Defence Industry in a post-DSR world

Can I begin by acknowledging that we meet on the land of the Ngunnawal people and pay my respects to elders past, present and emerging and thank you for that beautiful welcome to country Aunty Janette.

I won’t go through the full acknowledgements list – it’s very impressive. I will acknowledge my parliamentary colleagues, Ambassadors, High Commissioners, members of the diplomatic corps, Chief of the Defence Force, Secretary of the Defence Force, senior leadership from the Department of Defence, Australian Defence Force personnel and veterans and to AIDN, thank you for the opportunity to speak tonight. And thank you, Carl for your excellent scene setting on what AIDN is feeling and what AIDN is looking for.

The title of my speech is very unimaginative, but it is simply: “Defence industry in a post-DSR world.” And I thought tonight might be a useful opportunity in front of 450 people to quickly summarise what is in the DSR – I’m sure you’re all very familiar with it – and to talk about how industry will not only benefit from the implementation of the DSR but will be critical to the success of that paper.

As Carl said, defence industry is a fundamental input to capability. You are essential in the defence of the nation. And that criticality is even more apparent if we consider the environment we’re in. We face the greatest strategic uncertainty since World War II. We face the greatest arms race since World War II in our region. We face a period where the 2020 Defence Strategic Update from the last Government rightfully concluded that the 10-year warning horizon for a major regional conflict, the bedrock of our defence posture, has evaporated.

Now that was the scene-setting for the Defence Strategic Review. Speed drove the DSR, and that’s why the DSR was established rather than a white paper. We intentionally constructed a process to drive recommendations in six months, not in the two years that you normally see with a white paper process. And that reflects the speed and the strategic urgency that this Government feels that we are facing.

Now there a multitude of recommendations from the DSR. I think the four most critical elements within the DSR are: one, a shift to a National Defence strategy, a mobilisation of the entire nation, not just the Department of Defence and its traditional acquisition to really drive the defence of the nation. Secondly, a focused force. We can no longer afford the luxury of a balanced force, we must invest in a focused force. And I commend Richie Vagg who’s here, for his role supporting the leads in that. And that focused force is driven and structured a reshaping of the ADF, a modernised army with a focus on littoral manoeuvre and long-range strike, a more lethal navy and a Royal Australian Air Force with even more strike options.

The third element that I think is most critical for the DSR is the recommendation of greater defence funding, and I’ll return to that later on in my remarks. And very significant procurement reform. I urge everyone, if you haven't already, to re-read chapter 12 of the public DSR. It is one of the longer chapters in the public DSR and it is very confronting reading for anyone who is involved in defence procurement.

Those four themes led on to six immediate priorities: which are pursuing AUKUS Pillar 1, the acquisition of nuclear-propelled submarines; secondly, investing in strike and the Guided Weapons Enterprise – and I know Air Marshall Leon Phillips will be talking about that later, so I won’t steal all his thunder; hardening of the northern bases; a commitment to defence innovation; an investment in the workforce by the ADF workforce and the public service; and a recommitment to regional partnerships in our region.

We also made hard decisions. It’s a statement of fact that the last Government in the last three years added $42 billion of spending commitments to the Integrated Investment Program without increasing funding or without making decisions to cut or re-scope programs. We have made the hard decisions over the first four years of the DSR and applied $19 billion of funding to those six immediate priorities.

So that brings me to the main theme of my speech tonight: how will industry be a critical partner in this process and how will you benefit from our reforms? And I’ll start off with procurement first, and chapter 12. As the Defence Industry Minister I feel it didn’t get as much attention as maybe it should have in the reporting of the DSR. And that’s no reflection on journalists. It’s very technical and it’s not quite as sexy as talking about long-range strike or nuclear-propelled submarines to talk about minimum viable capability or contracting reform. But it is critical.

And I really do believe that the shift to minimum viable capability is one of the most revolutionary aspects of the entire DSR. Saying that no longer will we not accept into service something unless it’s delivering 100 per cent of what is contracted. Recognising that the need for speed and urgency. Recognising that that last 10 per cent of capability is often the hardest to secure and is often the part where we see the biggest litigation between the department and industry. This says that with minimum viable capability we will be more looking at accepting platforms into service at 80 or 85 per cent and then using an iterative upgrade process to get to 100 per cent. And this is because we need speed but also reflecting the modern technology cycle.

