The IP Paradox

By Brent Clark

There has been much recent comment in the press regarding the underwhelming levels of local work resulting from the Government’s generational increase in investment in Defence capability. Discussion has arisen over the merits or otherwise of the AIC programme, and on Defence’s statements to the effect that they have little control over the primes’ subcontracting.

This stands in stark contrast to the experience many Australian companies have had in contracting with Defence.

To-date, CASG’s views on how formal interaction with industry should occur are enshrined in the suite of ASDEFCON contracting templates. In a recent joint Ministerial statement, it appears that the “best endeavours” approach of the existing AIC policy may be replaced by harder contractual commitments to expenditure levels on local Australian industry (ideally Australian-owned). Whether these changes can achieve this outcome, or there remains the ‘but not at additional cost nor impact to schedule’ for the ‘acquisition phase’ escape clause remains to be seen.

It is fair to say that these templates reflect a view that Defence must treat industry with a great degree of caution. Under these templates, Defence retains controls over many steps of the process of the supply (by industry) of defence equipment. Additionally, in the event that Defence wishes to exert authority over its supplier, Defence retains a range of powerful contractual remedies able to be drawn upon at different acquisition or sustainment stages. Defence even retains the power to simply walk away from a contract for no better reason than it be ‘convenient’ to do so.

So local industry is understandably perplexed when Defence representatives claim that they are powerless to enforce prime contractors to abide by the local AIC levels that the Prime’s themselves tendered – and contracted for.

There has to be a Sovereign commitment to AIC. Defence needs to use its wide-ranging powers to support Australian owned SMEs. This includes external auditing to ensure compliance. No longer can Defence allow enforcement of AIC to be put in the ‘too hard basket’. Stove-piped project-by-project acquisition methodologies has allowed this to happen. Consider the paradox of intellectual property (IP).

Among the many measures enshrined within Defence’s ASDEFCON suite is its position on IP.

Defence demands licenses to the IP underlying a supplier’s products. Such licenses are nuanced by the supposed constraint that the supplied products/technologies be used only for “defence purposes” – as compared to “commercial purposes”; but for much of military technology, defence purposes are the only purposes for the goods, so this constraint is immaterial if, for example, Defence subsequently gives away or exchanges this technology with our allies – which often are the only commercial export market for those goods.

For suppliers of high technology items, such licenses demand further access to the technology’s source code and other technical data. Now while this same approach ostensibly also applies to goods that are imported; in practice, Defence contracting personnel appear to implicitly accept that this level of control of IP of systems developed overseas, and often supplied by the local branch of the foreign primes, are beyond their reach.

After all, who would realistically expect to be supplied, for example, the full source code of the US-developed Aegis combat system and the SPY radars that equip the RAN’s Hobart Class DDGs?

But Australian developed technology gets harsher treatment. Local SMEs report cases where they are told by Defence’s contracting personnel that: “you are an Australian company, so we must have paid for the IP on previous contracts, so we should own it”.

Such statements may simply reflect a low-level of-understanding by public servants that have not benefited from Defence private sector experience, of the level of commercial risk borne by SMEs in their continuing investment in the development of Australian technology between often intermittent Defence contracts.

But the consequences are well understood - the ability to supplant the SME from the longer-term support of its own product by handing the SME’s IP necessary to support the product to a larger aggregated services supplier.

If Defence is genuinely concerned about long term access to IP, as distinct from just the perpetual licence that it secures through the contractual Defence Licence, then there are already provisions for placing IP and source code in escrow. Being an Australian SME should not be used as an excuse by Defence procurement to take ‘the easy path’.

It is unfortunate that, faced with the prospect of having the local supplier of technology engaged over the longer term to support its product, Defence’s instinctive response is one of innate discomfort, rather than enthusiasm at an opportunity to partner with its local industry.

AIDN appreciates that Defence has reached these positions following unfortunate prior experience on some large programmes where foreign owned primes have utilised their control over IP to block Defence’s access to sufficient technical information to enable other parties (including SMEs) to interface equipment to the prime’s equipment and /or address obsolescence issues.

