Long march begins towards an Australian military-industrial complex

Not since Bronwyn Bishop was appointed Minister for Defence Industry, Science and Personnel in 1996 has local industry been so excited about the prospects of carving out a share of the billions of defence dollars planned to be spent over the next decade as the Coalition implements its new Defence Integrated Investment Program (DIIP).

Assuming the published investment plan will be fully delivered, larger companies should already be looking at pro-active graduate recruitment plans, while small business proprietors should be canvassing their sons and daughters about interest in taking over the family firm.

Speaking to media when confirming his post-election Ministry, Prime Minister Turnbull was upbeat, saying: “What we are doing in defence industry is completely transformational. We are building a defence industry in Australia (and) people do not entirely recognise how big a change it is. This is a big change, a big reform and it requires additional leadership and additional oversight, additional advocacy and drive.”

Turnbull was right on one point, that in seeking to foster an Australian military-industrial compact with voters based on the dedication of an increasing share of GDP to Defence, the Coalition must first sort out what went wrong in its federal election campaign strategy which appeared to not convince voters of the reality of job opportunities and prosperity emerging from full Defence White Paper implementation.

Neither did the landmark incorporation of defence industry as a key plank in the Coalition’s national economic recovery platform. In the end, the Coalition’s campaign was not able to overcome the insecurity of those currently employed in traditional industries and fearing for the future of their career, or those now falling out of employment due to exhaustion of the mining/energy construction boom. Instead, the Coalition came perilously close to losing government.

This essentially explains the decision to take a large part of Senator Payne’s portfolio and hand it across to Christopher Pyne. A much more energetic salesperson is needed to make a much better case on the merits of expanding local defence-industry capacities and the significance of seeding a defence-industrial compact with voters through capitalising upon the elevation of Defence Industry into Cabinet.

When talking to the Coalition’s Defence Plans upon announcing his new Ministry on July 18, Prime Minister Turnbull was at pains to stress, “We will be rolling out our historic defence industry investment, building new jobs and opportunities in the advanced manufacturing sector right across the national supply chain, for businesses big and small. This will be transformative for our economy.”

Whether it be ships, submarines, land vehicles or cyberspace, the Coalition appears sold on the idea that platforms associated with future new military capability acquisitions will predominantly embody local materials (ie especially steel re submarines), while also being stuffed with Australian-designed and manufactured components. Similarly, the transfer of technologies associated with all this work will end up being easily diffused to entirely new industries that will revolutionise the Australian economy.

What matters going forward is how defence procurement will be changed to ensure weighting toward defence industry considerations ultimately ends up driving source selection decisions. As we have experienced over the last year, there is a terrible risk that critical new military capability decisions end up being over-run by self-serving local politics.

The Productivity Commission has just warned us of this. A recent report has found the Coalition’s quest to create a new generation of local defence suppliers will come burdened with tax concessions and subsidies that may yet rival the largesse smothered on the textiles and clothing and automotive industries over the past 30 years. In one estimate the effective rate of assistance for locally-built submarines incorporating local steel tops 300 per cent! In comparison, the current average for agriculture and manufacturing ranges between 2.5 per cent and four per cent.

Perhaps voters well understand that defence dollars do not grow on trees. Defence is funded from taxes levied on voters, and perhaps they also understand that to have more spent on defence, they will have to pay higher taxes, or other government-provided goods they currently enjoy – like healthcare and education – may not be as forthcoming in the future as in the past. That is why they generally abhor waste and support value-for-money concepts being applied to defence materiel purchase decisions.

There is an old rule in the game of industry policy. One man’s subsidy is another woman’s cost, so scepticism should not be unexpected when talk extends to the creation of a new industry that won’t be fundamentally underpinned by commercial decision-making and the putting of private capital at risk.

Beyond Pyne’s anointment as overseer of the (still unpublished) Naval Shipbuilding Plan, the Prime Minister went on to say, “There is a massive defence industry investment and acquisition program on land, in the air and inside cyberspace. This is a massive step change … it will drive jobs and growth in advanced manufacturing, in technology, right across the country. Christopher (will) oversee that (to) ensure that those projects are delivered.”

But hold on a minute. The cutting of steel for the OPVs is not proposed to start until 2018, while it will be 2020 before any substantive construction work begins on the Future Frigates. Work on the Future Submarines is even further into the future. And when is the next federal election due?

