Q&A, Defence Connect DIDS Summit

SUBJECTS: Potential conflict in Pacific, Peter Leahy Comments, Defence capability and sustainment, AUKUS agreement, support for defence SMEs.

PETER STEFANOVIC: Well, I’ll get things going anyway. You talk about this in the report, the time frame. And we often hear about the 10-year warning time of conflict and we’re repeatedly told that we no longer have the luxury of that time frame. What is a more accurate time frame now that we’re looking at in terms of potential conflict in our region? 

MINISTER FOR DEFENCE INDUSTRY PAT CONROY: Well, it’s probably not useful for me to put an arbitrary number on it. But it’s actually more to reflect what a seismic change that occurred in the 2020 defence strategic update. The entire defence of Australia since 1945 has been based on us having superior military capabilities to our – than our immediate neighbours and a 10-year warning horizon for a major conflict. That second part has evaporated. That means that we can’t rely on a 10-year warning, which means we have to act with urgency. 

So, I’m not going to say it’s this year or next year in terms of warning. We have to concentrate on accelerating delivery of capability as well as the long-term investments that we need. And part of that recognition by this government is both my elevation to cabinet and my new title. Like, I’m no longer just Defence Industry; I’m Defence Industry and Capability and Delivery because that urgency has to be reflected in responsibilities. 

PETER STEFANOVIC: Without domestic manufacturing, how does business get the confidence to be able to work in such a short time frame now, even if there is a question mark over that time frame? 

MINISTER CONROY: Well, we do have domestic manufacturing. I think we’ve got around 100,000 people who work in the defence industry and we’ve got some really strong capabilities. We spend about – well, this year we’ll spend about $33 billion in acquisitions and sustainment and around 70 per cent of that will be spent on Australian industry. So, it’s a record amount. And we’re very focused on those capabilities. 

The SDIPS are one part of that. They’re the most critical that we have to have in this country, but it’s not just limited to those SDIPS. But if I can use GWEO as an example, that’s got three streams of work: immediate uplift in war stocks because the level of war stocks is insufficient; improved maintenance, prepare and overhaul of our munitions and explosive ordinance because if I can halve the time it takes to overhaul a missile, that effectively doubles the number of missiles I’ve got; and domestic manufacturing. And we’ll be making missiles in this country in 2025, which is a huge step forward compared to where we were previously. 

PETER STEFANOVIC: Okay, I’ve got a question about missiles. But first of all, Peter Leahy, he wrote an OpEd in The Australian a few days ago. He says the ADF is now a strategic liability to our American friends. Our military is stretched too thin. Do you have a thought on that? 

MINISTER CONROY: Well, I think, first, I’d say I honour the contribution and service of Peter Leahy and he’s entitled to his opinion. I think his statement probably didn’t reflect the significant change that’s occurred over the last couple of years. For example, he was talking about the fact that we don’t have long-range fires and we don’t have the ability to manufacture missiles. Well, we’ll be manufacturing missiles in this country from next year onwards, whereas under the previous government’s plan it was somewhere in the mid-2030s. 

We’ll be establishing our long-range fires brigade in 2026, seven years ahead of the previous plan. We’re bringing things forward all the time. Those are two examples. We’re bringing forward landing craft by seven years, heavy landing craft. We’ve brought forward HIMARS. We’ve brought forward Naval Strike Missile. We’ve brought forward the manufacture of infantry fighting vehicles. We are making significant decisions bringing forward capability because the strategic urgency dictates that and the safety of the nation dictates that. 

At the same time, we’re putting record resources into the Defence budget to build our capability over the long term. Because the truth is, governments have to do both – get urgent capability now and build the long-term industrial base. 

PETER STEFANOVIC: Okay, so Mr Leahy, he’s got an issue with the term “urgency” there because his critique follows indications by Richard Marles that the government would defer investments in missile protection of the top end by there 2030s, therefore relying on the United States. So, is that not correct? 

MINISTER CONROY: Well, he’s referring to a specific project under the degraded area missile defence part of the IIP. I’d make a couple of points there: first, we’ve got significant missile defence capability already in the country, including our air warfare destroyers, our Super Hornet and Joint Strike Fighters, the introduction of NASAMS all make a contribution. And we’ve been very clear that we’re focused on Air6500, which is the brains of an integrated air and missile defence system, which is critical to bringing everything together. And we’ve allocated tens of billions of dollars to missile defence in the IIP. He’s focused on one specific project whereas our view is you should look at the whole ecosystem where we’re making very significant investment in air and missile defence. 