Pragmatically there may be some cases where for strategic reasons, a procurement may be undertaken through an FMS procurement – however there is a whole section on AIC for Foreign Military Sales acquisitions that rarely has had more than lip service ever paid to it.

What irony that IP positions developed to protect Defence against the occasional proprietary practices of foreign owned primes are used to stymie the health and growth of local defence industry.

More to the point, is the inconsistency of this contracting approach with the oft-stated desire to develop sovereign industrial capabilities.

How can local industry be expected to develop defence systems if, whenever it makes a sale, it is required to include rights to higher -Tier contractors, that enable them, as potential competitors, to use that technology.

And if due to this risk, there is only a poor business case to develop the desired types of technology locally, how can a sovereign industry capability ever emerge, let alone flourish?

Yet Government has made it crystal clear that it not only wants, but demands, that Defence act in a manner that allows such a sovereign industrial capability to develop.

It is AIDN’s view that, in implementing its announced ‘enhanced AIC’ initiative, the time has come for Defence to reconsider the approach it takes to IP in tendering and contracting local industry.

Instead of continuing with an approach that tilts the field against local industry, it must take a stand that aids local industry. Existing requirements for local industry to provide licenses to its underlying source code and technical data should be revisited to ensure local developers that signal non-compliance with such requirements are not disadvantaged.

Defence’s masters have declared that Defence must act to develop sovereign industry capability and remove the obstacles to the progress of local defence industry.

Whether Defence recalibrates its approach to local industry IP will be a sure indicator of whether its response to the challenge laid down by its masters is substantive - or merely rhetoric.

Published in Defence Connect 8 October 2020

The AIDN National 3rd Quarter 2020 Newsletter is available below.

AIDN National 3rd Quarter Newsletter 2020.pdf

A commitment by the French designer of the navy's new $90 billion fleet of submarines to source at least 60 per cent of components from Australian companies is yet to be locked in, more than six months after it was offered amid complaints local industry is being denied work.

Despite the Defence Department pressing Naval Group to enshrine its promise in a contract, The Australian Financial Review has been told the French company dragged its feet during negotiations with the Commonwealth.

Defence Minister Linda Reynolds wants a promise to have Australian suppliers contribute at least 60 per cent of contract value for the new submarine.

Documents released to Labor under freedom of information show Defence Minister Linda Reynolds told her French counterpart Florence Parly in March she considered it important to "capture the commitment" in the Strategic Partnering Agreement, the head contract that is meant to govern the relationship between Australia and Naval Group for the next 50 years.

"Naval Group was selected on the basis that they were most likely to be able to meet both our exacting capability needs but also our Australian industry and sovereignty requirements," Senator Reynolds wrote on March 30.

Senator Reynolds initiated crisis talks with Ms Parly and extracted Naval Group's public commitment to 60 per cent of the contract value being spent in Australia after its local chief executive, John Davis, gave a disastrously-received interview in February where he said Australian firms may not get 50 per cent of the work and local industry needed help to lift its capability.

A Defence Department spokeswoman said: "The commitment made by Naval Group will be formalised in an update to the SPA, which continues to be drafted".

Naval Group insisted it stood by its promise.

"We have made our strong commitment to Australian industry and jobs absolutely clear and we are working with the Commonwealth and Defence department officials to ensure the SPA reflects this," a company spokesman said.

Opposition defence industry spokesman Matt Keogh said the failure to enshrine the 60 per cent commitment after six months was just the latest example of the government's mismanagement of the project, which was the nation's most expensive defence acquisition.

The French Naval Group is leading Australia's future submarine project.

"How can local defence industry trust government announcements of work for them if they can’t negotiate the right outcomes with the French," Mr Keogh said.

"You can’t trust a word this government has to say about the future submarine program. On all three measures of this program – delivery schedule, cost and Australian content – the numbers are all going the wrong way."

The Australian Industry and Defence Network, which represents homegrown small and medium defence firms, said Naval Group's commitment needed to be made part of the contract.

"AIDN understands the complexity of finalising contract change proposals, it is rather concerning that months after Naval Group's commitment at a Senate hearing to ensure 60 per cent Australian industry content that nothing appears to have happened," said chief executive Brent Clark, a former Naval Group executive.

