Mark Bishop (WA, Australian Labor Party) Share this | Hansard source

In this address-in-reply, I want to respond to those matters in the Governor-General’s speech dealing with defence policy. In particular, I want to reflect on a number of matters relating to defence procurement in Australia, following the lengthy visit I made to the United States late last year. The Senate would be aware of my longstanding interest in defence policy matters, in particular the management of procurement. There are many relevant reasons for the importance of US defence procurement policy for Australia. Firstly, of course, the United States has long been a key source of defence materiel for the ADF and it is important that we keep abreast of new technology. Within the alliance there are matters of shared long-term strategies. There is also a growing degree of interoperability and a growing interdependence of our own defence industries. We do need to be sensitive to the changes affecting United States industry not only strategically because of the direct flow-ons for the cost of purchases we might make but also because of the direct implications that they may have for our domestic defence industries where we need continuity and an assurance of skill retention and supply capability. The importance of this knowledge of the health of US defence industries cannot be overstated, especially in a rapidly changing international economic and military climate. It is important that we understand these applications and their context.

In response to the global financial crisis, we are now seeing dramatic reductions in defence budgets in those countries with high levels of sovereign debt—for example, countries such as the United Kingdom and France, whose public debt levels are such that their entire financial security is under threat. Public expenditure on defence procurement throughout Europe has also been slashed. The demand for defence items has accordingly reduced sharply. Defence industries will immediately feel the brunt. Defence capability will be reduced significantly and no doubt over time R&D will also decline. No doubt cooperation with the EU on defence capability might be accelerated, and the discussion between the United Kingdom and France on shared naval resources is a case in point. Hence, the United States is important. Equally, there is a huge amount of pressure for budgetary cuts for much the same reasons—not to mention the realisation that defence and all other public expenditure such as state grants and federal programs can no longer be financed so heavily from debt. That debt, as we know, was generated by two phases of the global financial crisis driven by the collapse of the subprime market. As well as that, we have the massive indebtedness to China through China’s trade surplus, principally with the United States, now being corrected by a reduction in the value of the US dollar.

Yet there are other circumstances in the US defence procurement environment which are different and these circumstances directly affect the state of the industry. The key element is simply the dramatic nature of the US military budget, which—notwithstanding the growth since the days of the Reagan presidency—has grown in real terms by 79 per cent since 9/11. In fact, 21 per cent of the current budget is spent on overseas deployments; therefore, the growth in demand for military hardware production over the last decade has been huge. It should be noted that this growth followed a long-term decline after the Cold War, which for a period saw capability reduced; however, during that period no other industry efficiencies were sought by government.

It was said to me by both industry and government representatives that opportunities in that period to restructure, close redundant bases, innovate and invest were not taken. Competitive discipline suffered as the emphasis was placed on production on a cost-plus—but not on a competitive—basis. Companies, through large production runs of increasing unit costs, accumulated large cash surpluses which were not returned to shareholders or invested. Productivity and R&D dropped away as sustainment was the driving force—not efficiency and certainly not cost. Importantly, a huge level of skill was also lost, especially from government, which was driven mostly by outsourcing.

No doubt as part of that obsessive concern with the size of government in the US, Defense lost enormous numbers of people specialising in contract tendering and project management. Lack of salary, flexibility and wage restrictions within government were also limiting factors, I was told. Companies, though, maintained their levels of expertise, with the disparity then perhaps creating unevenness between the two negotiating parties. So complaints familiar to us in Australia began to emerge.

The United States government had no idea of how industry worked, communication was poor and tender specifications were inadequate. The symptoms were the same as they were in Australia: namely, tenders were regularly priced low and then increased as time passed under the cost-plus principle; budgetary evils such as spending limited to a financial year; limitation encouraged hollow logging and unmerited advances of payment; tender processes were cut short for reasons of expediency; product was poor and delivery times blew out significantly; there was lack of coordination across the three services; tender specifications were not met; and needless to say, costs just continued to go through the roof.

There was too much emphasis on partnership with industry, rather than on an objective, arm’s length relationship. There was constant pressure at the outset to underestimate costs to facilitate decisions, with costs not included and risks not evaluated or priced. There was poor articulation of the policy and the military strategies that supported purchasing. Supplementary funding was easy to acquire, especially where there was high constituency value in a particular contract. Prescribed processes were ignored. Payments were made on progress of process, not outcomes, and there was a chronic lack of knowledge or understanding of systems integration.

However, it must be said that the worm seems to have turned—or to at least be in the process of turning. Now, with some reduction in demand following the withdrawal from Iraq and faced with budget reductions, the US industry faces a double whammy, firstly, because demand is reduced post Iraq, and secondly, because efficiencies and productivity, which should have been achieved earlier, are now being demanded by government. In fact, action akin to that taken in Australia over the last decades following the reports of Kinnaird and Mortimer is now becoming the norm. The political climate is now demanding tax concessions and smaller government.