Another example is obviously we’re upgrading the Aegis Baseline 9 for the air warfare destroyers and the Hunter class will have that. We’re investing in SM-2 and SM-6 missiles that are the world’s best capability for missile defence. So, I think Peter Leahy has concentrated on one part of the whole solution; we’re focused on a whole solution and we’ve allocated huge resources to that. 

PETER STEFANOVIC: You mentioned AUKUS in your speech there. If there is a change in the US administration, do you have any concerns about what that might mean about AUKUS? 

MINISTER CONROY: No, not at all. And I’ve been very clear, as have many people, that AUKUS is a multi-decade commitment by three countries and all three countries have committed to it because it’s all in our national interests. It enhances the defence of all three countries and it will outlast governments of all persuasions. It’s already outlasted two changes of government – one in Australia and one in the United Kingdom and it hasn’t missed beat. I would argue that AUKUS has been accelerated due to the change of government here. And in the United States there is a genuine bipartisan commitment to AUKUS. I’ll give you an example. 

I was in Washington for the vote on the three critical – actually, there was four pieces of critical AUKUS legislation associated with the National Defence Authorisation Act in December last year. That passed the Senate with an 80 per cent yes vote. It passed the House of Representatives with a 75 per cent yes vote. To get anything through the US system with an 80 per cent yes vote is a huge achievement and demonstrates the strong bipartisanship of this program. 

PETER STEFANOVIC: Donald Trump often just does what he likes, though, doesn’t he? And JD Vance is his vice president Pick, he’s taking a protectionist stance on American product. Still not worried about that? 

MINISTER CONROY: No, because AUKUS enhances the three countries. This is about growing the collective industrial base of three countries so that we go in AUKUS pillar I from having three submarine construction yards capable of building nuclear submarines to four. It’s about enhancing the defence capability of all three countries. It is genuinely in the United States’ self-interest and it also complements what we’re doing. So, I’ve got no concerns at all. 

PETER STEFANOVIC: Just yesterday you announced the acceleration of the Ghost Shark program. Have all the business opportunities been squared away when it comes to that, or are there still more options for other businesses to join that program down the track? 

MINISTER CONROY: Absolutely. So, we’ve announced that we’ll be allocating a further $20 million matching what Anduril is doing to build the manufacturing facility that will produce Ghost Sharks. We’re yet to make the formal decision to full production, but there’s funding in the IIP to deliver that. And there’s something like 40 Australian companies already involved in the supply chain for Ghost Shark. And I would expect more to enter that. And that’s one part of our huge investment in autonomous vehicles and drones. We’ve allocated over $10 billion over the next decade for autonomous vehicles and drones. 

PETER STEFANOVIC: Ghost Bat. 

MINISTER CONROY: Ghost Bats’ one example. I announced a contract for SYPAQ down in Melbourne a couple of weeks ago. This company is a world-leading producer of small uncrewed aerial systems and that’s the largest contract to a sovereign defence Australian company for drones. And I announced that two weeks ago. So, you can see more of that flowing out. 

PETER STEFANOVIC: Some criticism, though, that Ghost Bats are not going to be armed; they’re more there to just surveil. Is that fixed? Can that be changed? 

MINISTER CONROY: Well, I think the public commentary changed a bit over the last week because I think people got the wrong end of the stick. We’ve made it clear that we’re prioritising the intelligence and reconnaissance capabilities of Ghost Bat because we think that’s where we get the immediate bang for buck. But it is a multi-‑mission platform and we are certainly very open for it having a strike capability. We just want the ISR capability delivered first. 

PETER STEFANOVIC: Okay. We’ve got some questions. We’ll just take a couple of those before I come back to mine. Minister, this is from anonymous. “Minister, whilst we continue to attend the summits and strategy days, defence SMEs are struggling to stay afloat whilst government policy embeds the power of primes.” Have you got a thought on that? 

