Chapter 1Introduction

1.1On 21June2023, the Senate Foreign Affairs, Defence and Trade Legislation Committee (the Committee) established an inquiry, for report by the final sitting day of March2024, into the performance of the Department of Defence (Defence) in supporting the capability and capacity of Australia’s defence industry.[1]

Terms of reference

1.2Pursuant to Standing Order 25(2)(a)(v), the Committee resolved to inquire into the performance of Defence in supporting the capability and capacity of Australia’s defence industry, with particular reference to the department’s:

(a)support to Australia’s defence industry in meeting the current and future needs of the Australian Defence Force (ADF);

(b)role providing and supporting opportunities for adjacent industries to contribute to the sustainability and viability of Australia’s defence industrial capability;

(c)work to address the reliance of Australia’s defence industry on inputs, be they tangible or intangible, from abroad and key capabilities that could form the basis of targeted exports;

(d)assessment and response to the risks that interruptions to supply chains may present to the ready access to such inputs and the benefits of producing defence industry outputs in Australia;

(e)role in enhancing Australia’s defence industrial base by pursuing greater advanced scientific, technological and industrial cooperation through AUKUS and other defence partnerships;

(f)design and implementation of programmes and initiatives that seek to improve the Australian defence industry’s capability and capacity; and

(g)any other related matters.[2]

Purpose of the interim report

1.3The purpose of this interim report is to provide background information on Australia’s defence industry and procurement process and to canvas the key themes raised in submissions, providing guidance for the Committee’s future work.

Conduct of the inquiry

1.4Details of the inquiry were made available on the Committee’s website. The Committee also contacted a number of organisations and individuals inviting written submissions by 14July2023.

1.5The Committee published 47 submissions, as listed at Appendix 1. The Committee also received a number of form letters outlining a consistent theme, an example of which has been published on the Committee’s submissions web page.[3]

1.6The Committee intends to hold a number of public hearings.

1.7The Committee would like to thank individuals and organisations that made submissions and looks forward to further engagement and contributions to the inquiry.

Structure of the report

1.8This report contains three chapters. This chapter sets out:

the purpose and conduct of the inquiry;

provides background information on Australia’s defence industry and Defence’s procurement framework; and

canvasses recent relevant inquiries and reviews.

1.9The chapters that follow include:

Chapter 2 which provides a discussion on definitions and an overview of the key concerns raised in submissions; and

Chapter 3 outlines the Committee’s views and recommendation, including directions for future work.

Background

1.10This section provides background information on Australia’s defence industry and an overview of defence’s procurement framework.

Australia’s defence industry

1.11Defence defines the Australian defence industry as including ‘all businesses and organisations that provide products or services or are developing products or services that have a specific application for Defence’.[4] More specifically, in the Defence Industrial Capability Plan, Australian defence industry is defined as:

… consist[ing] of businesses with an Australian Business Number and Australian-based industrial capability (such as Australian company and board presence, skills base, value-add work in Australia, infrastructure) that are providing or have the capacity to provide defence specific or dual-use goods or services in a supply chain that leads to the Australian Department of Defence or an international defence force.[5]

1.12Defence submitted:

A strong defence industry is part of our national power and contributes to regional stability.

Defence recognises industry is a fundamental input to capability and the vital role industry plays in delivering and supporting Defence capabilities. The Government has reaffirmed its commitment to a competitive and resilient Australian defence industrial base.[6]

Australian defence spending

1.13In the 2023–24 Budget, defence spending will stay at around 2.0 per cent of gross domestic product (GDP) over the forward estimates, increasing to 2.3 percent of GDP by 2032–33.[7] This does not include the addition of approximately 0.15 per cent of GDP to support the AUKUS submarine program as outlined by the Deputy Prime Minister, the Hon Richard Marles MP.[8]

1.14In comparison, the following allied countries’ military expenditure as a percentage of GDP is United States (US) 3.48 per cent, United Kingdom (UK) 2.22per cent, New Zealand (NZ) 1.37 per cent, and Canada 1.32 per cent. The People’s Republic of China (PRC) is presently tracking at approximately 1.74 per cent. Following the Russian annexation of Crimea in 2014, NorthAtlantic Treaty Organization (NATO) countries pledged to set a goal for military spending at least 2 per cent of their GDP.[9]

