Chapter 5 - Structure of the Australian Defence Industry
Introduction
5.1
One of the threads than ran through the inquiry
was the future structure of the Australian defence industry, including
rationalisation of prime contractors and the role of government in shaping the
evolving structure. It was a matter that arose out of the inquiry rather than
one that was specifically referred to in the terms of reference[1]. As a result, comments on this
matter were restricted to companies and individuals who had some association
with the sale of ADI and who took part in the inquiry. However, the Defence
Council of the Australian Industry Group, the relevant industry association,
took advantage of the inquiry to speak on this matter for the wider industry.
5.2
The Committee was not in a position to undertake
a detailed inquiry into this area. This would have required specific terms of
reference and an opportunity given to many more players within the Australian
defence industry to participate in the inquiry. Nevertheless, the Committee
believes that it should draw to the attention of the Government comments made
on this matter during the inquiry. It is in the national interest for the
Government to take all appropriate measures to ensure that, through the ongoing
rationalisation of the defence industry, Australia continues to have a defence
industry that meets our national needs.
5.3
The Australian defence industry now comprises a
small number of privately owned prime contractors[2], small to medium-sized
enterprises and small companies providing boutique or specialised services.
Much of their defence work is supplied to the ADF or the Department of
Defence. According to Mr Sharp (GEC-Marconi), not much is exported given the
difficulties of breaking into overseas defence markets in competition with
large foreign prime contractors.[3]
Industry comments
5.4
The Defence Council submitted that:
If the Government and/or the Defence Organisation have a vision
for the future structure of the industry it is not being clearly articulated.
This causes the industry significant uncertainty in positioning itself for the
future. Such a vision could be expected to include:
- An appraisal of the current trends in industry restructuring
around the globe, particularly among major defence powers;
- An assessment on how these trends will affect the Defence
portfolio, including a forecast on how major capability decisions and the
acquisition process will be affected, and the consequent ramifications for the
domestic industry across all major tiers; and
- A broad action plan for detailing the Government’s position on
how the domestic industry can prosper in the new environment.[4]
5.5
In his evidence to the Committee, Defence
Council Policy Adviser, Mr Christopher Rodwell, explained that the Department
of Defence has strong links with the defence industry through the publication
of the Pink Book (Defence New Major Capital Equipment Proposals 1998-2003) and
the Yellow Book (Defence Forward Procurement Plans for Minor Capital Equipment
1999-2004) and ‘through various forums, such as the Capability Development
Advisory Forum’. However, he went on to say that:
I suppose this is a broader issue than any one forum. The 1998
defence industry strategic policy statement was, in a sense, an outlook for the
defence and industry relationship. For the Industry Group Defence Council, the
logical step then is to put together a vision for the future structure of the
industry. We have looked at the defence-industry relationship; now it is time
to move forward and look at what the future industry will look like, because it
does affect Defence. The fact is that, if the industry does not rationalise,
there is little doubt that we will be seeing more defence spending flowing
overseas. Really, it is Defence’s interests – and, more broadly, in the
government’s interests - to see that this vision is put forward to help
industry set itself up for the future.[5]
5.6
In June 1998, the Government released its
Defence and Industry Strategic Policy Statement. The foreword to the Statement
reads:
This strategic defence industry policy will put into place the
appropriate framework, in partnership with industry, to ensure the ADF acquires
the capabilities we identify as vital, in a nationally efficient way.
5.7
As to whether the Department of Defence took
into account the future shape of Australia’s defence industry and national
security when assessing the bids for ADI, the Head of Industry Procurement
Infrastructure, Mr Graham Kearns, told the Committee:
Given that ADI is one of the largest players in the Australian defence
industry, clearly what happens in the sales process is going to have some
effect one way or the other on the shape of that industry and on whether that
shape would better serve our interests or not. That was one issue that we
certainly focused on, and that meant that we looked at the two bids in terms of
what that shape of industry would be and to what extent we would prefer either
bid from that point of view.[6]
5.8
Mr Ian Sharp, Managing
Director of GEC-Marconi Systems Pty Ltd, expressed sentiments similar to those
of Mr Rodwell in his evidence to the Committee:
First, Defence needs to sit down and understand what are its
long-term strategic demands of industry, then within maybe an industry
portfolio understand the benefits that a strong defence industry sector does
bring to the Australian economy. Once those are understood, they should work
with industry to achieve the outcomes they are looking for. Having worked in
the defence industry now for 20 or 25 years, I say that to date such
discussions and such a model have not been developed.[7]
5.9
Asked whether he thought there was not enough
collaboration between the defence industry and the Department of Defence, Mr
Sharp replied:
That is correct. Before you have that collaboration, and maybe
it happens in parallel as well, a government of any persuasion needs to
understand those benefits which we have just been talking about, develop an
industry model and then work with industry for that outcome. Definitely from
both the government and the opposition at the moment I have seen a change
through the privatisation process, where these things have been thought about
maybe for the first time, and I think that needs to continue.[8]
5.10
Mr Bathgate (Tenix) said that the initiatives
being taken as a result of the 1998 policy statement will assist planning
within the defence industry. He went on to say that Defence is talking to
industry about the capabilities they have in mind in the future and seeking
input from industry about achieving those capabilities, rather than about talking
about particular contracts. He added that ‘it is early days as yet; that might
be the best and simplest way of putting it’.[9]
5.11
In his opening statement to the Committee, Mr
Tony Shepherd, Chief Executive Officer, Project Development, Transfield Thomson-CSF
Pacific Holdings, drew attention to the rationalisation already taking place
within the Australian defence industry – the BAe acquisition of Siemens Plessey
and the upcoming merger with GEC-Marconi, and the Lockheed Martin Tenix joint
venture, apart from the Transfield Thomson CSF purchase of ADI. He went on to
say that:
In examining the Australian defence industry, it is important
not to get too carried away by the number of competitors; rather, one should
focus on which companies are capable of being prime contractor on major
procurements and have access to the appropriate technology. An examination of
the industry on this basis shows that we have two, and at best three,
competitors in each of the major defence segments of naval, aerospace, land and
sea for ISR. A reinvigorated and independent ADI is vital to the retention of a
strong local capability and competition, particularly given the small number of
companies that are truly prime contractor capable.[10]
5.12
The rationalisation that is taking place within
the Australian defence industry reflects global rationalisation trends but its
evolving structure also reflects Australian Government acquisition policies and
practices.