"AIDN has called for and continues to call for this commitment to be included into the SPA, otherwise this is just an unenforceable public relations statement from the French company."

In 2016, Naval Group's predecessor company DCNS said local content would make up 90 per cent of the submarine.

Andrew Tillett Political correspondent

The (unnecessary) challenges for the Australian high technology SMEs supplying to Defence

Brent Clark | Canberra

A quick look at ADM’s list of the Top 40 Defence contractors reveals that it is dominated by local subsidiaries of foreign owned prime contractors, with only one single Australian supplier of high technology systems on the list (EOS).

One might be forgiven for concluding that Australian owned industry - generally SME's - are just not particularly good at developing high technology Defence systems, and that they are simply not competitive against overseas suppliers.

After all, Defence acquisition, is run according to competitive principles, so the list at face value would indicate that Australian suppliers are not up to the mark.

Is this really the case?

Australian higher education institutions are well regarded in the science and technology areas, and the basic human resources needed for a strong defence high technology sector are readily available. And we are prepared to invest in it and have the capacity to continue to invest.

So why is the acquisition of advanced Defence technology from Australian-owned suppliers not more prevalent?

The start of the problem appears to lie with the Departments interpretation of the Commonwealth Procurement Rules in relation to the consideration of project risk during tender evaluation. Proposals involving technical development appear to be actively marked down. This acts to advantage overseas suppliers (or the local subsidiary of a foreign owned prime) which may have an offering that is already in service with their own defence force, as a result of development contracts funded by that country's defence force. The risk has already been taken by another nation.

This immediately puts the Australian technology supplier behind the eight ball.

Yet the assumption that any need to undertake technical development poses a risk to project delivery is overly simplistic. After all, the technical risk to project delivery is not simply a matter of how much technical development is proposed but is also a question of how good the proposing company is at undertaking the relevant type of development.

For example, a local supplier might have an exemplary track record of delivering development intensive projects; yet even with such a record, a tendered proposal from this Australian company would still be ranked behind a proposal from an overseas supplier requiring a lesser degree of development.

The results of this approach are predictable. Local technology suppliers attain at best an intermittent stream of development projects from Defence in their area of expertise.

Unsurprisingly, this causes the technologies and products from the overseas suppliers, with continuous (rather than intermittent) support from their own defence forces, to further improve their competitive position.

The result is a self-reinforcing system. Australian suppliers are competitively disadvantaged, which reduces their ability to win projects with Defence, which then further reduces their competitive position.

The outcome is bad for all Australians.

The acquisition organisation believes it has eliminated technical risk - but is left with different risks: the impacts of export controls, forex fluctuations, and managing engagements with suppliers for whom Australia is not their most commercially valuable customer.

The Defence end user becomes even further bound to technology supplied from overseas, compounding further the vulnerability of the ADF to disruptions of supply and/or support.

The silver lining of this sorry state of affairs is that the solution becomes obvious.

Rather than having a system that self-reinforces in a negative way, Australia's acquisition system needs to self-reinforce in a positive way.

Where local technology suppliers have a strong record of delivery on projects involving further development, the technical risk of further tenders involving development should be rightly assessed as minimal. This will immediately improve the ability of local suppliers of technology to win further development contracts, which in turn further improves the competitive position of the offerings of those companies.

The ADF benefits through the responsiveness both during the delivery project and subsequent support arrangements that can only be attained with local suppliers; and it reduces its vulnerability to overseas supply disruptions.

Local industry, being placed on a better footing, will become a more attractive proposition for the investment capital accumulating in the nation's superannuation system, enabling further expansion and maturation of sovereign industrial capability.

But the key to inverting what is currently a negatively reinforcing system to become a positive reinforcing system is to address the approach to assessing the technical risk of tendered offers.

The risk associated with the existence of development within a tender can only be evaluated in conjunction with an assessment of the ability of the supplier to undertake development of that nature. Where local suppliers' track records indicate that they consistently succeed at undertaking such development, the technical risk must rightfully be considered to be minimal.

This simple and logical change will unleash material growth in the high technology SME sector of the defence industry and should be immediately implemented.