1.15According to the Department of Finance, in 2021–22, Defence awarded 33 860 contracts with a combined value of $45.6 billion. This represents 57 per cent of commonwealth contracts by value.[10]

1.16The Australian Bureau of Statistics (ABS) produces the Australian Defence Industry Account (ADIA) which measures the direct economic contribution and direct employment headcount of the defence industry to the Australian economy. In 2021–22, the gross value added (GVA)[11] from Defence industry expenditure contributed $10.6 billion to the Australian economy, up 20.3 per cent from the previous year. This translates to a contribution of 0.49percent to the total economy’s GVA.[12]

1.17The three largest industry contributors to defence industry GVA in 2021–22 were:

Professional, scientific and technical services with 43.1 per cent of GVA;

Manufacturing with 16.7 per cent of GVA; and

Construction with 15.4 per cent of GVA.[13]

1.18The three largest state contributors to defence industry GVA in 2021–22 were:

New South Wales ($3.4b);

Victoria ($2.3b); and

ACT ($1.7b).[14]

1.19The ABS also estimated that 61 600 employed persons were associated with Defence industry expenditure, a growth of 17.1 per cent from the previous year.[15]

1.20In its 2021-22 annual report, Defence reported that over the last twelve months:

… the Defence Innovation Hub executed 64 contracts with Australian businesses and research organisations, worth a combined total of $152.7 million. Over the same period, Defence continued to engage with international militaries and defence industry companies in support of exports.[16]

1.21Australia’s defence exports are currently worth around $2 billion with its top export markets being the US, UK, European Union (EU), NZ and Canada.[17] Through Defence’s Global Supply Chain Program—focused on driving exports through the global supply chains of participating Defence contractors (primes)—2 000 contacts worth over $1.6 billion to 230 Australian suppliers, achieving a return on investment of 12 to 1, have been delivered since the program began in 2007.[18]

1.22Beyond the above information, there is limited data available that provides an indication of the proportion of Defence procurement that is supplied by Australian businesses compared to what is supplied by foreign defence primes.

1.23One performance criterion reported on in Defence’s annual report is ‘Defence engages industry to enhance support of sovereign capability’ with one of the sub-measures being the number of Australian companies involved in Defence procurement. This sub-measure was reported as being unable to be assessed as:

… there was no available reliable data on the number of Australian companies involved in Defence procurement as it specifically related to support of sovereign capability. Defence is working to identify appropriate data sources to address this issue in future reporting periods.[19]

1.24A 2017 inquiry by the Joint Select Committee on Government Procurement recognised that the current mechanisms for collecting information were inadequate and recommended that a suitable framework be developed by the Department of Finance and the Department of Industry that collected the relevant data to monitor and evaluate the degree of commonwealth procurement that is supplied by Australian-owned businesses, contains Australian-manufactured goods, or uses Australian-based services.[20]

1.25At the time, the Turnbull Government did not support the recommendation stating:

The Australian Government does not discriminate against suppliers based on their location, or the origin of their goods and services. This ensures comparable access to overseas markets for Australian businesses. The Government does not support the introduction of onerous reporting requirements on suppliers required to implement this recommendation. Introduction of such a measure would increase the regulatory burden and compliance costs for both suppliers and Commonwealth entities.[21]

Defence’s procurement framework

1.26Procurement is a core Defence function, contributing to departmental and ADF capability. Defence engages in various types of procurement to source the products and services it needs, including:

Acquisition procurements require goods and services that can be integrated into Defence platforms or used by Defence personnel on operations. Prime contractors are engaged by Defence on long-term contracts with possible sub-contracting opportunities for businesses.

Sustainment procurements relate to ongoing servicing, maintenance, upkeep and repair of current Defence capabilities and platforms.

Commercial procurements cover a range of non-materiel goods and services provided to Defence such as health services, logistics services, training, travel, information technology, stationery and personal protective equipment.

Estate management and infrastructure services procurements refers to the maintenance of Defence facilities, establishments and training areas, and a range of construction services.

