Wednesday, 2 December 2015
Joint Standing Committee on Foreign Affairs, Defence and Trade; Report
On behalf of the Joint Standing Committee on Foreign Affairs, Defence and Trade, I present the following reports: Principles and practice—Australian defence industry and exports and the Review of the Defence annual report 2013-14.
Reports made parliamentary papers in accordance with standing order 39(e).
by leave—On behalf of the Joint Standing Committee on Foreign Affairs, Defence and Trade, I have the great pleasure of presenting two reports:
The report into the inquiry of the Australian government support for Australian defence industry exports, entitled Principles and practice: Australian defence industry and exports; and
The Review of the Defence annual report 2013-14.
I will give an overview of each report, beginning with the report on the inquiry into Australian defence exports.
The committee accepts evidence presented—and validated by the recommendation of the first principles review—that there are elements of defence industry essential to the Australian Defence Force capability. Defence therefore has an obligation to identify elements within the defence industry that constitute fundamental inputs to capabilities, known as FICs.
In the committee's view, Defence must use available means to enhance and sustain FIC related elements of the defence industry that affect ADF capability, including through domestic procurement programs and enhanced support for exports.
Where exporting would assist to sustain or develop industry elements that are identified as FICs, support for defence exports should be viewed as a core Defence responsibility, in the same way as service chiefs manage other FIC elements.
This would fundamentally change how the assessment for value for money should be approached within the Defence procurement process, particularly by establishing long-term partnerships with industry, rather than trying to achieve value for money through open competition as a default position. Many projects would deliver better value for money with long-term partnering agreements, such as those that have been shown by the UK experience.
The report contains 19 detailed recommendations. The committee recommended providing assistance for Australian defence exports based on a distinction between core and secondary export focus:
The core export focus should apply to elements of industry output recognised as a fundamental input to capability, where defence exports can help sustain or spread production costs. This support should extend to funding for research and development that supports exports that will have an impact on the associated FICs. Secondary export focus would apply to those elements of industry output not recognised as a fundamental input to capability. In such cases, Defence and other related agencies should provide assistance, wherever practicable.
Lastly, subject to acceptance of the committee's core proposals, the committee has recommended that Defence discontinue the Priority Industry Capability and Strategic Industry Capability programs, retain the Australian Industry Capability targets for procurement activity that do not involve an identified fundamental input to capability, and continue to promote the Global Supply Chain scheme wherever possible.
Today I also present the committee's report on the Review of the Defence Annual Report 2013-14. I will mention in turn the key issues that arose during the committee's review.
The committee considered personnel matters, including Defence's critical categories of employment, Project Suakin and Reserve Policy.
Defence needs to ensure that employees have task-specific competence for their role and the relevant experience. The Job Families Project, an approach used to monitor APS gaps in critical capabilities, needs to be further developed. The committee has recommended that Defence collate and, in particular, publish figures on Project Suakin.
The committee also examined a range of mental health issues in the ADF. The committee recommends the departments of Defence and Veterans' Affairs report on the progress and the results of their mental health programs.
The committee is concerned about the extent of unfunded liabilities in Defence estate and infrastructure and believes it is important to have visibility on the cumulative effects. Although the committee does not expect Defence to include unfunded liabilities in its annual financial statements, the committee recommends that Defence report more details of its unfunded liabilities.
The committee is pleased by Defence's efforts on fuel farms and fuel management. To further this progress, the committee believes Defence should actively explore options to engage and collaborate much more with industry. In addition, the committee recommends enhanced reporting in future Defence annual reports on the Fuel Services Branch.
The committee is also pleased with the long-term improvements to Defence Housing and the quality of housing options available to ADF families. However, the committee recommends Defence, in partnership with Defence Housing, prepare a much more effective community consultation and communication framework for future housing redevelopments.
More generally, the committee found that reporting of performance should be much more transparent. For example, reporting to parliament on the Joint Strike Fighter needs to be much more comprehensive and similar to that made to the US congress.
In conclusion, the committee acknowledges the dedication and commitment of the men and women of the ADF and commends them on the outstanding service they provide to the nation. The committee also recognises the work of the APS in supporting ADF personnel on operations. It should also be recognised that ADF personnel are supported by a strong network of family and friends, and the committee expresses its appreciation for their sacrifice.
