Chapter 3
Conclusion and Recommendations
3.1
Throughout this inquiry the committee heard a strong message that the
presence of Defence bases and ADF personnel is welcomed by members of the local
community. It was widely recognised that there are a number of benefits
resulting from Defence presence in the regions, with particular reference to
the business opportunities that may arise from Defence training activities and
infrastructure upgrades taking place on Defence bases. The committee heard a
number of examples of local councils, industry organisations and local
businesses actively seeking increased engagement with Defence representatives
in their community.
3.2
The implementation of the 2016 Defence White Paper (White Paper) provides
an opportunity to build on the existing goodwill in the community to ensure
that Defence training and activities continue to reap positive benefits for
rural and regional communities. The main concern of the committee has been to investigate
whether appropriate policy frameworks, procedures and communication mechanisms
are in place to ensure the local job creation aspects of the White Paper
highlighted by the government can be realised.
3.3
In order for rural and regional communities to be able to participate in
and see the anticipated benefits of the employment opportunities, as a first
step, the committee recognises that it is important for an appropriate policy
framework to be in place.
Policy settings
3.4
As highlighted throughout the inquiry, the White Paper sets out the Government's
intent to strengthen and increase investment in defence capabilities to meet
the challenges of the strategic environment. The White Paper is supported by a
number of other policy documents and plans. These plans outline the
Government's intent, strategic direction, current priorities and initiatives
and provide some guidance for those engaged in the Defence sector and
specifically SMEs.
3.5
The White Paper and associated policy documents have recognised the
importance of developing sovereign capability and ensuring that Australian
industry is well placed to assist and support the Australia Defence Force (ADF)
into the future.
3.6
The focus on developing capability and capacity in defence industry is
welcomed by the committee. It is recognised that supporting businesses in each
part of the supply chain is important to ensure the current and future needs of
the ADF are met. It is, however, disappointing that the White Paper was
released well in advance of additional supporting policy documents and the LICP
pilot that will facilitate the implementation of the aspects of the White Paper
that the committee has been investigating. The committee is of the view that it
would have been beneficial for the supporting policies, and particularly the LICP
pilot, to have been available earlier when announcements were made about
employment opportunities and the committee notes that some aspects of the
policy framework are still under development.
3.7
The committee will now turn to the effectiveness of the translation of
the government announcements about employment into policies and procedures to
ensure the best outcomes for communities.
Implementation of strategic policy
direction
3.8
The committee has some concerns that there may be a disconnect between
the high level strategic policy documents and the implementation and delivery
of measurable outcomes for SMEs in rural and regional communities. Evidence
from SMEs reported challenges communicating with Defence and being made aware
of upcoming business opportunities and the difficulties experienced to win
contracts with Defence, particularly businesses who have not traditionally had
a relationship with Defence. The committee also received some evidence that the
procurement process is cumbersome and the amount and complexity of the
documentation required puts the process out of reach for a number of SMEs.
These examples indicate that there may be additional action necessary to ensure
strategic intent is matched by operational initiatives.
3.9
Defence provided evidence outlining how Defence officials are made aware
of government policies and priorities, including the distribution of policies
to all Defence staff to ensure awareness and briefing senior Defence personnel
on industry policy issues and priorities. While this dissemination of
information and increasing awareness is a positive step, it was not clear to
the committee how this approach will result in the priorities filtering down to
all levels and, importantly, being embedded in departmental procedures. The
committee therefore remains concerned about the level of information available
to Defence staff at all levels and locations about the implementation of
strategic policy documents.
Recommendation 1
3.10
The committee recommends that Defence review its procurement and
purchasing policies and procedures to ensure they are providing appropriate and
up to date guidance to Defence staff that will assist them implement the Defence
White Paper, associated industry policy documents and the Local Industry
Capability Plan Pilot.
