Sovereignty and defence in Australia
On 6th of February 2020, Graeme Dunk, Shoal’s Head of Strategy, presented on ‘Sovereignty and the state of the Australian defence industry’ at Parliament House. At the presentation were:
- Minister for Defence Industry and Member for Durack (WA) – the Hon Melissa Price MP
- Shadow Minister for Defence Industry and Member for Burt (WA) – Matt Keogh, MP
- Shadow Minister Assisting for Defence, and Member for Charlton (NSW) – Pat Conroy MP
- Senator David Fawcett (SA)
- DEPSEC CASG – MAJGEN (ret) Tony Fraser
- Members of the Australian defence industry
- Various parliamentary staffers
- ABC – Andrew Greene – Defence Correspondent
- Financial Review – Andrew Tillett
- The Australian – Ben Packham – Foreign Affairs & Defence Correspondent
Graeme Dunk is an experienced business manager, project manager and business developer with significant international experience in Defence. He has worked across Europe, United Kingdom, Singapore, Pakistan and India developing a wealth of experience in all facets of business. He has extensive knowledge of Australian defence industry, including have been the Executive Manager of a national defence industry association. Graeme holds master’s degrees in Strategic Studies and Maritime Defence Technology, a Bachelor of Science in Pure Mathematics, an Insignia Award in Technology from the City and Guilds of London Institute and a Diploma of Maritime Studies. He is currently undertaking a PhD on defence industrial sovereignty at the Australian National University.
This article provides you with an insight into the presentation content, which can also be viewed here.
6 February 2020: Sovereignty – Defence Industry presentation – Graeme Dunk
Minister Price, Members of Parliament, Senators, Mr Fraser, members of defence industry,
I am here today to talk briefly on the state of the Australian defence industry. An industry that, in recent times, has consistently been described in terms of sovereignty, and sovereign capability.
This presentation will therefore start with sovereignty, and then move into defence industry – the past, the present and what might be the future.
Sovereignty in the military field – operational sovereignty – is not the same as State Sovereignty. Simplistically, state sovereignty is a commodity, able to be used for benefit, but requiring protection. Operational sovereignty provides that protection, but it is a liability – it requires investment in order to have relevance.
For this discussion however we need to start by considering the military.
A military force exists to provide the Government with strategic options. As once remarked by Frederick the Great of Prussia “Diplomacy without arms is like music without instruments”. Those arms can only be obtained with an investment.
As everyone in this room will know – Money is finite, and so the Government cannot have all the capabilities – in both types and numbers – that it might want. Choices therefore need to be made.
Capabilities therefore are not of equal importance.
As capabilities are not equal, and as money is finite, the best return on the investment of that money for defence purposes is in the capabilities that will have the highest impact on the operational success of the military.
Defence industry exists to support the defence force. Whilst defence industry companies want to make money, and the Government wants them to make money, it is the provision of support to the military that separates defence industry from other industry. We will come back to defence industry sovereignty shortly.
This is not a new concept. Governments of both persuasions have recognised this – as Priority Local Industry Capabilities in the 2007 Defence Industry Policy Statement, as Priority Industry Capabilities in the 2010 version, and as Sovereign Industry Capability Priorities in 2016. The definitions differ slightly, but the concept is the same – and it all relates to operational sovereignty.
Sovereignty is fundamentally about authority and control, and for this short discussion control is the important variable. To be sovereign, to have a sovereign capability, the control does not have to come from the State, the Government, but it does need to come from within the state.
Operational sovereignty, that is the sovereignty associated with the military, has two faces, but fundamentally depends upon the risks that the Government is prepared to take. It is about having the capability to operate as, when, where and for the period required. One face – operational advantage – addresses the threat. As the name suggests it is focused on the risk of going into a confrontation in an inferior position – be that inferior technology, inferior training, inferior maintenance, inferior tactics. Operational advantage requires investment for innovation, and for designs appropriate for the operating environment and that address other operational requirements.
The other face – freedom of action – faces the supplier. It is the risk that supply and/or support is not available when required. It is not necessarily the risk that supply/support will be withheld, just that it might not be available when required – we might be a lower priority from the supplier than their other requirements.
Somewhat paradoxically this is more likely to arise in coalition activities, and with equipment sourced and supported by allies than with other suppliers, particularly if we are likely to be in the same fight, and requiring the same support at the same time. Logically that supplier will prioritise their own requirements. The withholding of support for the Oberon class submarine by the UK during the Falklands War shows that this applies to even the closest of friends.
These risks will vary depending upon the criticality of a particular capability to a desired operational outcome. The way to mitigate these risks is through defence industry sovereignty.
Defence industry sovereignty, therefore, is not just “doing stuff” in Australia, it is having control of both the “doing” and the “stuff” – having control over the innovation, over the design – and over the how-how and the know-why of the design, over the manufacture, over the ability to upgrade, and over the ability to update and upkeep. As noted previously, this control needs to come from within the state, but sadly, in Australia, most of the control rests overseas.
Now to industry trends.
