complex issue.
A similar case was put to the Committee by NIOA, a defence equipment manufacturer:
Sovereignty will become critical as Australia’s defence interests are shaped by COVID-19. Australia’s national interests are always best served when such important projects for our national security are done in a way in which the programs are controlled within this country. The ownership, the intellectual property, the company’s headquarters, the jobs, the investments, the taxes, the profits and the control remain within Australia.
Identify areas needing trusted supply chains
The Committee heard evidence about other inputs to critical national systems where the required security or assurances can be provided and where supply chains are vulnerable to interruptions by the actions of foreign suppliers and state actors.
The focus for this analysis of resilience would be on:
the characteristics of the global market for a particular product and its potential for supply disruption; and
Australia’s exposure to such disruption, including the exposure of the proposed supplier to extrajudicial or coercive measures by a foreign government.
Global markets with disruption potential
One the greatest drivers of supply disruption is dominance of global markets by a small number of suppliers. Dr Wilson told the Committee:
As a general rule, the areas where you would have the greatest degree of risk would be industries where there is a dominant supply globally. One I would certainly look at would be electronics and advanced manufacturing equipment, particularly around telecommunication sectors. … Another issue that has been prominent given its significance in the Australian economy is the infrastructure and construction sector, where a number of critical inputs typically come from China. In the early days of the pandemic as a natural disaster, we saw a number of Australian projects having trouble sourcing construction materials. …in a construction build, if you require windows or a certain component, the rest of the build can’t go on until they turn up. We’ve also had some issues in the agriculture sector, where our ability to grow products, separate from the climatic conditions that we face, also depends on imports, particularly fertiliser and agricultural chemical products. There is a pressing need to study these kinds of things further.
A prominent instance of a market with potential for disruption is critical minerals, which constitute a very small, but essential, part of an increasingly large number of advanced production processes. There are certain countries which have a monopoly or a dominant position in the market for particular minerals. In addition, some minerals are sourced from countries where political instability and poor local governance put supplies at risk. This was highlighted by the Perth USAsia Centre publication on the subject:
Critical materials are already an essential component of contemporary economies, and will continue to grow in importance as new digital and clean energy technologies diffuse around the world. Yet existing value chains are not up to the task. Political risks mean they do not provide the supply security needed by consumers in the technology sector; while social and environmental challenges mean they are failing to deliver developmental benefits for governments and communities in producing countries.
The global trade in defence equipment and materiel is highly politicised, where governments closely guard their own sources of supply and where subsidies and other special assistance to local production and exports are powerful shapers of the global market.
The South Australian Government considered that ‘because of the COVID-19 pandemic, there will be increased pressure on international primes from their own foreign governments to preference their sovereign industry in the supply chain’.
In its submission, Quickstep Holdings illustrated this situation to the Committee:
US President Donald Trump’s comments about making all F-35 JSF components in the US exemplify this protectionist approach. While impractical, the remarks revealed the internal contradiction at the heart of calls to mitigate supply chain vulnerabilities by bringing production back onshore. Other examples include moves by US defence primes to keep manufacturing work in-house, instead of distributing to Australian suppliers like Quickstep, in order to maintain higher levels of production in the US.
The pandemic also revealed the extent to which the global market for PPE, pharmaceuticals and other medical supplies were exposed to disruptions. This was partly due to decisions by government to restrict exports and partly caused by other problems such as interruptions to movement of air cargo.
The nationalistic measures by governments across many parts of the world to protect local supplies of PPE during the pandemic were discussed in detail in Chapter Two of this report.
The Royal Australasian College of Surgeons expressed its concerns about the surety of the international supply of medical equipment:
Problems associated with international PPE and ventilator supply chains have shown high producing countries like China cannot be relied upon due to the pandemic, the consequences of social isolation, and the shutdown of medical specific manufacturing industries overseas. Contingency plans in Australia need to be realised.