Local Industry Capability Plan
Pilot
3.11
The Local Industry Capability Plan (LICP) pilot was announced during the
period that the committee has been conducting its inquiry. Initially to include
three projects, the LICP pilot has now been expanded to include six projects at
varying stages of implementation. The committee welcomes the LICP pilot and its
emphasis on facilitating increased engagement between prime contractors and
local businesses. The committee is positive about the additional opportunities that
local SMEs may have to participate in Defence work contracts as a result of the
LICP pilot.
3.12
Encouraging prime contractors to actively engage with local business
during the preparation of tender proposals is important as it provides a
mechanism for prime contractors to develop a better awareness of the local
industry and their capability and capacity to undertake Defence contracts. The
committee notes that under the LICP pilot, tenderers will be required to
include information about proposed local industry participation as part of
their response to the Request for Tender and successful tenderers will be
required to prepare a Local Industry Capability Plan which will be considered
and reviewed by Defence throughout the project to determine economic benefit
and validate engagement and commitment to opportunities for local industry
participation. The committee has made a recommendation later in this chapter on
how this information could be utilised.
3.13
The committee notes evidence from Defence that the outcomes from the
LICP pilot will inform Defence policies and in particular the Defence Industry
Participation Policy, expected to be released later in 2018. It is appropriate
that the valuable feedback and lessons learned from the LICP pilot should
inform other Defence policies and procedures. Given the emphasis that has been
placed on the potential for the LICP pilot to deliver sustained positive
outcomes for local industry, it is the view of the committee that a
comprehensive evaluation be undertaken of the LICP pilot.
3.14
A detailed evaluation will also provide an opportunity to assess the success
of the LICP pilot over a longer period. As noted in supplementary submissions
to the committee, the LICP pilot is in its infancy and it is difficult for
local communities to accurately assess any impact on local industry and whether
the processes in place for the current tenders have led to increased local
consultation and engagement.
3.15
The committee recognises that the six projects included in the LICP
pilot are at varying stages of implementation which will affect the timing of
information being available on the progress of the pilot. With this in mind,
the committee has not recommended a particular timeframe for the completion of
the evaluation but notes it would be advantageous if it were completed as soon
as practicable.
Recommendation 2
3.16
The committee recommends that Defence conduct a detailed evaluation of
the Local Industry Capability Plan Pilot which should be made publicly
available.
2018 Defence Industrial Capability
Plan
3.17
The committee welcomes the release of the 2018 Defence Industrial
Capability Plan in April 2018 which includes a list of ten initial
Sovereign Industrial Capability Priorities. These priorities are focused on
areas that are operationally critical, priorities within the Integrated
Investment Program over the next three to five years or need more dedicated
monitoring, management and support.
3.18
The establishment of Sovereign Industrial Capability Priority Grants
will enable SMEs who are contributing to a Sovereign Industrial Capability
Priority to apply for grants of up to $1 million to fund capital equipment
purchases and non-recurring engineering costs. Businesses will be required to
match funding on a 50:50 basis and total funding for a business over a two to
three year period will be capped at $3 million. Total funding for these grants
will be up to $17 million in a financial year.
3.19
The committee notes that this new grants program is a positive step and
will make available financial assistance to a number of SMEs who are
contributing to a Sovereign Industrial Capability Priority. As there will be a
number of SMEs who will not be able to access these grants, the committee
encourages Defence to explore other initiatives to assist SMEs in addition to
this grants program.
The use of Tier 1 contractors
3.20
The committee notes that much of the work undertaken for Defence is
through the engagement of Tier 1 contractors. The committee is of the view that
Defence should ensure that the policy intent of the White Paper and associated
documents is also carried through in the work being undertaken on behalf of
Defence.
Tier 1s and SMEs
3.21
The committee emphasises that, although it welcomes the LICP pilot, it
is of fundamental importance that processes are in place to ensure that the
consultation and tender consideration process is robust and transparent.
Evidence to the inquiry from businesses highlighted some of the challenges they
had experienced when providing input to prime contractors for tender proposals.
The committee heard examples of businesses not being awarded the work from the
successful tenderer, despite having provided input during the tender
development process.