Innovative technology procurements utilise the Defence Innovation Hub as the primary gateway for companies seeking to submit innovation proposals or ideas to Defence.[22]

1.27The Capability Acquisition and Sustainment Group (CASG) is Defence’s key delivery agency for Defence capability and assists Defence to manage commercial risk in the capability and procurement lifecycle, consistent with the commonwealth and Defence accountability framework. There is a range of legislation that impacts on commonwealth procurement, including the Commonwealth Procurement Rules (CPRs) and initiatives such as the Indigenous Procurement Policy and Australian Industry Participation.[23]

Commonwealth Procurement Rules

1.28At the centre of the procurement process are the CPRs which articulate the requirements for commonwealth officials performing duties in relation to procurement and focus on providing value for taxpayer money. Achieving value for money requires consideration of the financial and non-financial costs and benefits associated with procurement.[24]

1.29The CPRs are issued by the Minister for Finance (Finance Minister) under section 105B(1) of the Public Governance, Performance and Accountability Act 2013 (PGPA Act). The Department of Finance is responsible for policy stewardship of the Commonwealth Procurement Framework.

1.30The CPRs have been designed to provide officials with flexibility in developing and implementing procurement processes that reflect their relevant entity’s needs.[25] The Department of Finance explained:

The Commonwealth Procurement Framework is devolved. Each entity is responsible for its own procurement processes and decisions in order to meet its purpose and objectives. The devolved nature of the framework provides Defence flexibility to implement procurement governance structures relevant to their business needs, risk, operational complexity, volume and value of procurements, and type of goods and services required.

Under the devolved framework, the Accountable Authority of relevant entities may issue AAIs [Accountable Authority Instructions] to guide entities' officials in their processes and practices. The Accountable Authority of Defence can issue these instructions to set out specific operational rules to instruct officials on matters relating to the finance law and ensure compliance with the Commonwealth Procurement Framework.[26]

1.31Australia's trade agreements with other countries give our local businesses valuable access to overseas markets that are considerably larger than our own. A key condition of Australia’s Free Trade obligations is that Australian Government procuring entities cannot discriminate against suppliers based on locality, size, degree of foreign ownership, or origins of goods and services.[27]

1.32On 13 June 2023, the Finance Minister, Senator the Hon Katy Gallagher, released an updated CPR reinforcing the central mantra of ‘value for money’:

Achieving value for money is the core rule of the Commonwealth Procurement Rules as it is critical in ensuring that public resources are used in the most efficient, effective, ethical and economic manner. Price is not the only factor when assessing value for money, and these Rules require officials to consider a range of other relevant financial and non-financial costs and benefits. Broader economic and social benefits can be realised through normalising consideration of environmental sustainability and climate change impacts, the use of recycled materials in public projects and through more diversity and competition in our supplier base and workforces. This will provide greater opportunities for small, regional and Indigenous owned businesses to contribute to the Australian economy and create more jobs for local communities.[28]

Value for money

1.33The Department of Finance provides the following advice to agencies considering procurement on what ought to be considered value for money and what actually constitutes value for money. The CPRs Division 1: Rules for all procurements notes:

Considering value for money

4.1 A thorough consideration of value for money begins by officials clearly understanding and expressing the goals and purpose of the procurement.

4.2 When a business requirement arises, officials should consider whether a procurement will deliver the best value for money. It is important to take into consideration:

(a)stakeholder input;

(b)the scale and scope of the business requirement;

(c)the relevant entity’s resourcing and budget;

(d)obligations and opportunities under other existing arrangements;

(e)relevant Commonwealth policies; and

(f)the market’s capacity to competitively respond to a procurement.

4.3 When a relevant entity determines that procurement represents the best value for money, these considerations will inform the development and implementation of the procurement.[29]

1.34Followed by, more explicitly:

Achieving value for money

4.4 Achieving value for money is the core rule of the CPRs. Officials responsible for a procurement must be satisfied, after reasonable enquiries, that the procurement achieves a value for money outcome. Procurements should:

(a)encourage competition and be non-discriminatory;

(b)use public resources in an efficient, effective, economical and ethical manner that is not inconsistent with the policies of the Commonwealth;

(c)facilitate accountable and transparent decision making;

(d)encourage appropriate engagement with risk; and

(e)be commensurate with the scale and scope of the business requirement.

