Policy Paper

by Craig Stone
Canadian Forces College
January, 2014  

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Table of Contents

• Executive Summary 
• Introduction
• Background Issues To Australia's Defence Industrial Policy
• Australia's Defence Industrial Policy in 2012
• Areas of Concern
• Lessons for Canada
• Concluding Remarks and Recommendations
• Annex A
• References
• Endnotes
• About the Author
• Canadian Defence & Foreign Affairs Institute

Executive Summary 

A number of Canadian acquisition announcements over the past few years have generated significant debate about a variety of issues like whether or not Canada should have a separate procurement agency, whether or not industrial and regional benefits are appropriate and whether or not Canadian companies should be given preference over international companies. In discussions about improving our procurement process Australia is often used as an example because the nations are generally considered to be similar in size with respect to GDP, population and military. This study examines Australia’s approach to establishing a defence industry policy with a set of Priority Industry Capabilities and how that policy connects with military procurement in order to identify those lessons that might be useful for Canada as it seeks to improve its own procurement process and its relationship with the defence industry. The study looks at some important background information on the Australian experience and then looks more specifically at the most recent articulation of policies in Australia. Although Australia is not without its own challenges, there are a number of lessons that stand out for Canada. This study discusses the lessons for Canada and recommends that government spends the time and effort required to connect a series of related policy documents that provides industry and others with an articulation of what the government of the day intends to do and what their priorities are moving forward. It also recommends a holistic review of the entire procurement process to determine what is working well and what actually needs fixing would be useful.

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Introduction

The main strength of this latest stage in the evolution of defence industry policy is its comprehensive catalogue and description of the range of practical, funded programs in place to foster the development of the Australian defence industry base.
- Robert Wylie1

The Canadian government’s decision and subsequent acquisition announcements over the past few years have generated significant debate about whether or not Canada should have a separate procurement agency, whether or not industrial and regional benefits are appropriate and whether or not Canadian companies should be given preference over international companies to name just three issues out of the many that have been raised by the media, government officials and industry. Much of this debate is connected to the 2008 release of the Canada First Defence Strategy (CFDS) and the significant increase in funding specifically identified within the strategy for military procurement. More importantly, since the release of the CFDS, a number of the military procurement projects identified in the strategy have not proceeded as planned and could be considered political liabilities for the government. They are problematic in terms of the industry’s ability to meet the requirements based on the funding available and/or problematic in terms of industry concerns about the process being unfair and biased to one solution. This set of conditions has created an environment where serious consideration is now being given to changing how procurement is done in Canada.

Wylie's quote above was made in reference to Australia's most recent defence industry policy statement Building Defence Capability: A Policy for a Smarter and More Agile Defence Industrial Base.2 Wylie’s statement captures two issues that have been consistently lacking in the relationship between Canada's defence industry and military procurement. First, the statement implies that there is a comprehensive catalogue and description of funded programs to foster the development of Australian defence industry. This is something that has never been done in Canada, although some might argue that the CFDS does provide a list of large procurement projects. Second, the statement implies that this is the latest stage in the evolution of defence industry policy which in and of itself implies that Australia has had previous defence industry policy statements. Again, a defence industry policy statement is something that has not been done in Canada.

Australia is often used as an example for how Canada might improve both its procurement process and its relationship with industry because the nations are generally considered to be similar in size with respect to GDP, population and military. This paper will examine Australia’s approach to establishing a defence industry policy and how that policy connects with military procurement in order to identify lessons that might be useful for Canada as it seeks to improve its procurement process and its relationship with the defence industry. The study will begin with a brief look at some important background information on the Australian experience and then look more specifically at the most recent articulation of defence policy and defence industrial policy. Next, the study will identify some of the concerns about the policy that have been raised by industry and others. Finally the study will discuss what lessons Canada can take from the Australian experience beginning with an examination of the most recent government and industry initiatives that are attempting to resolve the procurement challenges in Canada.