MINISTER CONROY: Well, I understand some companies’ frustrations with Defence contracting. That’s natural and I respect that. I urge people to look at the holistic figures. Record amounts of money are being spent in the Australian defence industry and not just in primes. Primes are one part of the ecosystems, but SMEs have a huge role there. That’s fact one. 

Fact two, employment in the defence industry is growing if you look at the latest ABS statistics. And we are very clear that SMEs have a strong role. SDIPS is an example of that where they are critical to the delivery of that. And one of the key goals of the Defence Industry Development Strategy is to grow SMEs into medium-size companies. I described the Australian defence industry as a bit of an hourglass – we’ve got a narrow layer of primes at the top; it narrows rapidly to a few medium-size Australian companies and a big broad base of Australian SMEs. And a lot of them are on the S side of SMEs. We want to grow them into the medium-size companies. That’s why we’ve got $150 million in grants. That’s why the IIP will be changed to support the SDIPS. That’s why we’re doing record numbers of global supply chain initiatives. 

Because probably the easiest way for SMEs to export isn’t exporting a full product – as critical as that is – it’s exporting as part of a supply chain for a larger company. And that’s why we’ve more than doubled the number of global supply chain – 

PETER STEFANOVIC: Is that why they’re struggling so much? Is it because those larger companies are kind of scooping up most of the business? 

MINISTER CONROY: Well, I think that – I do reject that narrative. That’s not to say that individual companies aren’t feeling the pain. I recognise that some individual companies may have seen work decline. But there’s record amounts of money going into the Australian defence industry and we don’t just judge that by an ABN; we look through the ABN to where the activity is conducted and the industry is growing. So, I recognise there are some in the industry that are unhappy and I always do my best to work with them on that. But employment is growing in the industry. Resources are growing in the industry and I’m confident they’ll grow even further given that fact that we’ve just increased the Defence budget by $50.7 billion over the next decade, the biggest increase in the Defence budget ever, including $5.7 billion over the next four years. 

PETER STEFANOVIC: As you, as we all know here, we’ve got wars taking place at the moment. You’ve got Ukraine, you’ve got Gaza, you’ve got Taiwan, which is a powder keg that China wants at some time down the track. That all leads to supply chain issues. You mentioned supply chain issues. How do you plan around that, the unknowns? 

MINISTER CONROY: Well, I think it’s all about resilience. And that’s why the title of our key planning document, our replacement for the white paper, is the National Defence Strategy. It’s not just about the defence industry; it’s about mobilising all of Australian industry from critical minerals up. And we’re trying to invest there. 

We’ve got a long way to go. Like, one of the strengths of the global marketplace is its global integration. But we have to do things differently. Anyone who experienced the joys of trying to buy toilet paper during the Covid pandemic understands how fragile global supply chains are. And we have to understand where are the critical parts of that chain are and invest in resilience and redundancy. Some of that will be building it in Australia. Others will be building more stock in Australia. 

PETER STEFANOVIC: What assurances can you give that the worst is behind us? 

MINISTER CONROY: Worst in terms of what? 

PETER STEFANOVIC: Supply chains or logjams, blockages? 

MINISTER CONROY: Well, I think what I – let me take a step back. I think we have to be open to the fact that there’s always going to be global supply chain interruptions. If it’s not Covid it’s obviously the Houthis in the Middle East. You have to deal with that and plan accordingly. You can’t rely on just-in-time manufacturing anymore and we have to plan for that and that’s what we’re doing. 

PETER STEFANOVIC: Okay. James V asks, “Minister, are you still targeting a 50 per cent reduction in paperwork, time, cost and bureaucratic drag within future CASG and how is it tracking?” 

MINISTER CONROY: Well, I’m not sure whether 50 per cent is the official target. That might be better directed to Chris Deeble when he talks, but we are aiming for a dramatic reduction in paperwork and red tape. And I appreciate every single Defence Industry Minister has said that sitting here. But we are really committed to it. Air6500 will be the test case for that. 

More strategic partnerships is a good way of doing it as well. I’ll give you an example of some of the insanity of having competition for competition’s sake that we’re trying to get rid of. When we were last in government when I was an adviser, we discovered that the DMO was pitting every single six-week maintenance period for individual shifts all to have competition. It was wasting industry’s time, it wasn’t saving money and it was leading to a lack of planning and certainty for industry. That move to batching of maintenance, now we’ve got the regional maintenance centres, strategic partnerships are smarter ways of doing things so long as you do it in a way that allows competition at the right points and make sure that primes don’t dominate. 