3.22
The committee notes that although this evidence refers to projects
operating outside the LICP pilot, it demonstrates the potential challenges for
local SMEs when providing information to prime contractors to assist them to finalise
tender documentation.
3.23
The committee sees the LICP pilot as an opportunity for Defence to
ensure robust processes around the interaction between Tier 1 contractors and
SMEs are in place. In particular the committee received evidence concerning the
provision of feedback from prime contractors to unsuccessful tenderers.
Feedback from prime contractors to
unsuccessful tenderers
3.24
The committee received some evidence about businesses which have been
unsuccessful when tendering for subcontracting work to prime contractors and
have not received feedback to explain why they were unsuccessful. Defence
advised that there are different contractual requirements in relation to the
provision of feedback to unsuccessful tenderers. There are some contracts which
do not require contractors to communicate with unsuccessful tenderers; it is up
to the discretion of the contractor to provide this feedback.
3.25
The committee welcomes advice from Defence that a special condition of
contract will be introduced immediately into Defence's traditional head
contract to ensure that prime contractors follow guidance in the Commonwealth
Procurement Rules on unsuccessful tender debriefs.
Challenges experienced by SMEs with
respect to Tier 1 contractors
3.26
The committee was concerned about the issues raised in the evidence
about the subcontracting tender processes for the Cultana Training Area
Redevelopment (CTAR) Stage 1 Project. Following the Canberra hearing, Defence
provided broad information about the local engagement undertaken by the prime
contractor for the project but at the time of finalising the report, a response
in relation to the particular concerns raised by local businesses had not been
received from Defence.
Commonwealth Procurement Rules
3.27
In its first interim report the committee recognised the limitation of
the current Commonwealth procurement framework and looked more closely at the
South Australian model. The committee discussed the SA model with Defence during
Additional Estimates and asked whether that model could be applied in Defence.
At that hearing Defence confirmed that they are aware of the SA model and have
also talked to the Northern Territory Government about their approach to
procurement. Defence reiterated that the Department of Finance (Finance) are
the custodians of the Commonwealth Procurement Rules (CPRs).
3.28
The committee again explored the SA model further at its final hearing
in Canberra with Defence and Finance. Finance responded that unlike the SA
model, mandatory weightings are not used in the CPRs. Finance pointed out that from
March 2017 the CPRs include a clause requiring agencies to incorporate
consideration of economic benefits for contracts over $4 million for general
procurement and $7.5 million for construction procurement. Finance
stressed that it is up to individual agencies to determine what constitutes
economic benefit and what weighting to give to that noting that it does not
override the need to achieve value for money. Finance has provided some
guidance for agencies to help them implement that policy.
3.29
Defence indicated that in its view these changes to the CPRs are
relatively recent and Defence has not yet embedded a mature methodology for
identifying the economic benefits. Defence reported that it has reviewed the SA
model and that this is one of the inputs being used to develop their assessment
models. The committee also notes that this identification of economic benefit
is being worked on through the LICP pilot.
3.30
The committee recognises the importance and value of Defence further
developing the assessment model to determine economic benefits. The committee intends
to monitor progress on this matter.
Recommendation 3
3.31
The committee recommends that Defence provide an update to the committee
about its progress to develop the assessment model by 31 August 2018.
Documentation
3.32
The amount and complexity of procurement documentation was another key
message from witnesses which the committee took up with Defence. Finance
indicated that they do not provide any instruction about the volume and size of
procurement documentation and that it is up to agencies to determine. Defence
responded that their contracts for large value items and services are
understandably very thorough but they use the Commonwealth contracting suite
for tenders under $1 million which is a streamlined set of tools and
templates which was developed by Finance in consultation with SMEs. It is
designed to minimise the burden on SMEs.
3.33
The committee was pleased to hear from Defence that they remain open to
incremental change to documentation based on feedback from industry.