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Background Issues To Australia's Defence Industrial Policy

Although the intention of this paper is to look at the most recent articulation of defence industrial policy, it is important to note that Australia has been issuing defence and defence industry policy papers on a fairly consistent basis since before 2000. For example, since 2000 Australia has issued three industrial policy papers, four defence policy papers, and conducted two formal procurement reviews.3 In that same period Canada has issued one policy paper in 2005, the Liberal Government’s Canada’s International Policy Statement: A Role of Pride and Influence in the World, which included a chapter on defence. This was the first policy statement since 1994 and a year after its release the government was replaced by the electorate. Since then, the Conservative Government has not issued a defence policy statement, although many consider the Canada First Defence Strategy the next best thing.

With respect to defence industrial policy, Canada has not issued a separate defence industrial policy statement. Canada has traditionally included comments on defence industry issues as part of its defence policy and this has varied from a few paragraphs to a few pages.4 More specifically, a review of Canada’s defence policy statements would indicate that Canada devotes attention to the defence industry within its defence policy statements only when the government of the day plans to make significant investments in defence. This lack of a specific defence industrial policy is at odds with many of our traditional Allies, particularly since the end of the Cold War and the significant restructuring and consolidation of national defence industries that has occurred.5 It is in this context that an examination of Australia’s approach to this issue is useful. Both Canada and Australia have similar problems in terms of scale and scope for their defence industries, but Australia has taken what appears to be a much more proactive and transparent approach.

The starting point for any discussion on Australia’s defence industrial policy is the connection that Australia has made between its defence policy, its defence industrial policy and the Australian Defence Force (ADF) capability requirements.6 In addition, the process of developingpolicy during the past decade has also included significant public input and this has helped the government of the day move forward with implementing its policies. More importantly, although the political party in power has changed the overall approach to defence has not. There is consistency in policy between what the Liberal Party issued in 2007, what the Labour Party issued in 2009, 2010 and most recently in 2013.

The 2007 policy statement Australia’s National Security: A Defence Update 2007 indicated that it was important for Australian industry to “continue to make a significant contribution to delivering the Defence Capability Plan (DCP) in a timely and cost-effective way.”7 The same document indicated that “Australia’s defence industry is crucial to our national security and it underpins the Defence organisation’s ability to perform its mission.”8 The actual defence industrial policy Defence and Industry Policy Statement 2007 had essentially the same wording and also articulated an intention to connect the defence industry policy to “the Government’s broader approach to Australian industry that seeks to create sustainable prosperity for the nation.”9

Three additional issues are important from the 2007 defence industry policy statement. First, there was a clear connection to the 2003 procurement review when the government indicated that “a central plank of the procurement reforms is the close involvement of industry prior to project approval to assist in refining costs, identifying risks and clarifying capability requirements.”10 By this statement the government was acknowledging its belief that defence procurement was the only concrete way to shape Australia’s defence industrial base.

Second, the 2007 policy statement identified Priority Industry Capabilities (PICs) and connected those capabilities to the classified Defence Planning Guidance and the public version of the Defence Capability Plan.11 This connection was to be achieved by including the requirement for a Defence Industry Self-Reliance Plan, – a classified document that would complement the Defence Capability Plan. Figure 1 shows the relationship between the internal classified documents and the external public documents.

Second, the 2007 policy statement identified Priority Industry Capabilities (PICs) and connected those capabilities to the classified Defence Planning Guidance and the public version of the Defence Capability Plan.11 This connection was to be achieved by including the requirement for a Defence Industry Self-Reliance Plan, – a classified document that would complement the Defence Capability Plan. Figure 1 shows the relationship between the internal classified documents and the external public documents.

