Left High and Dry
An AIDN National Op-ed
Written by AIDN National CEO Brent Clark
“The long-feared day arrived, on May 1st, with the PLAN launching an invasion convoy across the Taiwan Straits. President Biden responded to calls from Taiwanese President Tsai Ing-wen for support, with assets from the third and seventh fleets joining into a maritime engagement.
President Biden issued an ultimatum to Chinese President Xi Jinping to call back the PLAN fleet or face immediate consequences, and called on allied nations to join an international naval coalition to engage the PLAN and enforce the peace in the Taiwan Straits.
Australian Prime Minister Scott Morrison responded to this call, by deploying a task group to the naval coalition. HMAS Sydney, which had been in a stand-off position 350km south of Taiwan, immediately joined the fray, firing multiple salvos of long range Evolved Sea Sparrow missiles (ESSM) at PLAN targets in the Straits.
Apparently, the USN and RAN action was successful, with no PLAN ships reaching Taiwan. Media reports suggested that the ESSM’s had been particularly effective and had scored many direct hits on PLAN vessels. PLAN launches of DF-26 anti-ship missiles at HMAS Sydney were ineffective, and foiled by use of advanced electronic countermeasures (ECM).
The silence from Beijing from May 3 suggested that President Xi was licking his wounds, and considering how to back out of a crisis he had engineered without losing face. Polls taken in both the US and Australia indicated that each country’s public strongly supported their government’s military action.
Unbeknownst in Washington and Canberra, the real posture in Beijing was very different. During the initial engagement, the PLAN had collected a wide range of Electronic Intelligence (ELINT) covering the operation of the ESSM’s guidance system, and the operation of the ECM deployed against their own DF-26 missiles. This intelligence was immediately transferred to the China Electronics Technology Group (CETG) Corporation that had designed the guidance system of the DF-26, and the ECM utilized on PLAN warships. The CETG engineers had an intimate understanding of the strengths and weaknesses of the algorithms used within their systems, and within two days had understood why the DF-26 missiles had been deceived into missing their targets. And on the third day their engineers pieced together the puzzle of how the ESSM guidance system had remained locked onto their ships while their own ECM was deployed. Armed with this understanding, CETG’s engineers updated the algorithms of the DF-26 guidance system and the fleet’s ECM suite, implemented the changes within the software systems, and used the collected ELINT to ‘replay’ the engagement, but this time with the updated algorithms in place. The replay suggested a reversal of the outcome.
Chen Zhaoxiong, CETG’s Managing Director and his senior executives hastily arranged a meeting with VADM Shen Jinlong (Commander of PLAN) and described the outcome of the technical investigation. During the meeting, VADM Shen signed an order for the immediate update of all of the missiles and the fleet’s ECM suite. BY May 9th, all the updates had been made, and a second invasion fleet sailed towards Taiwan.
As previously, USN and RAN assets conducted long range strikes against the PLAN fleet. Unfortunately, the reports indicated that these were not successful, and PLAN vessels were able to cross the straits reaching Taiwan. Even worse, DF-26 launches against USN and RAN vessels scored direct strikes. Media reports indicated appalling scenes; opinion polls indicated that the Australian public’s support of the war had plummeted.
President Biden was also shocked by the loss of USN vessels. His military experts updated him on how the PLAN’s successes had been based on recent improvements they had made to the EW capabilities of their systems, but also that American military industry was itself working round the clock to overturn those advantages. Re-assured that the pendulum would swing back to the USN, President Biden declared that the US would continue to fight for the freedom of Taiwan.
Prime Minister Morrison discussed with Biden whether the RAN would also be able to receive the equipment updates. After all, without the updates, the RAN’s ESSM’s were now effectively useless against the PLAN. And the ships of the RAN task group were in grave danger unless their ECM was updated to cope with the new versions of the DF-26. The US President assured Prime Minister Morrison that the RAN would receive the updates. This would occur after the USN fleet was itself updated, and once the military communications satellite link to Australia had been re-assured as being secure. This was a factor PM Morrison had not expected, and enquired further about the link. Unfortunately, during the week after May 1, US intelligence had identified that the link had been breached by cyber-attack, and it could not be used to relay to Australia the software updates until the exact nature of the breach had been understood and rectified. Apparently this might take some time, as the US had other internal cyber-breaches that needed to be addressed as higher priorities.