Australia needs to support a local defence industry. Now more than ever Australia needs to focus on our domestic economic growth. We also need to ensure that we are investing in fostering high technology knowledge through education – but without a vibrant and receptive industry sector to absorb, use and continually grow this knowledge it remains fundamentally impossible to achieve a self-reliant and sovereign industrial base.

Note: Brent Clark is the CEO of AIDN National.

Published in the Australian Defence Magazine on the 6th of August 2020

AIDN’s Perspective on the Strategic Defence Update and Force Structure Plan

By Brent Clark, 30 July 2020

1 July this year, the Prime Minister announced the strategic defence update and the associated force structure plan in order to achieve the outcomes required in securing Australia’s interests in an evolving and increasingly complex geopolitical environment.

AIDN’s remit is not to provide commentary on the changes in Australia’s strategic circumstances, this is the domain of others.

Where AIDN can contribute to the ongoing dialogue is in how industry can meet the requirements of the largest expenditure on capital equipment, support systems and sustainment since the end of the second world war.

The Morrison government has announced that it will be spending around $270B over the next decade, and this expenditure is multidomain, there are some large acquisition items in the maritime domain and some much-needed enhancements of Australia’s cyber security infrastructure to name but two areas of the announcement. Further to this the Government has given firm commitment to ensuring that the Defence budget remains unaffected by the declining economic forecast due to the COVID-19 pandemic.

This announcement indicates that around 2% of GDP will be spent on defence in 2020/21 and that this is forecast to rise to around 3.5% around 2029/30. This is a significant investment by the Australian Government on behalf of the Australian taxpayer. Furthermore this has to been seen through the lens that the government has announced on a number of occasions that a local build has 60% local content and the corresponding spend within Australia.

Whilst the Government is yet to publish an integrated investment plan, with usable program time lines so that industry can plan properly to undertake potential investments in additional employees and plant and machinery, the government has provide industry with some certainty to look to the future and the Government rightfully deserves praise for this.

This type of expenditure should provide a boost to the Australian economy and Australian industry, particularly the small to medium businesses.

That is assuming that a significant amount of this funding is returned to the local economy. It is important to understand the benefits to the Australian economy in local expenditure, by doing this there is a significant multiplier effect of the dollars spent, this effect ranges from one dollar creating an additional dollar, up to one dollar creating an additional two dollars of effect for the Australian economy.

There are now economic assessments finding their way into the opinion space and these initial assessments are of concern. The ANZ recently published an assessment and some of this data causes alarm; specifically, the amount of money being spent offshore verses locally. This analysis indicates that from 2021 to 2030 only around 48% of this funding is being spent locally, and a large proportion of that amount will be going to foreign owned multinational defence contractors.

It is important that the Government ensures that there is a significant proportion of this defence spend occurring locally, and with Australian companies, it should not be acceptable to Australian that only 48% of Australian taxpayer money is actually being spent in Australia. Especially when the government has made consistent statements about meeting and exceeding 60% local content on Defence programs.

If more money is spent locally, then not only is there a boost to the Australian economy overall, but the environment is created for research and development and investment in Australia’s domestic market, which fundamentally increases Australia’s self-reliance and therefore assists in the creation of a sovereign Australian industrial base.

OPINION: Government can do better for Australian industries in naval acquisitions

By Brent Clark, CEO-AIDN -29/07/2020

As a result of the release of the 2020 Defence Strategic Update and the 2020 Force Structure Plan which together outline a new strategy for Defence and the capability investments to deliver it, the Prime Minister has announced a commitment to spend $270 billion over the next 10 years on additional defence capabilities including $75 billion investment over the next decade for the Royal Australian Navy, building on the government’s 2017 Naval Shipbuilding Plan.

In this context, the Defence Industry Minister was quoted as saying, in part, “We’re talking about a generation of Australian jobs, and a substantial level of Australian industry involvement in these major acquisitions”. What has not been addressed in the Minister’s statement is any reference to the manner in which Australian industry involvement will be optimised as a fundamental and integrated part of a capability life cycle approach to both the acquisition and sustainment of naval capability over generations.