The relationships that are shown in Figure 1 are an evolution and refinement of the previous Defence Needs of Australian Industry policy documents that were released beginning in 1997.12 In the initial policy documents there was a much broader indication from government to industry of what capabilities the ADF would be looking for in the future. At that time the articulation of specific industry capabilities and the notion of taking a strategic approach to defence industrial policy was a relatively new concept for Australia. The 1998 policy statement focused on integrating industry with the capability development process and Australian governments have continued throughout the last decade to improve on the connections between industry and the capability development process for the ADF. For example, Robert Wylie indicates that “Developing defence policy for Australian industry is an iterative process. The latest iteration, released in 2010, builds on the previous 2007 iteration’s attempt to formulate a strategy-led industry policy.”13

Source: Australia. Department of Defence. Defence and Industry Policy Statement 2007 Canberra:
Defence Publishing Service, March 2007
Figure 1: The Relationship between Industry Priorities and Capability Planning

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Australia's Defence Industrial Policy in 2012

The current 2010 defence industrial policy, Building Defence Capability: A Policy for a Smarter and More Agile Defence Industrial Base, is based on the 2009 defence policy for Australia, Defending Australia in the Asia Pacific Century: Force 2030 (Defence White Paper 2009). Both of these documents make reference to the 2008 procurement and sustainment review Going to the Next Level: the Report of the Procurement and Sustainment Review, and the defence industry policy also makes reference to the strategic reform program that was launched in conjunction with the 2009 defence policy, The Strategic Reform Program: Delivering Force 2030.15

The defence policy statement provides the government’s views on a number of key issues with respect to Australia’s defence industry. Three are particularly relevant to discussions later in this study.

The government has indicated that

military-off-the-shelf and commercial-off-the-shelf solutions to Defence's capability requirements will be the benchmark against which a rigorous cost-benefit analysis of the military effects and schedule aspects of all proposals will be undertaken. Such an approach is consistent with the Defence Procurement and Sustainment Review.16  

In many respects it is the last part of the above quote that is most important – consistent with the ‘Defence Procurement and Sustainment Review.’ Not unlike what Canada is experiencing, Australia has also experienced schedule delays and cost overruns with some of its recent procurement projects and this has influenced how the Australian Government has articulated its defence policy and its defence industrial policy.

The second key issue that is discussed in the defence policy is industry’s role in supporting ADF capability. There is a clear indication within the defence policy that the Australian Government wants to increase the defence industry’s ability to support the ADF. For example, the defence policy states “Defence will adopt procurement and industry strategies to grow local industry capacity and competitiveness,”17 This is to be achieved by:

• increasing industry capacity and competitiveness through targeted productivity and workforce growth initiatives;
• building greater flexibility into Defence Capability Plan reprogramming to mitigate the adverse capacity and capability impacts associated with large expenditure peaks and troughs; and
• if necessary, increasing the amount of offshore expenditure, to a level that allows for a more managed, sustainable and achievable local industry growth rate.18  

Third and perhaps most important, is the commitment to ensure that “certain strategic industry capabilities remain resident in Australia.”19 However, the policy also indicates that Australia “should not pay a premium for local industry work, unless the costs and risks of doing so are clearly defined and justifiable in terms of strategic benefits.”20 Consequently, the government has decided to articulate priority industry capabilities and will intervene in the market place if required in order to ensure those industries remain viable. Initially, the articulation of those priorities was not going to be publically identified but that decision had changed by the time the 2010 defence industrial policy was released. Their initial view was that making the list public “would confer an advantage on any adversary seeking to exploit critical strategic vulnerabilities, and would compromise commercial leverage.”21 This was changed shortly after the defence policy was released when Senator John Faulkner, the Minister for Defence at the time, indicated that the government recognized the value of the information for industry to make plans and investment decisions and therefore “we have decided after careful consideration of the commercial and national security concerns of the government, to make additional information about the Priority Industry Capabilities publicly available from today.”22

The 2010 defence industrial policy builds on the defence policy statement and provides specific guidance on the Priority Industry Capabilities (PICs) and also adds Strategic Industry Capabilities (SICs) that it wishes to monitor. It also provides much more specific views on how it will approach connecting ADF capability with industry. There are a number of important issues that are articulated in the industrial policy and some of the policy intentions appear to be at odds with other policy intentions.

