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Wanted: a new defence industry policy framework

The Business of Defence - Sustaining Capability argues Australia's defence industry strategy is at a turning point. However much they may otherwise differ, this view is shared by all contributors to the CEDA study. There are three primary reasons:

• The first results from the globalisation of the industry structure. Much future procurement will involve Australian firms as sub-contractors to the global supply chains of major off-shore primes. This new pattern of relationships poses a host of collaborative, technical and distance challenges for Australian firms. These challenges will be complicated by the fact that there will undoubtedly be further rationalisation of defence industry in the US and Europe-resulting in less (not more)competition in our marketplace.
• The second reason to develop a new approach arises from the unique character of this industry. Government is the sole buyer. In the interests of national sovereignty it needs to preserve local capabilities at least sufficient to sustain through life support and repair and modify in times of war. But this is no easy task. Subcontract relationships to off-shore primes reduce Australia's degree of freedom in developing an industry structure to its own taste. Further, technological and other uncertainties remain large and can evolve significantly through the life of a defence project. At the least, these latter considerations increase the pressure on government to be clear about what it wants. It also invites government to play a more active role in the development of collaborative capabilities at the firm level and to develop new forms of linkage with its industry partners.
• Third, uncertainty also surrounds Australia's geo-political outlook, yet procurements involve long term decisions and expensive equipment will now remain in service for longer-often for 30 or more years. The key issue here concerns the extent to which Australian forces will operate in conjunction with those of major allies or in a more self-reliant way, especially in conflicts in our own region.

While there are differences of emphasis and perspective between the papers, there is general agreement that the response requires more investment in the conception or strategic phase of projects, closer links between the military services and industry specialists in the development of equipment requirements and more transparency. In addition, alliance contracting and other novel approaches are likely to become more prominent in the relationship between government and its suppliers in delivery phases. These are a response to technological and other uncertainties and commercial risk, bidding for work with international primes etc. But these organisational developments need to be associated with acceptance of a more directly catalytic role by government and more transparency in relationships.

In general, for its clarity about challenges, about the strategic capabilities required to sustain national sovereignty and for its detailed attention to organisational and institutional issues, the recently produced British Defence Industrial Strategy Defence White Paper presents a model for what is required, in another key, for Australia.

You can view a detailed summary of all nine papers.

There is substantial agreement between the papers in The Business of Defence on the general factors which are shaping the defence procurement and industry environment, but there are also significant differences of emphasis and interpretation. Three factors would seem to be primary in the development of a policy framework.

• First, the government's own geo-strategic assessments will prescribe likely scenarios around which general defence capabilities need to develop. There are naturally many uncertainties here, not least the emphasis between neighbourhood, regional and alliance responsibilities.
• Second, these general capabilities will be the foundation for identification of specific strategic capabilities that need to be developed in local industry to ensure through life support of equipment and repair and modification of critical components in times of conflict. Many factors, not least technology, create an array of options here. Much depends upon whether government wishes to sustain an independent ADF capability, or not.
• Third, the capacity of local suppliers to successfully enter the supply chains of global primes will also be an important factor in determining levels of local defence industry activity. In this latter area, government can play a facilitating role, but unlike in the past, market forces will be primary.

A new policy framework needs to reconcile and balance considerations like these - considerations which are both not readily consistent and also substantively problematic. What is clear, however, is that because of its monopsony power government can help shape appropriate strategic outcomes, if it so wishes.