Consultation mechanisms
3.34
As it has noted in interim reports for this inquiry, the committee
received evidence of positive and collaborative engagement and consultation
between Defence and the respective communities, as well as evidence about
aspects of communication that could be improved. The evidence received about
consultation mechanisms focused on consultation between Defence and the local
community broadly, as well as consultation between Defence and local
businesses.
3.35
The committee understands that level of engagement varies from
base-to-base and a single mechanism cannot address all aspects of defence
engagement. However, some key communication mechanisms were highlighted during
the inquiry.
Importance of the relationship
between the base commandant and the local community
3.36
Throughout the inquiry the committee heard evidence noting the significance
of the local base commandant in ensuring good relationships with the local
community. The committee agrees with the importance of this relationship. While
the committee heard positive examples, communities saw the relationship as a
key one to build on and were concerned should a base commandant be less engaged
with the community. The committee asked Defence how it ensures local
commandants are appropriately engaged with the local communities and whether
there are any policies in place but at the time of finalising the report the
committee had not received a response.
3.37
In the absence of advice from Defence and in order to facilitate
engagement with local communities, it is the view of the committee that it may
be beneficial for some general guidance setting out a standard set of
requirements for community engagement to be developed.
Recommendation 4
3.38
The committee recommends that Defence develop general guidance for base
commandants to achieve an appropriate level of engagement with the local
community which includes ensuring contact points are available to stakeholders
in the local community.
Communication with business
representatives, especially small and medium enterprises
3.39
Another consistent message from witnesses was the importance of
stakeholders such as local councils being informed about current and planned
activities at defence facilities to enable planning for the provision of
services as well as capital works and training activities so that business
opportunities can be communicated to local businesses.
3.40
The committee was surprised to hear that in some areas the communication
mechanisms with local government and other stakeholders were less developed
than others regardless of how long Defence had been in the area.
3.41
The committee notes advice from Defence that it engages continually with
local communities and it uses direct engagement as well as utilising the
existing functions of local, state and territory governments, industry peak
bodies and Tier 1 contractors to provide information.
3.42
The committee notes there are a number of stakeholders involved in
communication mechanisms and it is important to create and maintain mechanisms
to facilitate engagement with local businesses. The potential contribution of
SMEs is an important consideration in order for the policy intent of the White
Paper to be implemented. The committee stresses the importance of Defence
working with local councils and other stakeholders to ensure the available
consultation mechanisms are appropriate and working well.
3.43
The committee welcomes the establishment of the Centre for Defence
Industry Capability (CDIC) to provide a source of information for businesses
across Australia.
Centre for Defence Industry
Capability
3.44
The committee notes that the CDIC website provides a wealth of
information about the Defence industry to assist businesses. This is a valuable
tool to assist SMEs increase their understanding and awareness about working
with Defence and the Defence industry more broadly. A central point of advisors
based in states and territories is also very valuable.
3.45
It will be very important for the CDIC to continue building capacity and
developing networks at the regional level. This should also include a focus on
businesses that have not previously participated in Defence work and may be
looking for opportunities to contribute to the defence supply chain.
3.46
Evidence to the committee throughout the inquiry emphasised the
importance of SMEs having access to information about working with Defence and
being supported to increase their capacity and capability to be able to tender
for Defence work. The committee welcomes the 'Introduction to the Defence
Market' seminar series recently delivered by the CDIC in capital cities and
regional areas to assist SMEs.
3.47
While the work of the CDIC is welcomed, on a practical level it may not
be the most relevant mechanism for some SMEs in regional and remote areas to
directly access information. For a number of SMEs, the availability of a local
liaison contact, such as a chamber of commerce or a representative from local
council, is an important part of the communication process.
Recommendation 5
3.48
The committee recommends that the Centre for Defence Industry Capability
ensure its processes and communication mechanisms specifically consider how
best to provide information to SMEs in rural and regional areas.
Recommendation 6
3.49
The committee recommends that the Centre for Defence Industry Capability
publicly report on its engagement with SMEs, particularly engagement with SMEs
in rural and regional areas.