The government has indicated that “Industry must become more resilient and self-reliant if it is to prosper… It can no longer expect the government to use offsets or local content quotas to help protect Australian defence industry from overseas competition.”23 This is also consistent with the most recent Commonwealth Procurement Guidelines that establish value for money as a core principle best achieved through competition. Competition will encourage innovation, improve productivity and promote efficiency. The defence industry policy also indicates that in order to deliver the capability requirements of the 2009 Defence White Paper, the industry will need to significantly increase its local capacity through investment. Caruso et al summarize the four principles that are underlying the policy as “(1) to set clear investment priorities; (2) to establish a stronger Defence-Industry relationship; (3) to seek opportunities for growth; and (4) to build skills, innovation and productivity.”24 The difficulty with this focus on competition and the desire to not use offsets is that the requirement to grow local industry and identify PICs that are actually achievable for Australian industry may require deliberate intervention by government, which is at odds with market based competition.

Australia’s defence industry today is “predominantly made up of 3,000 SMEs and eight recognised defence Primes, with only one Prime, ASC Pty Ltd, Australian owned. The defence industry in Australia employs around 29,000 people with SMEs accounting for 50% of employment in the sector.”25 This is not unlike Canada’s defence industrial base which is also composed of primarily small and medium sized enterprises having niche capabilities and more often than not with parent companies located elsewhere.26 Within the Australian manufacturing sector, defence industry is concentrated in shipbuilding and repair, aircraft assembly, modification and repair, electronics and computing, vehicles and clothing.27 Almost 80% of the expenditures by DMO are concentrated in the electronics, aerospace and maritime sectors as shown in Figure 2 below.

Source: Australia, Department of Defence, Building Defence Capability: A Policy for a Smarter and
More Agile Defence Industrial Base (Canberra: Defence Publishing Service, 2010), 27.
Figure 2: Defence Expenditure by Sector

When Australia’s 2009 Defence White Paper was developed, the outlook for defence and industry could only be considered positive. With approximately $100B expected to be spent by government on replacing and maintaining defence equipment over the next 10 years, the outlook for local industry was positive. However, two important issues from the 2008 procurement review are worth noting. First, the review highlighted that any analysis of market trends would suggest that “Australian-unique defence programs will become increasingly uneconomic in the future” and that “While Defence demand is high in dollar terms, the volume of units required by the ADF is unlikely to lead to efficient manufacture.”28 In essence, this implies that Australia, like Canada, will have to explore ways to combine its demand with that of its allies to achieve economies of scale, particularly for major weapons systems like the F-35 Joint Strike Fighter.

Second, the 2008 procurement review also noted that Australia needed to “take advantage of acquisition opportunities, including off-the-shelf purchases and international programs, to contain costs and free-up local industry capacity for priority tasks.”29 This actually supports the plan to provide a list of PICs, but the challenge facing the Australian Government is to find the correct balance between growing priority industries that are compatible with the defence capability requirements of the ADF while also remaining consistent with the recommendations of the most recent procurement and sustainment review. Of particular interest with respect to the emphasis on purchasing off-the-shelf is Caruso et al’s observation that

The success associated with the introduction of the C-17 Globemaster transport aircraft and Super Hornet fighter aircraft, schedule slippages and cost overruns attributable to extensive Australianisation of previously introduced capability, and the strength of the Australian dollar increases the incentive for buying COTS/MOTS [commercial off-the-shelf/military off-the-shelf] offshore, and decreases the focus on manufacturing locally.30 

The 2010 defence industry policy builds on the 2007 policy and provides a much clearer articulation of the role of PICs, (See Annex A for the list of the twelve PICs related areas). PICs are defined in the 2009 defence policy statement as “those industry capabilities which would confer an essential strategic advantage by being resident within Australia, and which, if not available, would significantly undermine defence self-reliance and ADF operational capability.”31 The intention is that these PICs will be reviewed regularly as part of the development of the annual defence planning guidance, the main defence planning document for the ADF between White Papers.

It is this connection to the annual planning guidance that provides Australia the ability to connect defence industrial policy with defence policy and ADF capability requirements. It also allows the procurement process to be connected to the industrial policy priorities because solutions to defence capability requirements are managed through the procurement process, both acquisitions and sustainment. This is consistent with the 2008 procurement and sustainment review’s recommendation that “[D]efence should prepare an annual submission detailing current and future capability gaps and the priority for their remediation for government consideration and approval.”32

The 2008 procurement and sustainment review also recommended that the public capability plan contain enough information with respect to project scope and timings that industry would be able to develop strategic business plans. Again the consistency across policy documents is apparent when both the defence policy and the defence industry policy indicate that industry will be advised of any changes to the priority areas through the public version of the Defence Capability Plan.

