By Matt Keogh MP

03 July 2020

Matt Keogh writes on the centrality of defence industry to our COVID recovery.

As COVID-19 enveloped the world and many nations experienced supply chain
shocks, there were growing calls in Australia and across the globe for increased
domestic manufacturing self-sufficiency. While it was impressive to see our old car
factories being used to build ventilators, gin distilleries producing sanitiser and
prosthetics companies making PPE, this happened, in part, because those
businesses could not effectively sell their usual goods due to coronavirus
restrictions. The present COVID-19 crisis has highlighted many pre-existing areas
needing reform, as well as an opportunity to bring about the necessary changes to
address them. Australian defence industry is an area not only requiring such reform
but one that presents an opportunity that if done right, will enable many other
benefits for Australia that we desperately need to start experiencing.

What is Australian defence industry doing?

The Commonwealth government has embarked upon a $270 billion defence
acquisition and sustainment program over the next decade, which includes major
projects like the Future Submarines and Future Frigates. Unfortunately, despite
headline grabbing media releases, the Morrison government’s commitment to
Australian industry content for defence industry has been sorely lacking. There is a
complete absence of enforceable contractual requirements imposed on defence
suppliers to ensure they meet any sort of Australian industry content commitments,
nor has there been any real by government effort to ensure such work actually
contributes to the development of our sovereign defence industry capability.

The 2019 ‘Transfer of Technology Options Report’ prepared by Naval Group for the
Department of Defence, obtained through a recent freedom of information request,
revealed that foreign drafting engineers will need to be imported for Australia’s
troubled Future Submarine programme because as it stands there are no such local
workers with sufficient experience and knowledge to get the job done. This is despite
the fact that we have known for a decade that Australia would be looking to acquire
these new submarines. There has been ample time for the federal government to
skill up and encourage people to obtain relevant qualifications for what Defence has
said is the largest regeneration of Australia’s Navy since World War Two.

The Coalition Government’s naval shipbuilding program was promised to create
15,000 jobs, but the massive skills shortage across the country means these jobs
may never end up as local jobs. Seven years of Coalition Government has seen $3
billion cut from TAFE and training, widespread skills shortages, and 140,000
apprentices and trainees lost. On top of that, we recently learnt that on the current
trajectory, another 100,000 apprentices and trainees will be lost if serious federal
intervention doesn’t take place. There was a 73 per cent fall in apprentice job ads
between January and April this year alone. The Australian Industry Group says youth
unemployment will skyrocket without a substantial increase in federal government
support. In short, the necessary skills for defence industry are not being produced in
Australia, which represents not only a serious failure of government skills policy but
is a dereliction of duty when it comes to defence industry preparedness.

Getting the policy settings right

In this context, you might expect that the federal government would be doing
everything it can to support Australian businesses winning defence contracts.
However, domestic participation in the defence industry is actually decreasing,
despite multiple government initiatives. In fact, the Australian defence industry
ecosystem actively pulls against local business participation. Australia is one of the
few developed nations with a significant defence force but without a range of ‘home
grown’ prime contractors, with only one naval shipbuilder – Austal, after companies
like Australian Defence Industries (ADI) and Tenix Defence were acquired by French
company Thales and the UK’s BAE Systems. Further, despite the Department of
Defence’s Major Service Provider (MSP) arrangement for above the line (ATL)
support services, which aims to foster a viable, vibrant small to medium enterprise
(SME) sector, our defence businesses are being locked out of promoting capability
options to Defence, in part due to trends toward integrating above the line and below
the line (BTL) work. Instead they are left to the whim of foreign contractors, who
engage them as subcontractors based on foreign designs and capability offerings.
The extensive use of external ATL providers means that the necessary project
scoping and management skills are missing from the Department itself.

Without alternative requirements imposed upon them, Defence prime contractors
prioritise their pre-existing (usually foreign) supply chains over using local
businesses because they perceive the investment in Australian industry as risky.

They also argue it is not economically viable for them to take on local supply chains,
all often forcing domestic suppliers to not just compete for scarce work against larger
scale foreign suppliers but to beat their prices by hefty margins. This double
whammy results in local SMEs being priced out of the opportunity to secure valuable
Australian defence industry work and ability to boost our sovereign capability.
If just ten per cent more of this spend ended up in Australia rather than overseas, it
could mean an additional $2.7 billion spent in our local economy every year. There is
a clear role for the federal government in boosting support to local defence industry
businesses, so they are capable and ready to engage in relevant supply chains. The
key policy failure is a lack of any clear, measurable and enforceable Australian
industry content requirements, regularly audited, being imposed on prime contractors
by Defence. Instead we rely on “best endeavour” undertakings in unenforceable
Australian Industry Capability (AIC) plans to “maximise” use of AIC. While defence
procurement must always be about delivering the necessary capability demands of
our ADF, the Government must adopt a defence procurement approach that
mandates specified, measurable and enforceable local industry content
requirements for all procurement and sustainment requirements, together with a
regular audit capacity and real consequences for non-compliance.