Evidence to the Committee from the IIER told of the state of the global medicines market and its implications for Australia:
Australia imports over 90% of medicines and is at the end of a very long global supply chain making the nation vulnerable to supply chain disruptions. The Therapeutic Goods Administration (TGA), in 2019 discussion paper, noted that Australia is particularly vulnerable to medicine shortages arising from factors outside our control. They stated that these factors could include manufacturing problems, difficulties in procurement, political instability, pandemics, another global economic crisis and a range of natural disasters.
Oil for transport, industrial production and defence are highly sensitive because of their critical role in the global economy. Attempts to obtain, protect and dominate sources of fuel have been a constant of global politics since the beginning of the 20th century and have been a root cause of successive wars and overthrow of governments. The efforts by of the Organization of Petroleum Exporting Countries (OPEC), the oil-producers cartel, to control international supplies and to use them for diplomatic purposes during the 1970s and onwards is a well-known story.
The volatility of the international oil market was explored in a report for the NRMA by John Blackburn, which explained:
…there is a clear relationship between major global events and pump prices. … The history of petrol price movements in Australia since the 1970s shows that crude oil price spikes are translated into higher prices at the pump within 7 to 10 working days. The price rises are passed on through the entire transport logistics chain, resulting in higher prices for all goods and services. … Fuel vulnerability in the current global environment could be easily heightened by a similar chain of events.
Australia’s exposure to risk
Australia has varying degrees of exposure to supply risk from global markets. A production process in Australia can be located in a variety of places along long and complex domestic and global value chains in ways that are not always obvious to producers, consumers and governments. All of these elements should be part of the methodology for analysis employed by a national resilience framework.
Dependence on single supply sources
The pandemic has thrown a spotlight on the fact that many Australian industries have developed a growing dependence on a single source of supply. Mr David Williamson, Deputy Secretary of DISER, told the Committee of concerns expressed by businesses:
I think the pandemic has highlighted areas where our supply chains can be subject to some strain and need careful and deliberate attention. I think in particular it’s shown the importance of looking at vulnerabilities flowing from systems that focus on single sources and highlighted the opportunity, or the need indeed, for governments, businesses and communities to work together on those sorts of issues. Many businesses have told us that this has all forced them to look more closely at their full supply chain related to the supply risk.
The submission from the Perth USAsia Centre provided the Committee with rich detail about Australia’s exposure to trade risks, noting:
Many of Australia’s current economic relationships are ‘deep but narrow’ – large in gross size, but narrowly concentrated on a small range of countries and/or industrial sectors. When an external shock hits a trade or investment relationship that lacks diversity, the effects of that shock on Australia’s economy are magnified.
In a similar vein, the Griffith Asia Institute submission used the example of medical supplies to emphasise the weaknesses in Australia’s supply chains stemming from over-reliance on a single supplier:
For Australia and the rest of the world, the pandemic has highlighted the need to diversify its supply chain of personal protective equipment (PPE) and basic medical supplies from major suppliers, particularly China.
In the case of agriculture, the Institute for International Trade cited what it called a ‘lack of robustness’ in supply chains for farming inputs. The Institute told the Committee:
This example highlights a classic case of a single supply chain point of failure in an otherwise secure production network. … Concentration of agrochemical suppliers in China is a significant risk to Australian food supply robustness.
Single components in a supply chain
Global supply chain vulnerabilities can relate to just one or two key components of a production process in Australia. The Maritime Union of Australia (MUA) cited the example of off-shoring of specialised functions and the associated supply problems revealed during the pandemic:
The Darwin port leased to the Chinese company is in the news, but we’re also seeing discussion of offshoring of port access control and some port functions because it’s cheaper to put the remote control functions in the Philippines. So we’re seeing economic decisions without understanding the security and resilience areas. We've seen during the pandemic Telstra call centres impacted when the Indian and Philippines governments closed businesses overnight. We know of banks whose call centres have been impacted.