The actual 2012 public version of the defence capability plan is structured so that each equipment acquisition proposal over the decade to 2021 is presented in a common format: Background, Australian Industry Capability Considerations, Phase Scope, Planned Schedule, Australian Industry Opportunities, and Point of Contact. The two specific references to industry are further described as:

Australian Industry Capability Considerations provides an indication of the Australian Industry Capability (AIC), Priority Industry Capabilities (PIC), Strategic Industry Capabilities (SIC), and Global Supply Chain (GSC) potential for each phase of the project in tabular format. Further detail on the AIC, PIC, and SIC aspects is generally provided under the Australian Industry Opportunities section of the project phase entry.

Australian Industry Opportunities identify potential opportunities for Australian industry involvement in the acquisition and through-life support stages of the proposal, and in related infrastructure aspects.33 

The Defence Capability Plan also provides additional information about industry opportunities. This is really designed to emphasize the government’s expectation that defence will “ensure best value for money outcomes in Defence spending, based on open and effective competition.” and that “consistent with the principles of value for money and the need to consider OTS solutions, government policy is to ensure that as much of the Defence budget is spent in Australia as is reasonably practicable.”34 In essence, Australia wants to use its industry capabilities policy to “maximise opportunities for Australian industry to participate in the delivery of the acquisition and sustainment of ADF capability and to achieve the required strategic industry capability outcomes where this represents value for money.”35

Discussions with Australian officials about trying to find the balance between using the market and off-the-shelf (OTS) solutions and ensuring that the Australian industry can support the PICs indicate that they are aware of the issue. Australia’s approach is to provide support around a number of alternative industry support programs. For example, the Australian Industry Capability (AIC) program seeks to ensure that whenever Australian industry can competitively provide input into equipment purchased from overseas that industry players should be given the opportunity to at least bid for the work. More specifically, “under the AIC program, all bids for Defence projects valued above $50M or with a PIC implication must include an AIC plan to examine participation by Australian Industry on a value for money basis.”36 Although the threshold is now $AUD 20M, the threshold value is less important than the requirement for bidding competitively because the AIC program does not support paying a price premium just to have Australian industry participate.37 What lowering the threshold does accomplish is that it allows a greater number of small and medium size enterprises to be part of the process.

A second policy approach is to provide assistance to industry in order to increase their competitiveness in the global marketplace. Using a series of grant programs covering industry workforce skilling, innovation, and export market development, the intention is that all industries will have the potential to fully exploit the business opportunities that remain in an off-the shelf procurement environment. In addition it is hoped that increasing industry competitiveness will also help diversify the defence areas of their businesses in order to build the overall size of the Australian defence industry through exports where the opportunity arises. This should in the longer term overcome any increased market volatility which an off-the-shelf procurement strategy produces.

The third policy approach is the PICs program. As indicated above, PICs are supposed to provide a strategic advantage for the ADF. Consequently, Australia has identified the domestic industry capabilities most needed to support the ADF. While many, or even most, of these capabilities relate to the ability to sustain overseas produced equipment, a substantial portion of the PICs cover the capacity for domestic equipment manufacture. The intention is to ensure that Australian industry can support the demands of the ADF within a specified capability range.

The establishment of the current set of PICs and getting agreement on what they actually are has its roots with the Rapid Prototyping, Development and Evaluation (RPDE) program that was established in 2005. Rapid, as the RPDE is commonly referred to, “was created in 2005 as a collaborative arrangement between Defence, Industry and Academia, to solve difficult and complex Defence capability challenges, in an innovative and collegiate environment.”38 In 2008, a workshop was conducted to identify and develop priority industry capabilities. The initial results were analyzed and additional workshops and senior level working groups were held to challenge assumptions, identify gaps in capabilities and come to an agreement on the list that was published in the 2010 defence industry policy (provided at Annex A). The list is focused on capabilities and not companies and there appears to be general agreement on the list by all parties.39