4.5 Price is not the sole factor when assessing value for money. When conducting a procurement, an official must consider the relevant financial and non-financial costs and benefits of each submission including, but not limited to the:

(a)quality of the goods and services;

(b)fitness for purpose of the proposal;

(c)potential supplier’s relevant experience and performance history;

(d)flexibility of the proposal (including innovation and adaptability over the lifecycle of the procurement);

(e)environmental sustainability of the proposed goods and services (such as energy efficiency, environmental and climate change impact and the use of recycled products)

(f)recognising the Australian Government’s commitment to sustainable procurement practices, entities are required to consider the Australian Government’s Sustainable Procurement Guide where there is opportunity for sustainability or use of recycled content;

(g)the Sustainable Procurement Guide is available from the Department of Climate Change, Energy, the Environment and Water’s website; and

(h)whole-of-life costs.

4.6 Whole-of-life costs could include:

(a)the initial purchase price of the goods and services;

(b)maintenance and operating costs;

(c)transition out costs;

(d)licensing costs (when applicable);

(e)the cost of additional features procured after the initial procurement;

(f)consumable costs, including the environmental sustainability of consumables; and

(g)decommissioning, remediation and disposal costs (including waste disposal).[30]

1.35The third key element to the CPRs extends the overall benefits across the economy, so the broad macroeconomic benefits. The Department of Finance outlines the following guidance in this respect:

Broader benefits to the Australian economy

4.7 In addition to the value for money considerations at paragraphs 4.4 – 4.6, for procurements above $4 million (or $7.5 million for construction services) (except procurements covered by Appendix A and procurements from standing offers), officials are required to consider the economic benefit of the procurement to the Australian economy.

4.8 The policy operates within the context of relevant national and international agreements and procurement policies to which Australia is a signatory, including free trade agreements and the Australia and NewZealand Government Procurement Agreement.[31]

1.36The Department of Finance states that for significant procurements, paragraphs 4.7 and 4.8 of the CPRs (above) require officials to consider the economic benefit of a procurement to the Australian economy in the context of determining value for money.

1.37In describing what domestic economic benefit are, the Department of Finance provides the following advice:

7. In general terms, economic benefits to the Australian economy result when the goods or services being procured:

make better use of Australian resources that would otherwise be under-utilised (for example employing people who would otherwise be under or unemployed, using spare industrial capacity, or freeing government funds for other spending);

otherwise increase productivity (for example by adopting new know-how or innovation, or enabling more people to acquire in-demand skills, or ensuring that resources are allocated to sectors in which Australia has a comparative advantage); or

provides broader benefits that support the development and sustainment of industry capabilities;

for example, enhancing key industry sectors through the Department of Defence’s Sovereign Industrial Capability Priorities.[32]

1.38This is the first introduction of the concept of broader benefits supporting industry capability when approaching a significant procurement. The Department of Finance provides the following example for officials of how a ‘capability’ could be interpreted:

Commonwealth officials are procuring a capability in support of the Australian Defence Force. The value is expected to exceed $4 million and therefore they are required to consider the economic benefit of the procurement to the Australian economy.

In evaluating a tender response, economic benefit considerations could include:

competitive pricing;

ensuring that supply chains for essential goods and services are competitive and diverse, including by providing opportunities for [small and medium-sized enterprises (SMEs)], Indigenous businesses and businesses that predominantly employ persons with a disability;

productivity benefits, including the creation of innovative practices, products and supply chains;

developing and sustaining Australian industry capabilities, including through: supporting people to gain in-demand or relevant skills; providing relevant skills and training opportunities; and employing trainees or apprentices in Australia

supporting remote and regional Australian communities, such as through employment opportunities, upskilling and training;

building, leasing or procuring infrastructure that supports Australian communities;

sharing knowledge, skills and technology with SMEs;

providing environmental, social and economic benefits to Australian communities;

promoting the development of industry capabilities, including in supporting Sovereign Industrial Capability Priorities and critical industrial capabilities.[33]

Sovereign Industrial Capability Priorities

1.39In 2018, the government released a Defence Industrial Capability Plan outlining the government’s long-term vision to 2028 ‘to build and develop a robust, resilient and internationally competitive Australian defence industry base that is able to help meet defence capability requirements’.[34] The Industrial Capability Plan included a Sovereign Industrial Capability Assessment Framework to provide a repeatable methodology to identify Sovereign Industrial Capability Priorities (SICPs).