And this is incredibly important for getting platforms to the ADF as soon as possible. It also gives a leg up to Australian industry because we will not be adopting a minimum viable capability for FMS cases. When we acquire the Apaches off the Boeing production line, they’d better be at 100 per cent of the promised capability or we’ll have significant issues. What minimum viable capability is about is supporting developmental projects. Developmental projects where we need to make maximum advantage and that’s where Australian industry is uniquely located.

The second part of the procurement reforms is contracting reforms. And I’m not the first Defence Industry Minister to talk about this. So I don’t ask you to believe me standing up here, I ask you to believe in our actions when we put them together. But we do need to embrace more risk in defence contracting. We do need to move beyond having 70 signatures required before an authorisation goes forward.

Now this places more pressure on the Department of Defence, and I’ve been frank with the Department about what our expectations are. But it goes two ways. That means more frank conversations between us and the Australian National Audit Office. It means me being able to stand up in Question Time and say, “Yes, we took risks, and that project didn’t work out how we wanted it to, but we learned from it and that informed the next acquisition.” But that’s the change that is required. Increasing speed by embracing risk and being more frank with industry about when decisions have to go to a sole source.

And that sole source doesn’t mean going overseas automatically. There are a lot of Australian companies that have great capabilities that are recognised by Defence where we will embrace sole source because it makes sense. Because what industry have told me is they are sick of wasting their time in competitions where the result is already for-ordained. They’re sick of wasting their time and resources and, quite frankly, I’m sick of wasting Defence’s time.

This won’t be the majority of contracting, but it will be part of contracting because we need to speed up the cycle. And these reforms will be a critical part of the Defence Industrial Development Strategy that’s being produced right now. And Chris Deeble, head of CASG is leading those procurement reforms, working with Naval Shipbuilding and hopefully the Chief Information Officer to flow that through to their parts of Defence as well. That is a very significant part of the Defence Industry Development Strategy, as will the justification for why we need a sovereign industrial base here.

Carl, you were talking about the need for new capabilities, the need for homegrown capabilities, and you’ll see that justification and articulation in the industry development strategy. You’ll also see a reshaping of the sovereign industrial capability priorities – SICPs. At the moment under the current SICP regime there are 14 SICPs, but eight of them aren’t even defined in any real detail. And without giving away too many secrets, I recently approved a foreign military sales acquisition which was the right decision, it was for a unique capability, but in the approval process I was informed that this was supporting four SICPs. Now when the FMS case can say it’s supporting four SICPs, we have an issue, we have a challenge. And that’s why we are changing that through the Defence Industry Development Strategy.

We will be reducing the number of SICPs and we’ll be providing more narrow definition of them. And that does two things: it gives greater guidance to industry about where we expect you to make investments but, secondly, it nails Defence’s feet to the floor and provides an obligation for them to fund supporting those SICPs. And you can see that when we release the Defence Industry Development Strategy.

You’ll also see a greater focus on exports. Exports focus through reshaping the global supply chain initiative and through co-development projects, which is a great opportunity for local work to win significant contracts in global supply chains. Carl, you mentioned Marand. I can’t think of a better poster child for the Joint Strike Fighter Program. That company is doing hundreds of millions of dollars worth of work around the world. It is exporting Australian product right now through the Joint Strike Fighter. So co-development work will be critical as well. So the Defence Industry Development Strategy is an important piece of work to look out for by the end of the year.

The Budget last month was also a very significant articulation of the defence strategic reform. Buried in the Budget papers is a commitment to increase defence funding by an additional 0.2 per cent [of GDP] above its existing trajectory by the end of the decade. That means that we project defence spending by the end of the decade to be around 2.3 per cent of GDP. So that’s an extra 0.2 per cent, and that literally means tens of billions of extra dollars are spent on defence.

And obviously, we have the epoch-shaping decision to produce nuclear-propelled submarines in this country. And this was an actual choice. Let’s be frank about that. This Government made a conscious decision to invest in the Australian industrial base to produce submarines, nuclear-propelled submarines, in this country. As recently as February this year the Leader of the Opposition was arguing to purchase those submarines overseas. I’m not making too many political points in this speech – I promise that’s the last one - but it’s really important. That is the alternative that people were talking about – purchasing a fleet of Virginia Class submarines as the permanent capability solution rather than just interim capability solution.