Although the final decision on what becomes a PIC ultimately rests with the ADF, all the players have agreed on the current list albeit with some concerns that will be discussed later. Moving forward PICs will be reviewed on a regular basis to confirm the health of the industrial sector supporting a particular capability area and action will be taken as required if there are problems. Determining the health of a particular capability area will be based on a set of evaluation criteria that are provided in Table 1 below:

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Areas of Concern

Impact of Priority Industrial Capabilities
One of the first issues in the defence industry policy that must be acknowledged is that PICs provide legitimacy for government intervention if the market fails to provide strategically important capabilities. The difficulty is that PICs are not the focus of defence business. As Robert Wylie argues, PICs are only 6-7 % of annual expenditures on acquisition and support and the majority of defence business will be competed on a standard value for money basis.47 This is supported by Minister Combet’s speech at the 2009 annual defence and industry conference where he indicated that the PICs represented approximately $700M while the entire DMO budget was $10.9B.48 Minister Combet’s intent was to highlight that there would be sufficient demand to sustain the industries connected to the PICs. This is at odds with the point being made by Wylie.

Foreign Ownership
A related concern raised by Wylie deals with the identification of PICs and that the government has not actually provided enough guidance on how they would manage the risk associated with a foreign supplier should that supplier decide to withhold or limit availability for political reasons. Caruso et al expand on Wylie’s observation by providing an example where a foreign company with very little presence in Australia was awarded a contract for an acoustic technology identified as a PICs rather than another supplier who had made a substantial research and development investment in Australia.49 It is important to note that the PICs are focused on industry capabilities and not specific companies so it is quite possible for a capability to be provided by an Australian based company with a foreign parent. Despite the appearance articulated above that everyone was in agreement on the PICs, there remain areas, from an industry perspective, that require improvement in implementation.

The issue of foreign ownership is also connected to the broader issue of how much actual capability should the defence industry be providing to the nation. For example, the trend in many western nations over the past decade has been to increase the amount of civilian contractor support for military operations. Australia is no different and is now in a position where industry is operating the strategic communications facilities. In this case industry is
actually providing a capability and sustaining that capability. The policy issue here is related to risk and how much dependence the ADF has on industry to provide required military capability for conducting operations.

The use of industry to provide military capability is not unique in today’s complex security environment. Canada has contracted its basic pilot training to industry and contracted a large part of its logistical support at the base camp in Kandahar to industry. Other nations have adopted similar approaches and solutions to sustain their militaries. For many, this shift to industry providing more direct support is all about achieving savings so that limited funds can be dedicated to more important requirements and Australia has embarked on similar efforts.

For example, the Defence Strategic Reform Program contains a number of initiatives designed to make the DMO operate in a more business like fashion, particularly in how it develops incentives that encourage industry to implement ongoing productivity improvements. This is just one of a number of initiatives that are based on recommendations from the 2008 procurement and sustainment review and are designed to provide $5.1 B in savings over 4 years.50 Within DMO most of the initiatives are connected to enhancing productivity through initiatives like reducing inventories, adopting commercial practices for improving maintenance processes and using better incentive arrangements to increase productivity.51 However, in the broader context of the Strategic Reform Program, the intention is to improve the linkage between policy development, force planning, the development of capability requirements and the subsequent acquisition of those capability requirements.

Practicing the Policy
Another area of concern that has been articulated by Ben White is that the “defence industry’s contribution to ADF capability appears vastly understated in the White Paper.”52 He cites the lack of offset policies and a perceived lack of investment in local industry capability in the past as a concern. In essence White is looking at past action by government and indicates that this brings into question the government’s actual commitment to a viable defence industry in Australia. He goes on to note that “in providing a sustainable defence capability, industry will need to be seen as a vital capability partner” and that “lengthy acquisition lead times and the long in-service life cycle of major Defence platforms means planning for a sustainable defence capability – with industry the primary source for its innovations – must occur now.”53 White’s observation is supported by the example provided in Caruso et al where a company that had invested heavily in research and development within Australia towards a PIC related system lost to an outside contender who had not invested in Australia.