I would like to thank the committee members. I note the member opposite, Mr Feeney, and thank him so much for his efforts and his work in this area. I would like to thank the many witnesses who gave their time to appear at the hearings and those who made submissions to the inquiries. I would like to also express my sincere thanks to the secretariat for the fine work that they do to assist all members and senators on the committee. I commend the reports to the House.
by leave—I rise to speak to one report in particular, that being the government support for Australian defence industry exports. There are two aspects in particular of this report upon which I want to dwell. I commend the report to the House. While defence procurement and defence industry generally is often regarded as a particularly arcane field of public policy, it is a profoundly important area of public policy. In this report, the parliament is well served and the debate is well served by a committee serviced by a secretariat that took to the task with great passion.
There are two aspects of this arcane field, if I can perhaps put it in those terms, upon which I want to draw the House's attention. For the committee members—and, I might say, for the Labor Party—a longstanding value is that, in defence policy, a preeminent notion is self-reliance—self-reliance insofar as possible Australia and the operations of the ADF should be able to undertake their work without relying on the capabilities of an external partner or, for that matter, the capabilities found resident in defence industries overseas. Australia does sit at the end of a very long supply chain and, as a consequence, in pursuing the objective of self-reliance, we must have particular regard to the capabilities found in Australian defence industries. That is why one of the central findings of this report and something that shaped the whole of its approach was the view that Australian defence industry needs to be regarded at the most senior levels of defence as a capability, and that needs to be more than just rhetoric. That needs to be vested in the fact that, henceforth, Australian defence industries will be regarded as a fundamental input to capability.
There are presently defined eight fundamental inputs to capability, and they are defined as personnel, organisation, collective training, major systems supplies, facilities and training areas, support, command and management. The fact that industry is not currently regarded as a fundamental input to capability is a flaw, and this report highlights the fact. By making sure that defence industry is regarded as a fundamental input to capability, that would mean that henceforth, in major procurement undertakings, it would be at the very earliest moments in defence planning that the capability of the Australian defence industry to contribute to that acquisition and sustainment program would be contemplated, and there would be a far more holistic sense inside the department and our acquisition processes about the real cost of the sustainment, the risks to sustaining that capability in Australia, and the risks to Australian defence industry ensuring that the ADF can use that capability in a proper operational sense. This is a transformative notion, and it is one that I strongly endorse and that I think is a keystone of this report.
When we talk about Australian defence industries, it is worth considering for a moment the state of Australian defence industries, and some of the unique challenges that the arms trade faces in Australia and beyond. As I said: Australia is an island at the end of a very long supply chain. A long-term defence industry is a national asset and it is vital to us achieving our goal of self-reliance. There is not a clear picture of how large the defence industry is in this country, but it is very significant. In 2010, it was estimated that there were some 3,000 small-to-medium companies engaged in the defence sector, employing something in the order of between 29,000 and 37,000 Australians. It has been true since the end of the Cold War that North American and European defence budgets have declined and, as a consequence, multinational defence prime contractors have been consolidating and reducing in numbers. As a consequence, they are more active in the pursuit of export markets, and Australia today sits very high indeed on their list of targets as a significant defence equipment importer. It must be recognised by this place that we are a very significant importer. The Stockholm International Peace Research Institute ranks Australia as the fourth-largest defence importer in the world, after India, China and South Korea.
However, when one looks at the AusTender site, trends in contracting reveal that there is a decreasing amount of DMO contracts—that is the Defence Materiel Organisation, now known as CASG—being awarded to Australian companies, and a corresponding increase in contracts being placed with offshore entities, particularly the US government, through foreign military sales. The Stockholm International Peace Research Institute reported that Australia was the recipient of 10 per cent of all US military deliveries from 2009 to 2013; again, a remarkable statistic. It is not surprising that the trends reveal that the current acquisition and sustainment activities and patterns of defence have helped foster a climate where there is declining industrial capability within Australia, and increasing reliance on offshore industry and, as a consequence, increasing risk in the area of industry capability and self-reliance. Defence requirements may dominate some spheres of endeavour—shipbuilding and ship repair being obvious ones—but it makes a smaller contribution to the overall Australian markets in electronics, vehicles and other products. And, if the pattern established at this time continues, then Australian defence industries will continue to shrink, our capacity to sustain ADF capabilities will continue to be at risk, and we will continue to see our goal of self-reliance undermined. This report is timely and it is timely to a very important debate that should and does enjoy, I think, a strong bipartisan spirit.