1.40The SICPs define sovereign industrial capability as providing ‘access to, or control over, the essential skills, technology, intellectual property, financial resources and infrastructure within our defence industrial base as required’. Furthermore:

The Sovereign Industrial Capability Priorities are the result of a rigorous assessment framework that looked at the strategic, capability, and resources dimensions of industrial sovereignty—and made judgements based on Defence needs. The Government’s priority is to provide the Australian Defence Force with cost-effective, cutting-edge capability while also maximising Australian industry involvement.

In this context, the Priorities focus on areas that are operationally critical to the Defence mission; priorities within the Integrated Investment Program over a three to five year period; or those in need of more dedicated monitoring, management, and support due to their industrial complexity, Government priority, or requirements across multiple capability programs.

Priorities are described at the capability level with a focus on technologies rather than companies or products. This approach will encourage innovation and new developments across the Integrated Investment Program capability streams and individual projects.

Effective implementation of the Priorities requires them to be embedded early into strategic planning and Defence capability planning processes and across the [One Defence Capability System].[35]

1.41Ten initial SICPs were introduced under the Plan and four additional priorities were added in 2021 to reflect the changing strategic environment, including:

combat clothing survivability and signature reduction technologies;

munitions and small arms research, design, development and manufacture;

land combat and protected vehicles and technology upgrades;

aerospace platform deeper maintenance and structural integrity;

Collins-class submarine maintenance and technology upgrade;

continuous shipbuilding program (including rolling submarine acquisition);

enhanced active phased array and passive radar capability;

advanced signal processing capability;

surveillance and intelligence;

test, evaluation, certification and systems assurance;

robotics, autonomous systems, and artificial intelligence;

precision guided munitions, hypersonic weapons, and integrated air and missile defence systems;

space; and

information warfare and cyber capabilities.[36]

1.42The Plan indicated that each SICP would have an Implementation Plan and Industry Plan developed. Implementation Plans outline critical industrial capabilities for each SICP, describe the existing Australian defence industry sector and outline the actions to be taken by government to support the development of each SICP. Alongside these Implementation Plans are detailed Industry Plans that unpack the industrial capabilities that need to be delivered or supported by Australian industry and encourage greater investment in those capabilities.[37]

1.43Additionally, the Sovereign Industrial Capability Priority Grants Program supports the development, maintenance or enhancement of the capability of Australian small to medium enterprises that contribute to one or more SICPs. Grant assessments and Defence’s investment decisions are based on clear alignment with Defence requirements, whereby grants of $50 000 to $1 million for up to 50 per cent of the cost of a project are available, capped at $3 million in a 3-year period per recipient.[38]

One Defence Capability System

1.44The Defence Capability Manual describes the One Defence Capability System (ODCS) (formerly known as the Defence Capability Life Cycle) as ‘an integrated system that ensures Defence capability decisions optimise capability outcomes within resource limitations’.[39] It involves four phases that ‘connect Government’s priorities through to prepared forces that are available to be committed to operations. At any point in time, individual capabilities will be at different stages of maturity across the four phases’. The phases are described in the manual and include strategy and concepts; risk mitigation, and requirement setting; acquisition; and in-service and disposal.[40]

1.45Originally introduced in 2000 following the Defence Governance, Acquisition and Support Review, two-pass approval was intended to give government greater control over capability development. Since 2003, the DefenceProcurement Review, chaired by MrMalcolmKinnairdAO (the‘Kinnaird Review’), recommended strengthening the two-pass process and led to the creation of the Capability Development Group (CDG) in Defence to give focus to and improve capability definition and assessment.[41] As such, capability proposals are usually subjected to a rigorous process (including contestability)[42] involving consideration at key decision gates by the Investment Committee and consideration by government, known as passes. The Investment Committee, chaired by the Vice Chief of the Defence Force, is responsible for supporting the Defence Committee by overseeing the implementation and integrity of the Integrated Investment Program (IIP), and monitoring Defence’s performance in delivering it. The Defence Committee, chaired by the Secretary, is the senior decision-making committee of Defence, and oversees capability processes.[43] The key decision gates and passes are:

(a)Gate 0 involves consideration of a business case by the Investment Committee and is an internal Defence consideration only. If approved, the proposal progresses to the next gate, or in some cases, is accelerated to Gate 2. Projects that are considered low risk might bypass the First Pass approval stage and progress directly to Second Pass, this is commonly referred to as Combined Pass.

(b)Gate 1 develops a more detailed proposal, which is again considered by the Investment Committee. If approved, the Committee recommends the proposal proceeds to government for consideration. This provides an opportunity to engage with government about how the capability relates to strategic priorities and the range of capability options. Developing the options involves consideration of Australian industry and innovative approaches. If the proposal is approved by government (known as First Pass approval) the proposal will progress to Gate 2. First Pass approval of a Gate 1 proposal does not commit the government to acquire a specific capability but allows for further investigation to progress the proposal to Gate 2.

(c)Gate 2 proposals include detailed planning and capability requirements, such as whole-of-life cost and schedule estimates, risk assessments, workforce planning, and Australian industry participation. The Investment Committee considers the detailed proposal, which will either be recommended for government consideration and approval (known as Second Pass approval) or referred back to the action area for further refinement. Second Pass approval provides Defence with the authority to acquire the capability and commence an acquisition process.[44]

1.46At each gate and pass, the proposal is examined to determine if it should progress further based on consideration of:

(a)Value for money. A decision to acquire an option is based on demonstrating that the preferred option presents the best value for money. This involves establishing an option set that, at least initially, includes scope for innovative approaches. This is followed by an assessment of the project’s value in terms of contribution to the Government’s strategic priorities as analysed through the Force Design process. Other Government priorities can also contribute to value, notably the opportunities for maximising Australian industry participation and contribution to Sovereign Industrial Capability Priorities. This value is compared to the assessment of cost and requirements for other resources (workforce, estate, etc).

(b)Assessment of Options. Government needs to be explicitly engaged in the choice of options. At each Pass, a range of options is presented with accompanying analysis on each, together with a recommendation on which should be further developed (First Pass) or selected to progress to acquisition (Second Pass/Combined Pass).

(c)Implementation planning and risk management. Definition of dependencies, requirements, costings, implementation plans to acquire and sustain the capability and risk analysis are progressively developed for each Pass. Government forms a judgement on whether this development work is sufficiently mature to progress the proposal further.[45]

Capability Acquisition and Sustainment Group

1.47As noted earlier, CASG is Defence’s key delivery agency for Defence capability. It exists to meet the ADF’s military equipment and supply requirements as identified by Defence and approved by government. It aims to achieve full cost and performance transparency for its projects and operations, taking responsibility for the integrity of cost and key performance indicator metrics and facilitating trusted information sharing.[46]

1.48As a part of its role, it works to improve industry relationships and industry performance:

This means it encourages open and honest dialogue and rewards good performance. CASG is committed to effectively delivering capability and through-life sustainment on time, on budget and to the required capability, while meeting quality and safety standards. CASG aims to be business-like, accountable and an outcome driven organisation with a strong and close relationship with the government and industry.

… CASG realises our success is dependent on industry understanding our business and having a commitment to work with us as partners to deliver the required capability to the Australian Defence Force (ADF).[47]

1.49CASG manages nationally significant projects that are unparalleled in their size, cost, timescale, risk profile and level of technological complexity. As at 30June2022, CASG was managing 158 major and 10 minor acquisition projects, with total acquisition costs of $130.5 billion.[48]

1.50CASG is accountable through Defence’s annual Portfolio Budget Statements which outlines annual priorities and funding plans and are approved through the parliament’s appropriations process. Its performance is analysed and reviewed in the Australian National Audit Office’s (ANAO) annual MajorProjects Report, the Defence Annual Report, and through the SenateEstimates process.[49]

1.51On 10 October 2022, the government announced the establishment of an independent projects and portfolio management office within Defence. The Minister for Defence and Minister for Defence Industry stated:

Data from the Australian National Audit Office and advice from Defence shows a series of major Defence projects – with approved budgets totalling more than $69 billion – are facing significant schedule delays and budget variations.