Lack of Specific Guidance for Industry
Australian industry has also articulated a number of concerns about the latest defence industry policy. Although they are generally supportive of the approach, the Australian Business Defence Industry Unit has articulated concerns in four specific areas. First, in relation to the articulation of PICs and SICs they note that they are “too broad and Government funding for the new projects and sustainment work in these areas too uncertain to give industry the guidance or confidence required to invest.”54 Industry will need to have more clarity on how investments inPIC and SIC areas will be promoted and argue that “a public commitment to regular tranches of new Defence projects and sustainment work for PICs and SICs would be a start to giving industry the confidence to invest in these priority capabilities.”55

Need for Longer Term Certainty
The second area of concern dealt with future capital acquisitions and the articulation of requirements into the future. Industry expressed concern over the ability to actually grow industry’s capabilities because most of the projects identified to be modernized or replaced in the current procurement cycle were already set in place. From their perspective, industry needs to know what will be required beyond the next decade if it is to grow the necessary workforce skills needed to meet future requirements. Industry argues that “[W]ithout regular tranches of new defence projects or long-term sustainment contracts, resources will continue to leave defence industry for other sectors.”56 The obvious risk to the ADF is that industry resources will be committed to other work and will not be available for defence when it is needed.

The third area of concern deals with the provision of reliable defence information. This is really a continuation of the previous concern but is more generalized across all of the ADF’s plans and not just capital acquisition. Industry argues that it needs reliable and dependable information in order to make investment decisions. The implication is that this has not happened in the past or that as a general comment, it could be improved upon moving forward. Industry is looking for more certainty and longer term commitments by government for defence projects and sustainment work.

Creating a Real Partnership
The fourth area deals with the notion of creating a real defence and industry partnership and the need to get industry involved early in the procurement process. Industry notes that the focus by the government on “Value for Money and market-based competition in key capability areas means industry gets involved too late to bring the best and most cost-effective solution to the table.”57 Not surprisingly, industry’s view is that if they are engaged earlier the level of risk can be reduced without ignoring the requirement of value for money and competition. Industry argues that “Early industry engagement in this first 20% can help clarify project feasibility, emerging technologies and robust cost estimates and allow industry to align business investment with Defence’s plans.”58 This view requires some caution because industry has also stated, as noted earlier, that early involvement with the needs definition stage must be done carefully to avoid suspicion with respect to intellectual property protection. A related but separate issue is the time it takes to actually complete the contracting process. A recent Defense News article by Nigel Pittaway quotes Graham Priestnall, the President of the Australian Industry and Defence Network, by indicating “You can’t have a situation where it takes the preferred tenderer nine months to get into contract – that’s ridiculous.”59

Increased Dependence on Foreign Supply
In addition to the four areas discussed above, the Caruso et al study provides the results of a survey of South Australian Defence Industries on their attitude towards defence and the 2010 industry policy. Perhaps the most significant observation made to the team was with respect to the increasing dependence on foreign supply with one of the respondents stating: 

While the strength of Australian Industry has been smart sustainment, the continued overseas acquisition of platforms will, over time, reduce the capability of Australian industry to sustain these capabilities. The front end engineering capabilities developed in acquisitions and developmental projects will be lost, leading to the loss of these skills required to sustain the platforms later.60

The Caruso et al study made seven recommendations based on the results of their survey with industry. These are:

• Clarify the government’s intentions with respect to PICs. The government should clearly define the link between required capabilities and industry priorities to provide greater certainty to industry its [sic] investment decisions.
• Audit the defence industry’s capabilities. Perform an assessment of the health of the supplier base in order to identify industry capability gaps. The gaps would inform future government action to obtain the required capabilities and capacities.
• Improve Investment in PICs. The government should contract industry directly to provide the desired level or expertise and industrial capacity for priority capabilities.
• Ensure contracting arrangements between Primes and SMEs are appropriate. Depending upon the risk inherent with each acquisition, Prime contracts should contain provisions to ensure that appropriate commercial terms are flowed down to subcontractors and SMEs to minimize complexity and compliance costs.
• Develop Improved Opportunities for SMEs. Defence should take a more active role in developing the SMEs and implement strategy to help drive efficiencies, to lower costs and make local industry more competitive.
• Improve the R&D funding model. To maximize the government’s return on R&D funding to industry, programs such as the Capability and Technology Demonstrator program need to be made more accountable.
• Conduct a defence industry attitudinal survey annually. To improve the development of the DIPS for future releases, there needs to be a feedback mechanism to capture industry’s attitudes to the Defence relationship and the business impact of the DIPS.61