Availability of regional/local information
3.50
The availability of information measuring the regional impact of Defence
activities is very important to rural and regional communities. The committee
heard evidence at every public hearing throughout the inquiry about the need
for this data to be readily available. In particular, communities want better
measurement of the local and regional economic benefits derived from activities
at Defence bases.
3.51
Following a number of requests from the committee, Defence was able to
provide some regional information, such as the number of local people employed
at particular bases or the value of goods and services purchased from local
suppliers. It is positive that some regional information is currently
available.
3.52
The committee notes that more localised information would be of great
benefit to communities and to Defence more broadly. It contrasts the
information made available to the committee for this inquiry with the detailed
information made available to the Parliamentary Standing Committee on Public
Works.
Financial system change
3.53
The committee heard that Defence's financial systems are largely
designed around paying suppliers rather than providing such information and the
committee is cognisant of the resource implications of increasing reporting
requirements undertaken by Defence.
3.54
The committee was however pleased to hear that as part of the
procurement reform framework in Defence, all contracts and purchase orders
raised will be required to relate to the postcode where the goods and/or
services are going to be provided.
Pilot information
3.55
It is expected that as the LICP pilot progresses, the information about
the local and regional impact of Defence facilities and training will be more
readily available. It is the view of the committee that this is a positive
development which could be used to address this information deficit and provide
a valuable feedback mechanism.
Recommendation 7
3.56
The committee recommends that Defence collate the information provided
in Local Industry Capability Plans relating to local engagement and local
economic benefits to produce a regular public update about Defence activities
in the regions.
Tier 1 contractor reporting
requirements
3.57
In accordance with their terms of contract, Tier 1 contractors are
required to report to Defence on a number of matters. The committee notes that
information provided from Tier 1 contractors in accordance with Defence
reporting requirements could be of benefit to a range of stakeholders.
3.58
Based on the evidence received to date, it appears to the committee that
there is some variability on reporting requirements for managing contractors,
including contractors implementing Base Services Contracts. The committee notes
that Defence is seeking to amend reporting requirements, including possibly
amending Base Services Contracts to include additional reporting requirement to
capture the local engagement of SMEs. The committee supports this course of
action. The detailed information required from Tier 1 contractors as part of
the LICP pilot is also welcomed.
3.59
In order to meet the need from the community, particularly rural and
regional communities, for more information about the regional impact of Defence
activities, it is important that Defence consider the most appropriate way to
make the information publically available, noting that some information may be
viewed as commercial in confidence.
Recommendation 8
3.60
The committee recommends that Defence review the reporting requirements
of Tier 1 contractors to ensure relevant regional/local information is provided
and Defence consider how best to make this publicly available.
External analysis commissioned by
Defence
3.61
The committee also notes the evidence from Defence about the studies
analysing the economic contribution of Defence activities that have been
undertaken to date. These studies have reported a demonstrable economic benefit
to the respective communities.
3.62
The committee is pleased that additional studies have been commissioned
in 2018 to analyse a number of other bases. While this is positive, this may
not address the ongoing need and importance of regional and local level
information being available for local communities and other interested
stakeholders.
3.63
It is important that there are mechanisms in place to facilitate the ongoing
collection and reporting of this information into the future. The committee is
of the view that Defence should work towards being able to provide detailed
information about the number and types of goods and services, the use of local
suppliers and the proportion of the total project spend flowing into the local
economy. While the committee understands current processes and systems are not
able to achieve this level of detail, the committee sees the information from
the LICP pilots, the change in contract and purchase orders reporting and the
ad hoc studies analysing the economic contribution of Defence activities
providing a solid basis for working towards making that information available.
Recommendation 9
3.64
The committee recommends that building on recommendations 7 and 8, Defence
work towards providing detailed information about the number and types of good
and services, the use of local suppliers and the proportion of total project
spend flowing into the local economy.
3.65
The committee believes that the provision of this information will build
on the tremendous goodwill and community support for Defence and allow Defence
to clearly articulate the economic benefit being provided by Defence to communities
around the country.
Senator Alex Gallacher
Chair
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