Prime Minister Morrison hastily convened the National Security Committee of cabinet, and demanded from his minister’s answers to two questions: How was it that after the hundreds of billions the government had invested in Defence capability, that Australian forces were left vulnerable and unable to have their capability updated to match our adversary; and: Had we not learned anything from the COVID crisis about the need for self-reliance”
While the tale above is fiction, it largely follows actual events that occurred between Israel and the US during the 1973 middle-east war. In that war, the Israel Air Force (IAF) was surprised by new model SA-6’s Surface Air Missiles which the IAF’s existing electronic countermeasures (ECM) could not handle. The SA-6 was downing unsustainably large numbers of aircraft. The IAF was forced to suspend close air support missions on the Golan Heights, where the Syrian army was on the verge of defeating the Israeli army. Whether for political reasons, or simply because it still did not have them, the US did not supply Israel with updated ECM effective against the newer SA-6’s.
However, there is a key difference between the two stories.
Unlike Australia, Israel had for many years nurtured within its domestic industry the capacity to undertake scientifically and technologically advanced tasks. When the hour of need arose, industry (Rafael ) was able to rapidly implement a countermeasure that did defeat the SA-6 threat, restoring the IAF’s freedom of action over the battlefield.
The purpose of relaying these tales – both fiction and fact – is to set out the real risks that face the ADF if we continue to rely on off-shore supply of military equipment.
In the current environment, warfare between high-end adversaries with technology-based warfighting materiel, becomes an arm wrestle between the algorithms and software of one side’s systems against the equivalent capabilities of the adversary’s systems. During warfare, these systems rapidly become obsolescent as each side analyses how their opponent’s equipment works, and how the algorithms and software within their own side’s equipment can be adjusted to defeat the adversary. This work is done by technologists who have been intimately involved in the design of the algorithms and software of the original equipment.
A nation that does not have access to sufficient scientific and technological smarts in industry to keep pace with these modifications, is a nation that is willing to place its servicemen and women in grave risk. AIDN cannot accept that Australia is willing to treat its brave service people this way.
Yet, Australia’s consistent approach to procure military equipment on the basis of price competitiveness does exactly this, and deprives the ADF of critical industrial support from its domestic industry.
AIDN’s position is clear. CASG must adjust its approach to procurement, if the issue is one of policy or procurement rules, then Government must revise both of these to ensure that Australian controlled Industry is able to provide this service to the Government and therefore the ADF.
The reflexive assumption that all advanced, science-based systems must be procured from overseas, rather than be developed in Australia must stop. Australia must be allowed to develop these industries. Doing otherwise undermines the ADF’s ability to sustain operations against technologically capable adversaries.
AIDN National 4th Quarter Newsletter 2020
AIDN National Announces the Election of New Board Members and Appointment of New Chair
AIDN National has elected three new board members for a two-year tenure on the AIDN National Board.
The newly elected members are Emily Frizell, Toff Idrus and Graham Priestnall.
All three members bring with them a vast amount of experience working in the Australian Defence Industry sector and join ongoing members Carl Quarterman and Julie Savage. The board represents the diversity of AIDNs membership with members from Queensland, Western Australia, South Australia and the ACT
Graham Priestnall has been elected as Chair of AIDN National replacing outgoing Chair, Lester Sutton.
“I want to thank Lester for his devotion to AIDN National and his personal drive to ensure that the organisation becomes the peak industry body for Australian Defence Companies, in particular the Small to Medium Enterprises” newly elected Chair Graham Priestnall said.
I would also like to thank Angus Hutchinson and Kerryn Smith as outgoing board members for their efforts.” Graham Priesntall said.
The new board looks forwarded to working with the CEO of AIDN National in finalising the process for a national organisation, an organisation that is represented by member companies Australia wide.
AIDN is a member-based organisation established over 25 years ago, to represent the interests of Australian Industry with a particular focus on the SME community.
Media Enquires – firstname.lastname@example.org
A Machiavellian Tale – Or a Tale of Self-Reliance
Written by AIDN National CEO Brent Clark
Italy from 1450 through 1550 was a tumultuous time. The land comprised a series of independent city states which were often warring with each other, with the central papal authority and with external influences from France, Spain and Austria.
The Princes of the city states were certainly living in (to use the PM's terminology from the July 1 Defence Strategic Update) a "challenging strategic environment", and weighty decisions over how to prepare their principality for conflict had to be made.
Foremost of these was how best to raise an army. Recruiting personnel, equipping them, training them was an expensive proposition. And the establishment of such an army was just the start, keeping the army available was a continuing drain of resources. Could this expense be justified if for most of the time the army was not actually being deployed?
And then there was the question of risk; would a home-grown army actually be effective?
These considerations led to an alternative approach becoming the norm; the use of mercenaries.