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Lessons for Canada

These clusters are not as specific as those developed in Australia but the longer term intention if the government implements the Jenkins’ and Emerson’s recommendations would be to provide additional fidelity to these clusters. What prevents that fidelity at the moment is the lack of adequate data to support further refinement. Canada does not have the analytical data nor has it engaged with industry in a way that Australia has in order to develop a more refined list. Despite some of the concerns expressed by Australian industry, it remains prudent to take any appropriate lessons from the Australian experience as Canada moves forward with its own refinement.

Lesson 1

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Concluding Remarks and Recommendations

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Annex A 

AUSTRALIAN PRIORITY INDUSTRY CAPABILITIES
Acoustic technologies and systems
Anti-tampering capabilities
Combat uniform and personal equipment
Electronic warfare
High end system and ‘system of systems’ integration
High Frequency and phased array radars
Infantry Weapons and remote weapon stations
In-service support of Collins-class submarine combat systems
Selected ballistic munitions and explosives
Ship Dry-docking facilities and common-user facilities
Signature management
Through-life and real time support of mission critical and safety critical software

AUSTRALIAN STRATEGIC INDUSTRY CAPABILITIES
Composite and exotic materials
Elements of national infrastructure, including:

• Supply and storage of aviation fuel
• Provision of terrestrial and space communications systems
• Logistic infrastructure for using Darwin and Townsville 

Geospatial information and systems
Guided weapons
Naval shipbuilding
Protection of networks, computers and communications
Repair and maintenance of specialist airborne early warning and control systems
Repair, maintenance and upgrading of armoured vehicles
Repair, maintenance and upgrading of aircraft (including helicopters)
Secure test facilities and test ranges
Systems assurance
System life cycle management

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References 

Australia, RPDE Review April 2012. available at www.rpde.org.au.

Australia. Department of Defence. Defence Capability Plan (Public Version) 2012  Canberra: Defence Publishing Service, April 2012.

Defence Material Organization. Priority Industry Capability Health Check 2011: Infantry Weapons. Canberra: DMO, 2011; available at http://www.defence.gov.au/dmo/id/pic/docs/PIC_FactSheet_InfantryWeapons.pdf

Building Defence Capability: A Policy for a Smarter and More Agile Defence Industrial Base Canberra: Defence Publishing Service, 2010.

The Strategic Reform Program: Making it Happen Making Every Minute, Dollar and Round Count Canberra: Defence Publishing Service, April 2010.

Defending Australia in the Asia Pacific Century: Force 2030 (Defence White Paper 2009) Canberra: Defence Publishing Service, 2009.

The Strategic Reform Program: Delivering Force 2030 Canberra: Defence Publishing Service, April 2009

‘Key Questions for Defence in the 21st Century’ A Defence Policy Discussion Paper Canberra: Defence Publishing Service, April 2008

Going to the Next Level: The Report of the Defence Procurement and Sustainment Canberra: Defence Publishing Service, 2008.

Looking Over the Horizon Australians Consider Defence Canberra: Defence Publishing Service, December 2008.

Defence and Industry Policy Statement 2007 Canberra: Defence Publishing Service, March 2007.

Australia’s National Security: A Defence Update 2007 Canberra: Defence Publishing Service, 2007.

Defence Procurement Review 2003 Canberra: Defence Publishing Service, August 2003.

Defence Needs of Australian Industry 2000 Canberra: Defence Publishing Service, June 2000.

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Endnotes

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About the Author

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Canadian Defence & Foreign Affairs Institute

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