It has been reported that to support a larger and expanded fleet, up to $12 billion will be invested in developing the infrastructure necessary to support the capabilities of our naval fleet during construction, operation and sustainment, noting that the future of maritime sustainment in Australia is set to change with Navy’s Plan Galileo laying the foundations for an integrated and consistent approach to maritime sustainment by leveraging opportunities created under the government’s Naval Shipbuilding Plan.

Successive governments have, over time, undervalued the importance of optimising Australian industry involvement including the sustainment of naval assets. Aiming at achieving a substantial level of Australian industry involvement without the government mandating and contracting minimum levels on both acquisition and sustainment elements on a project by project basis does not do justice to Australian industry.

Taking a life cycle approach to the acquisition and sustainment of a naval project has to commence at the concept stage rather than the emphasis initially being on the acquisition of the capability – early consideration of sustainment of the asset can have a profound impact upon the quality, size and effectiveness of the industry program.

A strong government commitment to the early and integrated engagement of Australian industry, with emphasis on the significant role of SMEs in the ongoing sustainment activities, as part of the development of a project capability life cycle will achieve optimised levels of Australian industry involvement during the sustainment over extended periods.

The government has recently committed to placing significant additional emphasis and funding on enhancing Australia’s trade/technical and technological skills base. Earlier engagement by government with Australian industry will provide the incentive to industry to invest in their skills base and capability in order to optimise their participation in the sustainment of naval assets into the future.

Australian industry has demonstrated in the past that it is capable of cost effectively committing to and optimising its involvement in the sustainment of naval assets (e.g. Collins Class Submarines, ANZAC frigates and mine-hunters to name a few).

The government needs to do much better than to seek non-binding undertakings from overseas primes to maximise Australian industry involvement during the acquisition phase of naval assets.

The government needs to provide the incentive and appropriate guidelines to its procurement agency, CASG, and to Australian industry, for its binding and optimised involvement and sustainment outcomes.

Editor’s Note: Brent Clark is the chief executive officer of the Australian Industry & Defence Network. He served as a submariner and officer in the Royal Australian Navy before joining AIDN and has held a number of senior corporate positions, including with Thales; Saab; and Naval Group. Opinions expressed in the essay are his.

By Brent Clark | Opinion | 9 July 2020 | Australian Defence Magazine

There has been substantial media and discussion around Australian companies becoming part of the supply chain for the large number of Defence programs.

The Prime Minister recently announced expenditure of $270 billion over the coming decade, a number so large it overwhelms the public.

Maths tells us that if we only achieve 50 per cent Australian content, in effect that means $135 billion of Australian taxpayer money is heading overseas, a 10 per cent increase of Australian content means an additional $27 billion remains in Australia, multiplying throughout the wider economy.

AIDN requires Australian companies to be designed into the supply chain from the beginning of these programs. Do this and meaningful work packages can be contracted, IP exchanged and Australian companies can undertake the required investment to be in a position to compete in a fair and equitable manner in order to become suppliers into these massive programs. If they are not designed into the supply chain from the outset, then the stark reality is that they will not be included at some mythical point down the track.

The task of integrating Australian companies into supply chains becomes far more problematic when the supply chain for the initial batches of equipment is established.  Australian companies would still need to be qualified to provide supplies; there is a cost to undertake this activity, and that will impact schedule and overall program price.  This makes Australian companies appear less competitive than they truly are.

This places Australian companies at a tremendous disadvantage to ‘break into’ the incumbent supplier base. It also potentially allows for more foreign owned companies to establish 100 per cent owned subsidiaries to be created in the Australian market, effectively forcing the current domestic-owned companies out of their home market.

If we are in the process of qualifying overseas companies for the initial platforms this means that there currently is an activity involving qualification, proving supply chains, transfer of IP and all the other requirements to become certified into the supply chain.

Why is there no opportunity to qualify Australian firms into this supply chain? Why is there some need to qualify overseas suppliers first and at a later point qualify Australian-owned companies?

AIDN rightfully asks the question of BAE Systems, to name but one of the foreign owned multinational companies that have been awarded lucrative defence contracts, exactly how many Australian companies are they in the process of qualifying to supply tier 1 and tier 2 level supplies?

This question can also be asked of Naval Group, Rheinmetall, Lürssen, indeed all of the Defence Primes.