Of these projects, at least 28 are a combined 97 years behind schedule and at least 18 projects are running over budget and at least $6.5 billion of variations from the approved budgets identified …

That’s why the … Government is moving to strengthen and revitalise Defence’s projects of concern process, by:

Establishing an independent projects and portfolio management office within Defence.

Requiring monthly reports on Projects of Concern and Projects of Interest to the Minister for Defence and Minister for Defence Industry.

Establishing formal processes and “early warning” criteria for placing projects on the Projects of Concern and Projects of Interest lists.

Fostering a culture in Defence of raising attention to emerging problems and encouraging and enabling early response.

Providing troubled projects with extra resources and skills.

Convening regular Ministerial summits to discuss remediation plans.[50]

Support for industry in the procurement process

Office of Defence Industry Support

1.52The Office of Defence Industry Support (ODIS) provides support for SMEs to engage with Defence. The core function of ODIS, through its industry engagement teams around Australia, is to provide advisory, guidance and mentoring services to SMEs. ODIS works closely with state and territory agencies, industry associations and Defence business partners, to help deliver capability that equips and sustains the ADF. Its key services include:

Specialist defence business advice, increasing the competitiveness of Defence SME partners so they have the capability to integrate into supply chains and grow to become competitive providers.

Direct linkages to Defence procurement programs through proactively identifying needs of Defence capability managers and delivery groups.

Identify current SMEs who can meet Defence needs in the short term and assist to build the capability of Defence industry.

Direct linkages to Defence end users to support innovative industry initiatives.

Assist SMEs to work with end users, Defence projects and industry programs to support greater innovative industry outcomes.

Tailor grants to assist the development of SMEs to meet Defence requirements in the short, medium and long terms.[51]

Grants

1.53Defence provides a range of grants to support industry. These grants help Australian SMEs grow to meet Defence capability needs and join global defence industry supply chains. The grants currently on offer include:

Source: Defence, 'Industry grants' (accessed 25 July 2023).

Australian Industry Capability Program

1.54Specifically, to support Australian defence industry, Defence’s Australian Industry Capability (AIC) Program, established in 2016, aims to:

Provide opportunities for Australian companies to compete on merit for defence work within Australia and overseas;

Influence foreign prime contractors and original equipment manufacturers, including Australian subsidiaries, to deliver cost-effective support;

Facilitate transfer of technology and access to appropriate intellectual property rights; and

Encourage investment in Australian industry.[52]

1.55In 2020, the AIC program was updated to strengthen opportunities for Australian industry by improving the enforceability, measurability and accountability of AIC plans in Defence contracts, including the addition of an AIC Independent Audit program and an enhanced AIC contractual framework:

Defence has changed the approach for AIC from a ‘one-size-fits-all’ approach across its acquisition and sustainment contracting templates to a more flexible and scalable approach. This enables greater alignment with the unique aspects of each procurement, and is consistent with the view of Defence industry as one of the fundamental inputs to capability.

The changes to be introduced by the new framework are all directed at:

better achieving Government’s and Defence’s requirements for maximising opportunities for Australian industry to participate in each procurement, while also recognising the core role of industry in delivering ADF Capability; and

strengthening the contractual terms to ensure that these requirements are achieved through introducing revised tendering processes and specific measurable contractual commitments to enhance accountability.[53]

Buy Australian Plan

1.56Additionally, in 2022, the government announced its Buy Australian Plan to ‘improve the way government contracts work and build domestic industry capability through the Australian Government’s purchasing power’. The BuyAustralian Plan recognises commonwealth procurement as a major economic lever which can be used to support domestic industry, including to strengthen Defence industries and capability.[54] To support the plan, a FutureMade in Australia Office has been established in the Department of Finance. The Future Made in Australia Office is:

engaging directly with businesses and industry sectors to support improved industry awareness of the opportunities to sell to the Australian Government, and uplift business capability to compete for, and win, Australian Government contracts;

strengthening engagement with states and territories to deliver economic, social and environmental benefits to regions, industry sectors and communities; and

coordinating implementation of the Buy Australian Plan and build procurement and contracting capabilities of the Australian Public Service.[55]