The submarine project will deliver 20,000 jobs in the Australian economy. We are investing $3 billion over the forward estimates and $30 billion over the life of the program in lifting the skills of the Australian workforce and uplifting the capability of Australian SMEs and companies to be part of this supply chain. And this supply chain is not just about building Australian submarines, it’s about being part of the supply chain for the UK program and even the US program.

I’ve just returned from the United States and I visited Electric Boat in Connecticut, and they are very keen to get Australian companies into their supply chain. They have significant capacity constraints and they see real opportunities for Australian industry to be part of their solution for their submarines as well. The Australian Government is committed to working on that.

We also committed out of the Defence Strategic Review – and this was another initiative – to continuous shipbuilding in WA. The previous commitment from governments was continuous shipbuilding in South Australia, which is incredibly important. We will be complementing that by continuous shipbuilding in the Henderson Maritime Precinct as well.

And GWEO – I can’t fail to mention GWEO a little bit because it’s a topic close to my heart – we’ve already implemented the DSR recommendation of appointing a three-star in Leon to drive this providing that one point of contact to drive a project that I think will be incredibly important for the defence of the nation and Australian industry. We’ve pulled $1.5 billion forward into the forward estimates because you can’t do anything without real money driving this project. Industry can’t make investment unless they know that there is money going in right now to drive that project, and that’s why we’ve brought forward $1.5 billion to make a commitment to long-range strike in GWEO, $4.1 billion over the forward estimates. And we plan on making missiles in two years’ time. That’s an incredibly ambitious goal, but we are confident we can get there.

And my final policy point in this speech will be the establishment of the Advanced Strategic Capabilities Accelerator – ASCA. Let me repeat a point we made when we launched the DSR: it will be established and it will start operating on the 1st of July this year. Not 18 months’ time – on the 1st of July this year it will begin operation. It is also transitioning over the established contracts around the Defence Innovation Hub. But let’s be frank, ASCA is about responding to concerns of the defence industry who’ve told me it’s incredibly difficult to secure a contract under the DIH, and if you are lucky enough to secure a contract it takes a long, long time to get into contract. And at the end of the process, if you’ve been successful in proving up your technology, there isn’t a flow-through into a capability decision. You look around, you’ve proved up your technology, but there’s no follow through and then your faced with the valley of death. You’re faced with selling your technology or trying to win work overseas.

ASCA is 100 per cent targeted at avoiding that problem. It does that by making sure that the technology supported are ones that capability managers, warfighters, say we can see being used in the field in the near future, aligning technology development with what the capability managers need - number one. Moving quickly, because the second best answer after a yes is a quick no. And driving it through the technology development process and then at the end of the process, once it’s been proved up – and some will fail – but once it’s been proved up, flowing through to acquisition decisions, flowing through to a project that can see that technology in the field giving an asymmetric advantage to the warfighters. That’s the new piece in this. That’s the challenging piece, but I’m confident we can get there. And it will be complemented by other government efforts. So, for example, a growing company might need more equity. It might need access to a first lender to give confidence to the private sector, and that’s where the $15 billion National Reconstruction Fund provides such a strong role backing Australian SMEs, giving them the first equity injection or the first loan to really get their project off the ground.

So, ladies and gentlemen, there’s lots to do, lots to do to implement the [DSR], but I should assure you that another myth out there is that somehow Defence has driven to a grinding halt by the DSR that’s working its way through the system. I can assure you that the National Security Committee of cabinet has been incredibly busy work on capability submissions over the last year. There has been only one capability decision that this Government has deferred due to the DSR, and we all know what that one was. And the end result of all this, ladies and gentlemen, is that I can say that the Albanese Labor Government will be spending more on the Australian defence industry than any government previously has. Let me repeat that: the Albanese Labor Government will spend more on the Australian defence industry than any other government has in the history of this nation.

And that’s why we need you. We need you, and I’ll end where I began – which is you are a fundamental input to capability. You are critical in Australia responding to the strategic circumstances we face. Your innovation, your commitment, your agility is critical to giving the ADF the weapons that they need to defend this nation. So I thank you for your patience. I thank you for your commitment, and I hope you enjoy the rest of the night.

ENDS