Reviewing the contracts associated with some of the larger programs, Naval Group reportedly has no actual percentage of Australian Industry included, BAE Systems reportedly has 54 per cent as a contracted requirement, Rheinmetall has best endeavours as does Lürssen.

If we specifically look at the Hunter Class Frigates example, assuming that the acquisition contract is $45 billion, then nearly $21 billion is heading overseas.

More concerning is that the Prime Contractor for this program could achieve 60 per cent of AIC without actually doing any work in Australia during the acquisition phase, assuming that they can achieve 90 per cent AIC during the sustainment phase.  This is highly likely given Defence claims a figure of 92 per cent AIC for the sustainment of the Collins Class Fleet.

AIDN proves this statement based on the maths: “The Prime Minister announced a budget of $45.6 billion for acquisition recently, applying the rule of thumb that sustainment is roughly twice the amount as acquisition, hence $91.2 billion, then the total cost of the program is $136.8 billion.

“Assuming a 90 per cent AIC result for the $91.2 billion of sustainment then this translates to $82.08 billion, i.e., $82.08 billion is spent locally thus achieving 60 per cent AIC over the full life of the program.”

Obviously, the Hunter Program will contract some percentage of AIC during the acquisition phase, but as demonstrated from the above concept it is possible to backend load the AIC through sustainment, allowing more of the acquisition work using their existing overseas supply chain.

It is difficult to believe this is what the Australian Government hoped to achieve when it stated it wanted to create a sovereign Australian Industry to ensure as a nation, we have a higher level of self-reliance. The COVID-19 pandemic has demonstrated the absolute need for Australia to achieve the highest possible levels of self-reliance.

At least BAE Systems has a contracted amount of AIC content (54 per cent) in the build phase. We can take some comfort that they have to achieve an Australian spend of at least $24.6 billion during acquisition, assuming that the AIC percentage is specified for the acquisition phase and not the total program life.

AIDN cannot identify what the other prime contractors will deliver in the AIC space, nor does it appear that Defence has a contractual clause to hold them to. The vagaries of ‘contractor best endeavours’ or ‘maximise’ do little to ensure that actual work packages are achieved in-country.

AIDN will continually advocate and highlight these issues with Government and Defence. We must ensure that the Prime Contractors are doing what they said they would during the bid phase of these programs.

We have this obligation to our SME community; this critical issue must be made right. The sovereignty of our nation depends upon it.

Note: Brent Clark is the CEO of AIDN National.

Its one thing to build war fighting capability it’s another to build industrial capability.pdf

AIDN Newsletter National 2nd Quarter Newsletter 2020.pdf

The Australian Industry & Defence Network (AIDN), Australia’s largest national defence advocacy group representing small business, has appointed Brent Clark as their new CEO.

Brent joins the organisation after a multi-decade career in defence and defence industry. He is a former submariner and has held a number of senior roles within Defence Industry.

“AIDN is thrilled to have Brent on board to help us develop as Australia’s voice for defence industry,” AIDN National chair, Lester Sutton said.

“Defence policy is an Australia wide concern and that obviously requires a strong voice in Canberra, which Brent will provide,” Mr Sutton said.

“The COVID-19 crisis has shown defence industry’s importance to the Australian economy, and that importance will only grow as the future submarine, future frigate and other significant defence programs ramp up,” Mr Sutton said.

“Our job at AIDN is to advocate as strongly as we can for our members to make sure they benefit as much as possible from the Federal Government’s defence spend to maximise sovereign capability.

“Beyond the benefits for AIDN members, ensuring a maximum level of sovereign capability is the right thing to do for our national security and the economy,” Mr Sutton said.

Brent Clark will continue in his role as CEO of Industry Voice, a complementary defence industry body that has taken a lead role in the debate around Australian Industry Capability (AIC) - particularly sovereign capability.

Industry Voice has joined AIDN as an Associate Member and signed onto the MOU to form a single national organisation representing small business in the sector.

“I congratulate Brent Clark on his appointment, and I look forward to working in collaboration with AIDN to jointly further the cause for Australian small businesses,” Industry Voice Chairman, William Hutchinson said.