In the face of the need for added revenue and government investment, something has to give and US Defense is being directed to take a disproportionate share of that pain. Secretary Gates has been blunt about what the administration expects. Not only have programs for the production of aircraft and the naval fleet been cut but processes are being reformed. For example, plans are afoot to restore the level of procurement skill in Defense previously lost, and I was told this could mean the hiring of an additional 20,000 people. New competitive tendering processes are being put in place. It is important to note that the restrictive clauses of the US National Defense Act, which strictly limited the sale of equipment to allied nations such as Australia, are being removed and the United States is well advanced in that process.

While it may have added complexity, the US congress has weighed in as well. It is insisting on new levels of accountability from Defense and industry that were previously unknown. Industry did express some frustration at these reforms to me but it is also interesting to note how they have reacted otherwise. Many of the large prime manufacturers, for example, have moved to divest themselves of some of their own existing vertical integration. They say that this will provide added flexibility in a reduced market as well as reduced costs over time. At the middle level, however, there has also been a process of consolidation, which will no doubt lead to added efficiencies within the supply chain. The risk is that competition may be reduced somewhat, though compared with our own limited market that is hard to comprehend.

So we must therefore ask this question: what does this all mean for Australia and our own defence industries? One thing is inevitable—that is, the defence expenditure in the United States will continue to be reduced for the foreseeable future. The pressure from the administration to improve competition and productivity will be unrelenting—notwithstanding the traditional demands from constituencies in the United States. Above all, the capacity of the United States to become involved around the world will most likely change considerably. I note that the recent visit of the Secretary of State and the Secretary of Defense is somewhat symptomatic of that change.

There are some negative views on this. Those views focus narrowly on the fear that unit costs must increase for Australian purchases. I would put a contrary view. First, there has been a significant decline in the value of the US dollar, which is quite intentional—that is, the Australian dollar can now buy more and so can other currencies where the GFC has only had a limited effect. Next, US companies are clearly shaping up under the restructuring, and new procedural disciplines are being exercised in order to be much more efficient. With the surety of their own domestic markets reduced, they are becoming much more active in new markets. As they told me, Australia is a shining light not only as a valued ally but also because of the long-term financial commitment inherent in the government’s white paper. This long-term plan has committed hundreds of billions of dollars to defence procurement and sustainment over the next 20 years. No doubt other financially secure nations in the world will be similarly targeted—for example, Canada, Norway and Germany.

I can only conclude that the US industry will present significant new opportunities for Australian companies in the procurement market. The linkages already built by some should be of great advantage. Most importantly, cost savings ought to be in the offing, not to mention improved access to previously restricted technology. None of this should be news to Defence or the DMO, whose relationships with US Defense and industry are deep and extensive.

I am aware that the exchange of information at government level and at the bureaucratic level is improving even though, in reform, we clearly commenced much earlier, although we still have a long way to go. Added to this is the seriousness with which our relationship with US has developed more recently under the Gillard government. Rather than being threatened by the rationalisation of procurement in the US, I can only say to Australian companies that they should be eager to avail themselves of opportunities as they arise. Australia’s defence industry has the ball at its feet as the result of the government’s defence capital investment program. Never has there been such an opportunity as in the current relationship with the US government, a relationship which proffers such levels of cooperation. I must say that, during my briefing by US officials and company executives at the most senior levels, I was impressed by their understanding and appreciation of both sides of the relationship with Australia.

We might ask: what does all of this mean? Will there be any real change or will we just continue to plod on incrementally? The cynics might say, of course, that the more things change, the more they remain the same. My concern is that, within Defence in general, this could well be fair comment. Despite all of the reforming zeal which has been directed at procurement and military justice, for example, we are still seeing significant evidence of repeats of old behaviour. I refer in particular to the very disturbing evidence emerging from the HMAS Success inquiry, referred to publicly by Minister Smith. Although we were given all the assurances that the initial allegations were not true, it seems they are likely to be proven otherwise—or indeed even worse. Given the work done by the Senate in this area, this is quite disappointing, especially the cultural attitude of denial which seems to continue and the regular failure of internal inquiries to reveal the absolute truth.

It is likewise, of course, with procurement. Last week’s revelation of difficulties with the MRH helicopter purchase so soon after the Seasprite disaster is very concerning and so is the revelation that the procurement of landing craft has been cancelled, having commenced back in 1997—more waste and incompetence, especially if it is correct that the original design was wrong, not to mention the faulty manufacture. Even more concerning is how this project slipped under the radar. Why did we not know about it as a project of concern? How many other failed projects are there which fall below the financial reporting threshold? The report of faulty keel laying for the first of the AWD’s in Melbourne suggests that, despite all the government’s pressure for reform, procurement processes remain, at best, problematic. This is depressing considering the strong intent of government. There has been a regular failure, or an apparent continuing failure, of Defence to make the necessary changes demanded and requested by successive ministers. The extent to which governments and ministers can manage Defence is therefore a matter of ongoing interest, especially when it comes to accountability for such a massive bureaucracy. This matter of accountability through the bureaucracy is a matter I will return to at another time.