So, I’ll give you an example of how we’re getting smarter in that as well. I recently announced TALIS was the recipient for regional maintenance centre east. Part of that contract is a requirement that they have to seek permission from Defence to bring any work currently done by their SME supply chain in house so that we don’t just have primes gobbling up all the work. You can expect to see more of that, while maintaining contract and flexibility. 

We also – and I won’t go on about it – but we also have to rebuild capability within the Department of Defence. That’s been, I think, a real story that hasn’t been explored properly over the last 10 years, is the need to invest in Defence Department capability. 

PETER STEFANOVIC: Andrew asks, “Will CPR reform consider deposits, mobilisation and progress payments as opposed to standard 20-day terms as a key aspect of improving the landscape for SMEs? 

MINISTER CONROY: I'm open to any ideas that are consistent with our broad whole-of-government procurement guidelines and deliver value for money for the commonwealth but also give industry more certainty. So, I really encourage people to raise those points with my office and with Chris Deeble and Fran Rush as different ways of doing things. We have to be smarter about this and not just rely on standard contracting terms. 

PETER STEFANOVIC: Okay. Back to my questions: in what way does the DIDS address the unique challenges faced by SMEs such as access to funding, tech infrastructure, market entry barriers as well? 

MINISTER CONROY: Well, market entry barriers, a big part of DIDS is a focus on defence exports. And there’s a few things that we’re doing there that’s different from previous governments. One is we’re reforming the global supply chains making them more rigorous and putting more responsibility on primes actually drive through the spirit of them. 

We’re also – I’ll give you an example of where they were artificially constraining Australian industry. Once a company reached 200 employees it was no longer eligible to be part of the global supply chain program as being supported by a prime. We’ve changed that, because I want Australian companies to grow. So, when an Australian company grows its 201st staff member, I want them to still be part of the GSC process. That’s one example. 

Another one is using the reputation of the sovereign Australian Government to sell Aussie products overseas. We’re to sort of – we’re not forward enough in advocating Australian industry. We’ve got – to give you an example, we don’t use ministers enough to promote Australian industry like other countries do. But more importantly, we don’t use the ADF enough. We’ve got a great network of defence attaches throughout the world that are respected. We’ve got embeds in lots of allies’ services. And if you look at how the UK does it, their military officers are half export promotion officers and half military officers. So, using the ADF to support our exports and using the backing of the Australian Government.

So that deal I did around the biggest defence exporting history in the country, the $3 billion Rheinmetall Boxer deal, that’s not a contract between Rheinmetall Australia and the German Government; that’s a government between the German Government and the Australian Government and I subcontract to Rheinmetall Australia to deliver that. That’s our version of FMS where we give confidence to the German government that those Boxes will be delivered on time and on budget because it’s backed by the Australian Government. 

PETER STEFANOVIC: How will the department and CASG shift their focus and priorities to support the implementation of DIDS? 

MINISTER CONROY: Well, I think a couple of things: one, actually nailing peoples’ feet to the floor on who is responsible. So, a big change with the SDIPS is the previous sort of articulation of these whether it was the SICPs or PICs and SICs, there was no-one responsible for them. If no-one’s responsible for them, no-one is making sure they’re healthy and being supported. So as part of the DIDS we have identified a responsible capability manager and a responsible delivery manager for each of those SDIPS who is held responsible. So, one of the SDIPS is maintenance, repair and overhaul of aircraft. I can tell you that the responsible service manager is the Chief of the Air Force Steve Chappell and the responsible delivery manager is Chris Deeble as head of CASG. If something goes wrong, it's their fault and it's their responsibility. So that is a critical reform that is there. 

The other one is building greater knowledge of industry within the department. One of the side effects of the One Defence reforms in 2014 was the abolition of a defence industry division within the DMO. We are rebuilding that defence intelligence unit within CASG to support all the delivery asks of Defence. Because Defence doesn’t understand defence industry enough and we need that to improve. We’ve got some great leaders in the organisation like Chris and Jim Mc Dowell and Leon Phillips who are very familiar with defence industry. But it needs to go throughout the entire system. 