When talking about the Australian defence industries, we often use terminologies and assumptions that are found in the broader economic debate and do not belong in this debate. Let me explain why it is that, when people in this House rise to their feet and demand that Australian defence industries be globally competitive, they may very well be using terminology that is misapplied to this industry. Let me quote Anne Markusen from her study, 'The Arms Trade as Illiberal Trade', where she says:
While free trade quickens the pace of world economic integration, the arms trade remains an anomaly. Protected from the rules and enforcement of new institutional regimes, arms sellers are free to refuse transfers to any party while arms buyers may extract commitments of 100% or more in countertrade or buy only from indigenous industry. Yet the world arms market and the defense industries that supply it are markedly more international today than they were a decade ago. Illiberal trade practices in this unique market have created a complex web of state-to-state, firm-to-state and firm-to-firm relationships that make it difficult to analyze the overall security and economic consequences of the arms trade in the post Cold War era.
The fact of the matter is that there is no open or transparent defence and security market in the contemporary world—not in the United States, not in Europe, the Middle East or the Indo-Pacific, let alone in the Russian and Chinese supply chains. Defence and related industries are excluded from multilateral and bilateral free trade instruments. The most comprehensive of these, the World Trade Organisation's Agreement on Government Procurement, makes this very plain in article 3.
Defence and related industries are not only exempted from international trade agreements but their performance is further distorted by the necessity for secrecy and by geostrategic considerations—obviously some customers will not buy from some suppliers—together with widespread government protection. An outstanding example of this is in the United States with the Buy American Act, which of course means that the largest defence market in the world enjoys extremely high levels of protection. Regulatory support subsidies and other forms of support by nations throughout the world mean that this is not a trade where it is easy to speak of firms and businesses being internationally competitive, and defence industry is often difficult to assess or define. Yet, while all this is the case, Australia continues to adopt an open-market approach with no hurdles for foreign suppliers to compete for its defence projects. And so while governments around the world are using many policies and programs to preference and guard their Australian defence industries, we are not.
So this report is timely. It is timely because it deals not only with the challenges that confront Australian defence industries—the fact that they are shrinking and the risks that poses for our broader strategy—but also of course with the fact that the Australian defence industries—while needing to operate successfully in a global marketplace; while needing to find export markets so as to properly supplement their work here in Australia and as a consequence perform better in Australian strategic interests—and in the conversation that we have we must remember this—are operating in one of the most—if not the most—regulated and distorted markets in the world. They are operating in a marketplace where national interest and exemptions from free trade instruments mean that these markets are difficult to measure and impossible to conceive as being operated by traditional economic concepts of supply and demand.
This is a report that finds itself with added importance at the moment because it has arrived in something of a vacuum. The 2013 Defence white paper remains the extant strategic guidance for Defence. We are now told that the much-awaited Defence white paper 2015 will be the Defence white paper of 2016.
One of the key aspects of this report and the evidence given to the committee is that the Australian Defence industry has now for a very long time endured an uncertain investment plan. That is why Labor welcomed the notion of a 10-year Defence investment plan. The next trick is for such a plan to arrive. The defence capability plan of some years ago has not been replaced or updated. This contributes to the difficulties the Australian Defence industry has when it seeks to gain capital, build investment and build capability in this country.
This is a fine report and I commend it to the House. I conclude by thanking very much the Chair of the Defence Subcommittee, Senator Fawcett, for whom this report was a labour of love. I very much thank all of the members of the committee for their work. I thank, too, Mr Jerome Brown and Wing Commander Joanna Elkington and their team of research officers for their work and the passion they brought to this task. I also thank the secretariat. This is a fine contribution and I commend it to the House.