Export industries dependent on imports
Supply chains for Australia’s import and exports are not distinct from each other but are intertwined. The Export Council of Australia, a peak body for small and medium exporters (SMEs), informed the Committee that ‘a core number of SME exporters also import a key number of components from overseas, hence supply chain issues impacted both their exports and imports’. The Council mentioned that, during the pandemic, its members have been affected by ‘problems with sourcing, challenges managing the just-in-time system, cancellation of contracts, constant delays, blank sailings to name some of the issues that SME exporters faced’.
Like all trading countries, Australia can be exposed to potential supply disruption where it produces one early input into a process but imports the finished product. The Australian Manufacturing Workers’ Union (AMWU) noted that ‘many of the complex goods that we do produce here are heavily reliant on imported components’. One example is in the production of medical supplies, as Mr Blackburn mentioned to the Committee:
In the work we’ve been doing, we came across something fairly astounding: we produce a third of the world’s supply of four opiates. These are pretty important. What happens is that we produce the active pharmaceutical ingredient and ship it overseas for final formulation and packaging, and it is sent back to us in, for example, morphine ampoules that are used for critical medical needs. However, if those ampoules are in short supply, or the supply chain to get it back is not there, we’ve got something we produce that we can't use.
The similar example of lithium was cited by the Critical Minerals Consortium:
In the case of lithium, Australia is a significant global supplier, and it imports batteries containing lithium. In this case, batteries (containing lithium) may be critical raw materials to Australia, but not lithium.
Dependence on long opaque supply chains
A national resilience framework also needs to consider complex supply chains where suppliers to Australia obtain inputs from third or fourth country sources. In this regard, the pharmaceuticals company IDT Australia made the point that Australia ‘sits at the end of a very long and often opaque supply chain’ and that the company’s sources of supply had moved over time and involved extended chains:
Over the course of IDT’s history, the Company has witnessed firsthand the movement of the manufacture of active pharmaceutical ingredients, closely followed by finished drug products, from countries such as Australia and the United States of America (U.S.), to India and China. In the U.S. over 90% of its medicines are generic products which are now imported from India and China, with India importing in excess of 80% of its APIs (to be manufactured into those generic drug products) from China.
Medicines Australia, the peak body for medicine researchers and manufacturers, made a similar point:
…while China might make the majority of the world’s active pharmaceutical ingredients (APIs) that go into making many medicines, it is still heavily reliant on other countries for the importation of the finished products.
Markets subject to protectionism
Australia’s openness to world trade and integration into global supply chains has underscored associated risks to our industries when foreign governments resort to protectionist measures. Dr Peter McCawley from the Australian National University contended that:
A mood of protectionism stalks the world. The current environment for working with our Asian neighbours is suddenly more difficult than at any other time since World War Two.
The Cognoscenti Group noted in its submission:
The American political class is becoming increasingly disillusioned with the World Trade Organization. Many believe that it has been a disaster for US interests. COVID-19’s exposure of the vulnerability of global supply chains has fed into American frustration with hyperglobalisation, China’s perceived ‘economic imperialism’ and a broken world trading system fuelling demands for a withdrawal from the WTO. … If this were to occur, trade dependent countries like Australia would be exposed.
The Committee considers that Australia currently lacks a clear definition of the critical national systems that underpin the capacity to protect the country’s security and prosperity.
Analytical work has been undertaken to give rigour to basic concepts such as criticality and how to apply them to the analysis of domestic supply chains and international relationships. Analysis has focused on critical minerals, critical infrastructure, manufacturing strategy, disaster risk management and defence sovereign capability.
The Committee has observed, however, that this analytical work has the important limitation of being confined to specific sectors. There is a need to broaden the focus of analysis to the economy as a whole and on a whole-of-government basis to develop a national resilience framework.
A national resilience framework would provide a repeatable methodology which could be applied to any element of Australia’s critical national systems to assess which areas are exposed to risks of supply chain disruption and where the potential damage from such risks is high.
The Committee recommends that within 12 months the Australian Government define which critical national systems are essential to Australia’s ability to function as a secure, prosperous, first world nation.
The Committee recommends that the Australian Government develop a national resilience framework to assess which elements of Australia’s critical national systems are vulnerable to high-consequence supply chain disruptions.