PETER STEFANOVIC: Okay. Back to some audience questions. “I applaud the government for their speed to capability approach. The DOD does not want to do things differently. How will the government address this?” 

MINISTER CONROY: Through a couple of things. One is building capability. We need more engineers and project managers within the Department of Defence, people who are more familiar are risk taking. I’ll give you an example – it’s a few years old but still current: the ANO did an audit of the Capability Development Group and it found that 50 per cent of ADF officers who were leading major projects, that rotation was their first rotation into CDG. So, we need to invest in a dedicated acquisition core within the Department of Defence. That’s really important. 

Secondly, we need to embrace more risk. And I made it clear to Defence leadership that we need to change how we do things. ASKAR is an example of that, Ghost Shark, going from an idea on paper to full rate production in three years is a massive achievement. And we will get there. The whole concept of ASKAR where we nail capability – sorry, capability managers’ feet to the floor where they have a say in what missions are generated and what technology is developed and in return there’s an obligation to fund that into service through a program of record, through the IIP, is making DIDS really invest – sorry, making the Defence Department really invest in speeding the capability. 

PETER STEFANOVIC: You mentioned Ghost Shark there and we spoke about it a little already, but another question from the audience: “Has Ghost Shark been to sea to date? If so, was it operating autonomously and how did it perform?” 

MINISTER CONROY: Well, I won’t go into the details too much of Ghost Shark because it is really cutting-edge technology and I think the Chief Defence Scientist would storm the stage if I was too explicit. But what I can say is the first prototype has been delivered. It is performing very well. And we have such confidence in it that we intend to transition to full rate production in the second half of next year. We don’t make those decisions lightly. 

PETER STEFANOVIC: Okay. Another question: “Minister, with two large portfolios” – this is a good question this one – “With two large portfolios, how do you best balance your own time between defence industry and Pacific,” not so much the same thing. 

MINISTER CONROY: Well, they’re both – I love both my portfolios. To some extent they complement each other. I’ll give you an example: I was in Fiji – 

PETER STEFANOVIC: China? 

MINISTER CONROY: That could be one confluence. Let me give you a less controversial one. I was talking with Prime Minister Rabuka of Fiji a couple of months back while I was there on how do we build support basis for the Guardian class patrol boats in the region. So that’s an example of a capability Aussie defence industry has built that is immensely valued in the Pacific and they’re very keen to support them closer to where they’re deployed. So, I think there’s a real crossover in the two portfolios and I think they complement each other to some extent. 

Obviously, my elevation to cabinet brings more resources to address both portfolios, which is obviously a good thing. But I think that it was a conscious decision by the Prime Minister to give me both. And I work very closely with Richard Marles as the senior cabinet minister in Defence and I think we’ve got a great team. 

PETER STEFANOVIC: Is China the biggest threat for us? 

MINISTER CONROY: That’s a question you can ask but I won’t answer. What I can say to you is, look, we’ve been very clear we face the biggest strategic uncertainty since ’45. We face the greatest arms build-up in our region since ’45. We face as the National Defence Strategy said a rising global power that hasn’t provided the normal strategic reassurance and transparency that you would hope from a global power. And we need to work through those issues. 

PETER STEFANOVIC: Okay. “How do we smash through the glass ceiling for sovereign Australia mid-tier industry providers to become true Australian large primes?” 

MINISTER CONROY: That’s an awesome question and it’s one we’re working on every day. Part of it is recognising Australian capabilities at building strategic partnerships. And I’ll give you an example of one company that is probably the closest to that in Australia – CEA radars. If we let CEA radars just live on vicissitudes of Defence contracting, it probably wouldn’t have survived the late 2000s. Conscious decisions by governments both Labor and Liberal changed human methods and I was involved with the first one of these, which was the active ship missile defence upgrade, the Anzacs, where if we’d gone on a conventional procurement cycle, it probably wouldn’t have been financially viable. We made a decision to buy the ship sets for all eight of the Anzacs before we’d even tested the first one at HMAS Perth because they provide the cash flow and certainty for CEA to invest in this, because it was a national asset. 