For some years now I have been analysing industry trends by considering the contracts placed by the Defence Department and, previously, the DMO. All contracts. The data for this analysis has been sourced entirely from Austender, and covers the period July 2007 (when Austender records began to be placed online) to June 2019.
As the Austender data reports single contracts, the analysis has been done by assigning each single contract as a separate data point. It is an analysis of the commitment of the Government to spend money – not the actual spend.
The figures cover all contracts awarded – the big acquisition projects, sustainment, legal services, professional services, infrastructure, hire of indoor plants, etc, etc.
It is not a cash flow analysis, but you can’t have cash flow if you don’t have a contract. As you cannot spend the money twice, the trends displayed from this analysis must therefore appear in cash flow analyses in some form over time. I have had these arguments with the Department previously.
One other point before the results. The analysis does not show sub-contracts. It does not show how the money might flow into the lower levels of industry.
From a purely economic perspective this might be an issue, but for a consideration of sovereignty it is not a factor as sovereignty is about control – and you don’t have control in a sub-contract, and particularly when the Prime contract is held by an overseas entity.
So, what has been happening in Australian defence industry? If we go back in time, there was a healthy pickup in the work contracted into Australia and that contracted to Australian companies. (The green line is total work into Australia – the grey line is for Australian companies). This was driven by projects such as Collins, the ANZAC ship build, and Jindalee.
It is important to note at this point, that Australian companies are those where the control rests within Australia. Thales Australia, BAE Australia, etc are not Australian companies as the control is held in offshore locations, profits are returned offshore, and the really important decisions are made offshore.
In more recent times both of these measures have reduced – the Australian industrial involvement much, much faster that the total involvement. About 10% of the contracts placed by the Department of Defence are with Australian-controlled companies – almost 40% of the expenditure, and the profits on another 50% flows overseas.
A variety of factors are at play – the increased use of Foreign Military Sales for both acquisition and sustainment is one, but particularly the sale of Australian defence companies to offshore interests – for example, ADI to France in 2006, Tenix to the UK in 2008, Rosebank Engineering to Switzerland in 2012, QANTAS Defence Services, Nautronix, HSA, Micreo, Hawker Pacific, Aviall, Insitu Pacific and Sigma Bravo to the USA at various times, Broadspectrum (formerly Transfield) to Spain in 2016, Avalon Systems to the UK, and so on.
Also, anecdotally, the figures reflect a reluctance on the part of the Department to trust Australian industry to do the job. Lower risks seem to be subscribed to companies in other locations. The 2016 Defence Industry Policy Statement recognised the need to change the Defence Department culture on innovation, but nothing substantially seems to have changed.
Now we take a look at Acquisition – and specifically at the percentage of Acquisition contracts that are awarded to Australian-controlled companies. We get this.
We have high levels of Australian company involvement in the earlier projects, but a dramatic decline in more recent years.
The hard truth is that Australian-controlled companies are not being trusted to provide the capabilities upon which operational advantage relies.
In some cases, Australian companies are being told they must convince the big overseas Primes of the value of their technology and then Defence will acquire it. This not only exposes their IP to offshore companies, but also makes them an acquisition target themselves – which further exacerbates the problem.
And on to sustainment – which is regularly stated as being the future for the Australian defence industry. In most cases this is the in-country sustainment of capability that has been developed by, and sourced from, offshore vendors. Recent contract awards for major systems for the Attack class submarine are an example of this.
When we look at recent sustainment activities the picture is even more dramatic, and dire than that for acquisition. Australian companies are simply not getting the contracts that will allow the development and/or maintenance of the sovereign capabilities that the Government states that it wants. Capabilities that we need if we are serious about having freedom of action.
Where does that leave us? Where do we go/ where can we go from here? Is Defence Industry Sovereignty – and Operational Sovereignty – possible in Australia under these circumstances?
The first option is not to change anything. The involvement of the local industry in defence acquisition and sustainment is likely to decline further, and operational sovereignty will not be possible. If this is not an issue for Government then tell industry that this is the case. They will adjust.
Under this option, the Government will need to encourage, perhaps even dictate to the Primes, the involvement of Australian companies as sub-contractors purely for economic benefits. Otherwise, the easy approach for global companies will be to use their existing global supply chains, profits will flow overseas, and any meaningful local content will diminish.
The other option is to rebuild the domestic capability towards having a sovereign capability. Not in all capabilities, as we know that we don’t need it in all capabilities, and we certainly can’t afford it in all capabilities.
If we really want operational sovereignty, we need to identify the capabilities that are actually critical for operational advantage and for freedom of action. We also need to identify those capabilities that, whilst not being critical are nevertheless important. Given the parlous state of the local industry, it will likely mean actively supporting the Australian companies within these important areas to ensure that they do grow their industrial capability.
And it will mean putting in place measures so that these companies are not just picked off as they grow.
This will be good for strategic outcomes, but it will also be good for employment, for economic performance, for national innovation, and for the generation of IP.
I can’t see that there is a middle ground.