5.13
Mr Favaloro told the Committee:
The government is in an extremely powerful position to influence
the shape and the structure of the Australian defence industry by the way that
it implements its purchasing decisions. At the present moment, we find it
difficult to understand how the procurement policy is being applied. It leaves
us with the impression that the policy is being implemented as if there was a
policy of competition at any cost. If that is the case, the Williamstown
dockyard, which we own and control and use to build naval ships, in the
scenario you have described would be ill-placed to cope, because in a $5
billion program you can build another shipyard - perhaps it would cost you $100
million or $150 million - and you would add it to your price. It might not make
a big difference in a $5 billion program.[11]
Having said that, there are ways that have been developed in
other countries of having a defence procurement policy which would enable you
to have a prime contractor with a single facility, such as our yard, contract
that for a specific project in a specific fashion and have the suppliers and
subcontractors and the technical solutions that would be wanted by the
government run on a competitive basis underneath that yard. In other words, the
yard is the prime contractor that is engaged for a specific project on specific
terms, but the sourcing of and access to supplies, be they from the US or
elsewhere, and the implementation and integration of those supplies into
whatever the vessel is can also be done in a competitive spirit, because you
are now running these things in a collaborative sense with your prime
contractor sourcing best of breed from overseas. In addition, you can use the
process to develop a local R&D which may not otherwise be there.[12]
5.14
Mr Sharp also drew attention to Tenix’s dockyard
dilemma and then discussed a similar problem facing his company:
We suffer exactly same problem in electronics systems and
software projects. We run a major project today which is coming to a
conclusion. What do I do with 200 software engineers as I wait for the next
contract to come through? We put a lot of investment into the processes,
training of our people and the like, and, unless I can have a long-term plan,
what do I do? As I go through the cycles of demand in the defence requirement
area, I could possibly open and shut businesses of a totally different nature
every five years to meet that demand to be competitive, but it does not make
sense.[13]
5.15
When taken back to the dockyard example, Mr
Sharp elaborated on the views he was putting to the Committee:
I think that in the planning and the concept of running a
shipbuilding cycle from frigates to landing craft to whatever it happened to be
there is a continuum which can be planned better than it is today. It is
challenging, given different demands on the defence requirement, changes in priorities,
Timor - it is a dynamic world. If it is communicated well with industry then I
think we can live with it. I would suggest that in some areas competition as we
have seen it today could change. You commented that you would not necessarily
give it to that company. I would suggest that there are models which say you
could give it to that company as long as you had an infrastructure in place
that showed you are getting value for money.[14]
5.16
Asked whether the Government would still go out
to tender, Mr Sharp replied:
Not necessarily. If you look at some of the models in the US and
Europe, those governments definitely support certain prime contractors that are
major employers where there is not necessarily the level of competition that we
suffer today at a prime contract level. They have an open book policy where
things are audited and you have got competition at various levels within the
food chain. But I think you will find there are very few companies here today
that have the deep pockets and the resources to prime contract and manage the
risk successfully. That in itself is a challenge.[15]
5.17
Although Mr Favaloro had suggested views similar
to those of Mr Sharp, Tenix had obviously taken note of the winds of change in
relation to future naval ship building in Australia. He told the Committee:
The Williamstown dockyard was established for the purposes of
naval ships. We have been building naval ships there since the middle of the
1980s - well, actually much longer. The Anzac ships were started there in the
late 1980s - 1988 or 1987, I think it was. That program runs out in 2004. Two
years ago we realised that the Department of Defence's requirements were
shifting and they were not going to be looking for more ships. So we have
expanded and changed the shape of our business to be ready to be able to
address the department's requirements when they eventually emerge in the
future.
That is the reason why, for example, we now have a business that
addresses the requirements of army, the land business. We have an aerospace
business that is attempting to address the interests and requirements of the
Air Force. Also, we have created a systems business, because you cannot run a
modern Defence project unless you have the ability to take the various
electronic components supplied from wherever, mostly overseas, and integrate
them into a whole solution here in Australia. So we have created a business
unit that is capable of doing that as well. We recognise that there is a need
for us also to evolve and change to keep up with the government's and the
department's requirements.[16]
5.18
It is evident to the Committee that there is
concern within the Australian defence industry about the extent of consultation
and co-operation between Defence and the industry about acquisition policies
and practices and their effect on the evolving structure of the industry. The
Committee does not wish to be prescriptive on the future of the Australian
defence industry in this report because it would need a broader range of
evidence under more specific terms of reference. Nevertheless, Committee
believes that it is important to flag this concern to ensure that it is placed
on the agenda and is discussed in appropriate consultative fora in the national
interest. The ability of the defence industry to meet Australia’s defence
needs in the future is not something that should be taken for granted.
Senator John
Hogg
Chairman
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