That led on to lots of other opportunities and obviously the mandating of CEA radars across multiple platforms where the last government in the frigate acquisition said it doesn’t matter which platform we choose, it’s to have a CEA radar installed. So that sort of picking winners is a critical way of getting Australian SMEs smash the glass ceiling and truly have the opportunity to become primes. 

PETER STEFANOVIC: Okay. “[Indistinct] individuals’ response to the delivery of the SDIPS, how do SMEs make themselves known?” 

MINISTER CONROY: Well, there’s multiple ways. The first and easiest way is going through the Office of Defence Industry Support, ODIS managers. There’s one of those in each capital city and those contacts with available on the Defence website. There’s also going through CASG and each of the delivery arms. You should have a relationship with – sorry, excuse me. You should have a relationship with each of the delivery managers already. And the Defence Intelligence Unit that we’re establishing will be critical as well. So, there’s multiple paths to getting to the same destination but ODIS is probably the starting place. 

PETER STEFANOVIC: Okay. We’ve got a couple of minutes left. “Will the defence primes be required to it utilise local suppliers in the first instance to deliver Australian capability?” 

MINISTER CONROY: Well, an important part of the DIDS is that commitment to Australian industry capability. When companies bid for Australian projects, whether it’s an acquisition or a sustainment, they’re required to nominate a level of Australian industry capability, usually through a percentage. That – two things: that part of the value-for-money decision, that is part of how we decide who is the successful tenderer. Secondly, a decision we made when we came to government is that is contractually enforceable. So, when a company, typically a prime, makes an AIC commitment, it is part of their contract that they must achieve. An important reform we’ve also made, is Fran Rush and her team now look through ABN’s. Because we’ve heard those stories of a foreign company getting an Australian ABN and that counting for Australian industry capability. We now look through the ABN to where the activity is conducted so we can be absolutely satisfied that that is actually building Australian industry capability. 

PETER STEFANOVIC: Okay. Another question from the audience. From Andrew here, “What are the key attributes and core capabilities of a successful medium enterprise?” 

MINISTER CONROY: Well, far be it for me to make a – it’s always dangerous for politicians to advise on how to run a successful business. But some of the things I have observed going around and meeting professional businesses is one is agility. SMEs are much faster than primes, they’re less bureaucratic than primes. Often the owner is working in the prime – sorry, the SME. That speed and innovation is really, I think, an advantage. Knowing your customer is critical, whether it’s a prime or a direct, relationship with Defence is obviously a huge asset. 

For people at the SME end, diversification. When I go through a company that might have 20 or 30 staff and I ask them what percentage of their revenue is defence, I start getting nervous if they say 70 or 80 per cent because defence, despite our efforts to get strategic partners and smooth out the demand cycle, defence business is lumpy by definition. So having a diversified customer base is always really useful as well. So, they’re three of the key lessons I’ve taken. 

PETER STEFANOVIC: When you were – a final one here: when you were in opposition, I remember talking to you and others. Since you came to power how shocked have you been at the threat that exists now that you might not have been aware of before? 

MINISTER CONROY: Well, I think the classified briefings are really explicit. And they should be and that’s appropriate. I’ve been a full member of the National Security Committee for Cabinet for two years now and it is true we face deteriorating strategic circumstances and it is the most challenging time since ’45. Like, even more challenging than the height of the Cold War. 

PETER STEFANOVIC: When you say “challenging”? 

MINISTER CONROY: Like, we face – this is the first time we’ve lost the 10-year warning. 

PETER STEFANOVIC: Yeah. 

MINISTER CONROY: And that was the safety blanket for governments of all persuasions, that knowledge that we had 10 years to gear up for a major regional conflict. That has gone and that requires a revolution in how we do defence procurement and how we resource Defence. And the DPM and I are leading that revolution. We’ve been backed by every member of the NSC, as demonstrated by that $50 billion budget increase. 

Over the decade in real terms, we’re increasing the Defence budget by 20 per cent in real terms. That is a massive increase in the budget and we’re increasing speed, because the whole government is focused on that. 

PETER STEFANOVIC: Does it need to go higher, though, when you consider the sheer volume of expenditure that, say, China is undergoing? 

MINISTER CONROY: Well, I think we’re focused on what we can do and we think that a 20 per cent real increase will deliver a much more capable ADF than the one we’ve got now, as good as it is now and we think that’s what we’re – 

ENDS