This brought various advantages. Mercenaries offered a ready built ("off the shelf") system. All of the costs of raising and training an army were averted, as they were already battle-ready.
Mercenaries could be used for the shorter intervals of pressing need, and did not need to be engaged over a longer period. This was economically attractive.
An active market of mercenaries existed, so their supply was seemingly assured. Most of all, they had experience in war-fighting, experience that a home-grown army could not match.
From a rational assessment of cost, and an evaluation of the risk of campaign loss, the use of mercenary forces became the prevalent model.
The results were disastrous.
Ultimately, in the heat of battle, the agenda of a mercenary was not aligned with the agenda of the principality that hired them. If the battle turned, at the very moment that a Prince really needed to rely on them, the mercenaries would melt away.
Prince Machiavelli wrote:
"I say, then, that the arms with which a Prince defends his state are either his own, or they are those of mercenaries or auxiliaries, or mixed troops. The mercenaries and auxiliaries are useless and dangerous".
What Machiavelli understood, but which the rational "value for money" assessment applied by the Princes entirely missed, was the value of self-reliance.
Machiavelli's point has applicability well beyond the armed services themselves, and extends to questions of supply of equipment to our armed forces.
Which brings us to the current debate on military industrial supply.
Australia has a defence procurement model that has been designed for the more benign strategic environment that prevailed until recently. The underlying assumption has been that a market for supply will always be available, and that the rational choice is to select suppliers that are cheapest and have existing equipment that we can readily procure. This minimises the risk that acquisition projects will fail to deliver, or that costs will increase beyond planned.
The outcome is that Australia overwhelmingly imports the bulk of its military materiel.
Yet, in the more challenging strategic environment that Australia is now confronting, the question must be asked whether this procurement model remains fit for our purpose?
Clearly, Australia is not self-reliant for supply of the defence materiel the ADF uses. How much of a risk does this pose to Australia?
The view of AIDN is that the risk is substantial, and is being consistently underplayed by our procurement organisation.
Why? Consider what may occur should a serious theatre war arise against an adversary that is equipped with technologically advanced weaponry.
We will want our brave service people to not only have the best equipment possible on the day that such a conflict commenced, but continually thereafter and for the entire duration of the conflict.
That includes the resupply of consumables that are expended, and the rapid repair of equipment and assets to enable their return to the battlespace. Yet if much of our materiel is imported, would the ADF be reliant on repair facilities located offshore? This creates serious risks if sea lanes and air corridors are cut.
A more serious issue relates to addressing the accelerated obsolescence of military technology during armed conflict. Modern military systems are rooted in technology, yet unforeseen vulnerabilities of those technologies are rapidly exposed when fielded against an adversary that also has advanced technologies. Rapid evolution of technology is required so that the equipment in the ADF's hands stays a step ahead of the adversary's equipment. Yet if the ADF's technology systems are sourced from overseas, those updates will need to occur in foreign industry.
But will they be interested? Maybe their own forces will have their own pressing needs, and their engineers' attention will of course turn to meet the needs of their own forces first, "ADF, I know it is urgent, but you are in the queue, we are getting through our queue as quickly as possible".
Even if the foreign industrial resource is available to update the algorithms in our equipment quickly; how will we receive delivery? Use communications networks to "download" the patch?
When confronting a technologically sophisticated adversary, such networks are vulnerable both to cyber and physical attack. Would we want to download an update to our sonar algorithms and risk having our adversary intercept that download and understand the updated design?
Reliance on foreign supply creates massive risks that the ADF will not be able to keep pace with the evolution of technology as the conflict progresses, and that our troops will be left vulnerable.
As with Machiavelli's assessment of the use of mercenaries over home-grown forces, the question of relying on foreign industrial supply over domestic supply boils down to a question of self-reliance.
Yes, there are costs associated with developing a home grown industry, and yes there are risks associated with asking Australian industry to develop certain technologies.
But what are the risks to the ADF by continuing a course of reliance on foreign industry?
Where and how does this factor enter into source supply evaluations routinely conducted by CASG?
Our world has changed. We are now in an era where the ADF may be called upon to engage an adversary significantly more capable than those it has confronted in recent times.
Our procurement model must be changed to not only address the needs of our troops on Day 1 of a future conflict, but on Days 2, 3 and throughout the full duration of conflict.
That means correctly accounting for the value to the ADF of an independent Australian military industry when assessing value for money of procurement decisions.
Published by Defence Connect
Sovereignty and the Curious Case of the Attack Class
Submarine Main Batteries
By Brent Clark
As the debate rages as to how best achieve the Governments stated requirement to establish a sovereign industrial capability to ensure that Australia can be as self-reliant as possible when it comes to the support of the nation’s defence equipment a strange decision was made.