Broaden the scope

With policy settings tailored to building Australian defence industry involvement and
supporting our defence industry SME’s, consideration should also be given to the
breadth of defence procurement to which these policies apply. We must consider all
elements which go into defence procurement. In addition to the obvious air, land and
sea platforms and their associated systems and weaponry, there are also IT
systems, health equipment and supplies, staple foods and cleaning equipment. The
very supplies we require to ensure our Defence Force is properly stocked were
precisely the supplies we were caught short of during the ongoing crisis. Australia
should be making these things – but only by getting defence industry policy right.

Sovereign capability

The monetary value and number of workers employed by virtue of AIC requirements
is not, on its own, enough. The real value from a thriving Australian defence industry
lies not just in the opportunity to contribute to our own defence materiel platform
requirements but to ensure that we are enabled to service, sustain, repair and
improve them over time, as well as develop our own defence industry export
markets. This requires a focus on using AIC requirements to develop Australian
sovereign defence industry capability through mandating technology and knowledge
transfer. This needs to not only result in genuine capability to design, develop and
innovate in defence technology developed here in Australia but achieved by using
Australian owned and run companies, rather than just wholly owned Australian
subsidiaries of foreign prime contractors or their foreign controlled suppliers.

This is not about lifting Australia into the global top 10 of defence industry exporters
for the sake of status seeking. It’s an opportunity to diversify Australia’s export
economy and job creation opportunities. Getting these policy settings right will not
only support more work for Australian businesses, but it will increase their capability,
and provide the basis for Australia once again being a home of defence industry
prime contractors, not just some of their suppliers. It is not enough for the Morrison
government to talk up its $270 billion defence spend as an end in itself. It needs to
articulate a plan for how those taxpayer dollars will be spent to support Australian
high-end manufacturing jobs, apprenticeships, and training. Importantly, this isn’t
about fighting to take jobs from one area in Australia to another, rather it is about
growing the Australian defence industry ‘pie’. Supporting and enabling such
expansion of work for local industry will provide the additional resilience that a
diversity of customers offers, more numerous and secure jobs, as well as greater
defence and economic ties between us and our closest strategic partners.

The opportunity of leverage

Pivoting defence procurement to benefit Australian businesses, jobs and sovereign
capability is not enough when it comes to maximising the opportunity afforded by
crisis. The real opportunity of defence industry policy acting in our national interest
presents itself in the opportunity to leverage our natural competitive advantages.
Much has been made over recent years of the opportunity represented by Australia’s
and, in particular, Western Australia’s, abundance of critical minerals, including rare
earths. Critical minerals, including rare-earths, have a wide range of strategic uses,
from powerful magnets to night-vision goggles, turbine blades and lasers, as well as
the manufacture of different types of batteries. According to the Australian Strategic
Policy Institute (ASPI), China’s control of between 80% and 90% of rare-earth
mining, separation and downstream manufacturing, and the resulting lack of diversity
of supply, presents a strategic risk to Australia, the United States and our allies.
A recent report by Perth USAsia Centre’s Jeffrey Wilson argues that the market will
not cure supply-chain vulnerabilities for many of these minerals because the risks
are too high. “Integrated approaches, which adopt a whole-of-value-chain
perspective and promote the development of both upstream extraction and midstream
processing, will be needed to properly secure supply”, notes Wilson. To date,
only the Japanese government has been prepared to provide financial assistance to
Australian companies seeking to overcome Chinese dependence. The federal
government has not been prepared to sufficiently de-risk or provide financial
assistance to dozens of companies with promising critical-mineral deposits to bring
this to fruition. Yet, as ASPI posits, dependence of military supply chains around the
world on critical materials sourced from China will continue unless this changes.
Alternatively, Australia could properly enable and de-risk the extraction of critical
minerals and their downstream value adding, with the potential for local defence
related specialty battery manufacture through the underwriting of end product
purchasing and mandating source requirements by Australia and countries with
whom Australia has close defence ties. Then, not only would Western military supply
dependence on a single source be rectified, but it would underpin the local supply,
value-adding and manufacturing industries associated with critical minerals and rareearths
for civilian purposes that Australia needs to develop truly advanced
manufacturing and once again become a country “that makes things.”