Although winners are also often grinners, Pyne as a self-proclaimed ‘fixer’ may end up not exactly welcoming the ‘delivery’ task that Turnbull has put on his shoulders. Selling the defence-industrial compact to voters will ultimately require the new Defence Industry Minister to spend a large part of his time away from South Australia as he criss-crosses the nation to spruik the vision of national economic development driven by defence procurement.

Yet a casual stroll down the aisles of either Woolworths or Coles will also confirm what most voters already understand. While there are lots of products that hark back to government-funded civil research programs, for example, Teflon on frypans and freeze-dried foods developed for space missions – there’s not really much there that can be directly translated to R&D supporting military capability acquisitions.

The inconvenient truth here is that most military innovation these days is adapted from work already underway in the private sector, and where business cases are justified against broader commercialisation opportunities, not sales to defence customers. In the case of real front-line defence materiel – for obvious reasons – it is developed to much higher performance standards than goods for civilian markets, and that’s why it costs a lot more.

Voters generally do not require their SUVs to be able to survive an IED blast. That’s why market-based economies don’t generally produce them. In cases where the deft hand of government ensures they do, there are few examples of where such specialist technologies have been successful in capturing mass consumer markets that are the real life of modern economies.

Even scanning the celebrated list of ‘third offset’ technologies now promising to revolutionise the US military, there’s not much among target tracking, precision navigation and guidance systems, conventional long-range missiles, directed energy and hypersonics that would convince the average voter their lives (let alone sustainable job opportunities for their kids) will be changed materially by overturning established market-based economic growth philosophies for a new command economy built around defence materiel made in Australia just for the ADF.

Nonetheless Turnbull has been nothing but effusive about Pyne, telling media that in his new Defence Industry Minister, “We have someone whose energy is perhaps legendary and he will need all of that to ensure that these projects are being delivered. This is all about delivery. This is three years of delivery. In three years’ time, you will be asking me here about what we have delivered.”

So can the salesman deliver? Clearly, more will be required from Pyne by voters in 2019 than the usual resort to citing Budget papers attesting to ‘x’ number of RFTs for ‘x’ number of projects having been issued, and ‘x’ number of tender responses slowly working their way through Defence approval processes for undertakings that won’t have any impact on jobs for several years. There must be some early changes in policies and practices that clearly put defence industry at the fore of the procurement decisions, and the reasons for that must be much better articulated.

Blaming Labor over past indecision in contracting new military capabilities won’t suffice. We already know from graphs in the May budget papers that many more jobs will be lost in naval shipbuilding before the workforce is again reconstituted to take on the OPVs and Future Frigates. Defence-industry took a big hit through the Rudd-Gillard-Rudd years and investors are nervous about shelling out on the strength of political promises on future defence expenditures.

Beyond shipbuilding, Australian Defence Business Review has calculated there are roughly 90 projects in the DIIP valued at between $50-70 billion that can be reasonably expected to roll out from solicitation through to delivery over the next 10 years. That body of work is yet to make its way through established Departmental tender evaluation and National Security Committee of Cabinet consideration processes. Attitudes must change in Canberra to move it on.

Pyne was still in sales mode during a recent visit to Western Australia when he talked up how new defence capability acquisitions planned by the Coalition could “spur economic growth in the state (to offset) the slowdown of the mining construction boom.” For workers already losing their jobs, there seemed little in response on delivery other than a need for patience up to 2020 when OPV construction would be transferred to the West in order to make space in Adelaide for the Future Frigate project.

This leads me to one last comment on Christopher Pyne’s appointment as Defence Industry Minister. Undoubtedly, he has performed enthusiastically as an advocate for his own state of South Australia, and has thus been rewarded with retention of his seat despite a significant swing against him. Politicians generally join political parties to do good things for their constituents. But when they take higher office in national government, there is also an expectation they will do good things for the nation.

Pyne’s appointment as Defence Industry Minister needs to be accompanied by some form of iron-clad assurance that the high ground will most often be taken, and Defence contracts will end up being awarded across the country based on merit, as against being directed to South Australia for the murky  purposes of political pork-barrelling. Perhaps this is why Marise Payne, an NSW Senator, may be glad to have been relieved of such responsibilities.

There is a growing chagrin within other states in regard to the volume of naval shipbuilding contracts thus far directed to Adelaide, as well as concern this will be followed up with the direction of land projects. The discontent has made it to Turnbull’s ears, and he was quick to assure media that Pyne, “As he has in every portfolio he’s had – as all of us are – are ministers responsible for all of Australia … we are building a defence industry in Australia.”