In March this year there was an announcement made by Naval Group that Australia’s main battery supplier to the Collins Class submarines was awarded contracts for studies and the design of the Attack Class submarine.
The ‘awarding’ of these contracts was not to be the sole source supplier, rather the Australian company was awarded a contract to compete with the Greek company Sunlight Systems.
Despite being the supplier of submarine main batteries for Australia for around 30 years, despite the fact that the Australian company has been funded to undertake expensive R&D activities into submarine batteries, despite the fact that the Federal Government funded the company to build new facilities to clear the path for the submarine construction yard in South Australia – the decision was made to put the Australian company into a competition with a foreign owned company with zero presence in Australia.
An interesting point to note is that in February, a month prior to the Australian competitive process being announced, the Executive Vice President Development Naval Group, Alain Guillou, released Naval Groups long term cooperation plan, developed to support the acquisition program for two Frigates for the Hellenic navy, in this launch he also stated that Naval Group had been working with Hellenic industry for many years and that Sunlight Systems in particular is a strategic supplier for Naval Groups submarine programs.
Submarine main batteries are one of the top five equipment sets for the Attack Class submarine, the others being; the submarine main motor, the weapons discharge system, the diesel generators and the main DC Switchboards. These four systems were awarded sole sourced to overseas suppliers and at least in one case the logic of not undertaking a competitive process for the main motor supplier is not readily obvious, given the battery decision. The rationale of ensuring the best technology available to be part of the Australian program produced in a competitive, value for money way should (if we follow Defence’s argument) mean that wherever possible competitive processes are undertaken.
Defence has released guidance on what constitutes sovereign industrial capability priorities, according to Defence these priorities are capabilities that are critical to Defence and must be developed or supported by Australian Industry. These include Collins Class submarine maintenance and technology upgrade and continuous shipbuilding (including submarine acquisition), they specifically mention in their own document that particular importance is placed on submarine endurance and that endurance includes batteries for energy systems. In the continuous ship building and submarine acquisition section Defence clearly states that Australian Industry will need to be integrated into global supply chains.
Unless Defence has made the decision that submarine endurance and therefore submarine batteries will not be a sovereign industrial capability for the Attack Class submarine, it would appear that on every measure the Australian SME PMB is a sovereign industrial capability.
The creation of sovereign industrial capability is fully supported and given the reality of the COVID-19 pandemic and how exposed Australia was to the requirements of foreign Governments own domestic pressures combined with the hit to the Australian economy, it should be a requirement of Government to all government departments, not just Defence, that Australian industry is initially sourced to supply equipment. If Australian industry cannot supply 100% of a piece of equipment, then measures need to be put into place to understand why not, and what is needed to ensure that it can.
There should only be very specific equipment that are not sourced domestically or at the very least involve some measure of Australian Industrial input.
But what of PMB and the decision made by Defence to compete a sovereign capability?
This Adelaide based Australian SME has been at the forefront of battery technologies for decades and it continues to expand its’ footprint globally. Earlier this year the company secured the battery design contract for the UK Ministry of Defence and it will do this with newer Nickle Zinc battery cell technology. It has also recently acquired the EnerSys’ submarine battery business and secured the contract to supply the Royal Canadian Navy with submarine main batteries. This Australian SME continues to grow its domestic footprint at the same time continuing to increase its defence export market, another requirement of the Australian Government. Should PMB be unsuccessful in securing the Attack Class opportunity the potential to damage its global position is obvious.
But sovereignty also provides the Australian Government with technology control, if we accept that Australian companies produce world leading technology, then the Government should be able to control where that technology goes and have the ability to develop these technologies for the sole benefit of Australia and Australia’s allies.
The only way to ensure that there is no military technology leakage is for the Government to have the right to refuse export sales, this currently exists with PMB, there is no ability for the Australian Government, nor Defence, to prevent a Greek owned company selling technology anywhere and to whomever it chooses.
AIDN has consistently advocated for Australian companies to be able to compete in a fair and equitable manner, we acknowledge that there are occasions when equipment may require to be sole sourced as the capability and the ability to supply from within the Australia market does not exist or the equipment provides a unique and necessary capability. If a company like PMB, a company that is by Defences own definition providing a sovereign capability, a company that has been supplying to Defence for decades, if this company does not justify being sole sourced then it is hard to imagine a scenario where any Australian company can be. This decision further undermines Australian companies already sceptical opinion of the procurement system.
The IP Paradox
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.
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