Western Australia as a defence services hub

Reviving Australian manufacturing, especially defence industry, will not undermine
our support for a strong, rules based, global trading system. Australia is a trading
nation, and our economy will continue to be powered by our high-quality exports,
such as Western Australia’s booming mineral and energy natural resources. Our
relationships with key export markets like China, Japan and Korea will continue to be
important in the years to come; though this crisis has highlighted the importance of
diversifying our trade relationships and opening up new markets for export in
countries like India and Indonesia. Home to Australia’s only Indian Ocean capital
city, in the same time zone as 60 percent of the world’s population, including some of
the world’s most rapidly developing economies in East Asia, and proximate to
emerging global powers such as India, Western Australia is perfectly placed to
become a global hub not only for critical minerals products but the epi-centre of a
Western Indo-Pacific defence industry and global naval servicing hub.

The Indian Ocean is home to some of the world’s busiest trade routes – half of the
world’s container ships, one third of the world’s bulk cargo, and around two thirds of
global oil shipments pass through its waters. The Indian Ocean rim is home to 2.3
billion people. It plays host to the full spectrum of economic diversity, with some very
developed countries and others still very much developing, all of whom will require
critical minerals for different purposes including batteries, solar panels, and wind
turbines as over time they introduce and increase their renewable energy generation.
Here, it is worth noting the limited Western defence naval and air bases which
presently reside around the Indian Ocean – those that do exist either provide limited
sustainment support or are located proximate to areas of conflict. Australia,
specifically Western Australia, could position itself as the destination of choice on the
Indian Ocean Rim for maintenance and sustainment operations of our close partner
forces. Australia is the only Five Eyes destination in the Indian Ocean that could
provide complete sustainment, maintenance, and repair capabilities as well as
forward crew/personnel swaps. Not only does Australia possess this advantage, it
boasts Indian Ocean sustainment locations that provide a proximate safe harbour.
HMAS Stirling, the largest Royal Australian Navy base in Australia, is conveniently
located nearby sustainment and support facilities at the Australian Marine Complex
in Henderson. Given its proximity to our near Asian nation neighbours, let’s not
discount defence facilities and sustainment support based in Darwin. Both facilities,
aided by capital city resources offered by Perth, can provide sustainment tasks to
support not only the Royal Australian Navy but also the US, UK (and French) navies,
among others. The opportunity of proximity to the increasingly important Indian
Ocean Rim, and proximately to South East Asia is not to be underestimated.
Further, with Australia the only Five Eyes nation facing both the Indian and Pacific
(as well as the Southern) oceans, it makes sense that our Five Eyes partners will
take comfort from the additional security and existing interoperability that they can
avail themselves of by utilising Perth (and even Darwin) as a new sustainment and
repair location in the ‘Indo’ part of the ‘Indo-Pacific’. Of course, establishing Australia
as a regional sustainment and repair hub will not just happen. It requires serious
engagement by the Australian government acting in tandem with our global friends
and partners. If they are to be convinced of the hub’s benefits, they will need
transparency, as well as guarantees that necessary infrastructure such as additional
ship lifts, or even a graving dock, will be commissioned to support its activities.

National industry in the national interest

Supply chain shocks exist for many reasons, whether it be increases in demand not
being met by supply production, disruptions to transport logistics, or suppliers that
prioritise other customers’ demands. We have experienced all three of these during
the COVID-19 crisis. It is incumbent on the federal government to consider ways to
minimise such shocks in the future, as our strategic circumstances become
increasingly complex. Considering the scope of supplies required by defence and the
capacity to better spend existing budgets to develop domestic manufacturing, the
opportunity for national industry in the national interest must be grasped.

A frequent refrain of the last two decades has been “Australia should be a country
that makes things”. And we must. However, we need to ensure we receive ‘best
bang for our investment buck.’ Advanced manufacturing is not a new concept, even
if its applications are relevant now more than ever. Creating higher value-added
products is key to opening new markets, fostering more jobs, and facilitating
sustainable economic growth. For Australia, this means making the most of our
comparative advantages set against geopolitical trends. It demands far stronger
policy settings and far clearer national economic priorities. Australia is already in a
recession. The Coalition government’s failure to properly implement key defence
programs will make the downturn worse than it needs to be, unemployment queues
longer, and economic recovery more difficult. Australians desperately need an
effective, well-executed COVID-19 recovery plan which sets our nation on the path
to prosperity for decades to come. This is the plan we have been looking for.

Matt Keogh is the Federal Labor Member for Burt and Shadow Minister for Defence Industry and Western Australian Resources.