1.57Additionally, the Future Made in Australia Office is working with the Department of Industry, Science and Resources ‘to deliver the Buy Australian Plan and better understand industry capability and capacity’ and with the Officeof Defence Industry Support ‘on business information and industry capability activities to ensure businesses interested in participating in the defence industry are aware of resources such as the Selling to Government website’.[56]

1.58Building on the 2022–23 October Budget measure, the government will provide $18.1 million over four years from 2023–24 (and $1.5 million per year ongoing) to the Department of Finance to improve government procurement processes for businesses, including by:

delivering tools to improve the ability of businesses to compete for procurement opportunities more effectively;

improving AusTender to increase transparency and establish a supplier portal for panels;

increasing engagement with small-to-medium enterprises to promote awareness of opportunities to sell to the Australian Government; and

improving procurement and contract management capability across the Australian Public Service to deliver value-for-money Commonwealth procurements.[57]

Previous inquiries and reviews

1.59This section outlines relevant previous parliamentary inquires and reviews conducted on the issue of procurement and sovereign defence industrial capabilities.

Parliamentary inquiries

Joint Select Committee on Government Procurement

1.60In 2017, the Joint Select Committee on Government Procurement (JSCGP) conducted an inquiry into the Commonwealth Procurement Framework, particularly the amended CPRs which came into force on 1March2017 (CPR17). The amendments aimed to ensure that the full benefit of commonwealth procurement will flow to the Australian economy and were designed to mitigate the disadvantages faced by Australian suppliers accessing government procurement opportunities.

1.61The JSCGP received evidence identifying several problems with the implementation of the previous CPRs. These include a procurement culture that focuses on lowest cost rather than value-for-money, a lack of accountability and transparency, and unacceptable risk shifting. There is also a perception that—due to a lack of technical skill and expertise—the government has become an uninformed purchaser.[58]

1.62The JSCGP noted that value for money was the principal objective of the CPRs, but that the rules allowed purchasing authorities to also give consideration to special cases where opting for a domestic rather than a foreign supplier would bring ‘economic benefit to Australia’. The inquiry found that, in practice, the guidelines for the implementation of the rules designed to support Australian capability ‘have the potential to undermine the intent’ of the CPRs by lack of clarity in implementation.[59] The report stated:

The Committee feels strongly that any guidelines introduced should define economic benefit as broadly as possible without contravening Australia’s international trade agreements. At a minimum, the Committee believes economic benefits should encompass: social benefits; regional, state and the national economic impact; potential tax revenue; employment and innovation opportunities; workforce training; and building Australian industry capability.[60]

1.63The JSCGP recommended a series of changes to existing Department of Finance guidelines, such as:

to explicitly define what constitutes economic benefit;

have the procuring agency or Minister retain discretion to increase weighting to leverage economic benefit; and

encourage maximisation of economic opportunities and benefits when assessing a tender for the degree of local content and participation.[61]

1.64The government responded to this recommendation stating:

The Government supports this recommendation in part, as a number of these initiatives are already in place. Finance already provides extensive guidance on what constitutes economic benefit and how it could be assessed when undertaking a value for money assessment. Considering the economic benefit to Australia when undertaking a procurement already encourages the maximisation of such benefits to the Australian economy. Additionally, for procurements over $20 million, Australian Industry Participation (AIP) Plans are required of successful tenderers, detailing the actions they will take to provide Australian suppliers with full, fair and reasonable opportunity to supply to the project … A local content weighting would be inconsistent with Australia's international obligations and compromise Australia's ability to gain access to new markets for its exporters.[62]

1.65The JSCGP also recommended:

the Department of Finance design and deliver a public service wide training program to support the effective implementation of the new CPRs in line with new guidance material; and

the government ensure that all departments and agencies must ensure that an individual has successfully undergone procurement training before that individual can be delegated a procurement authority.[63]

1.66The government supported both of these recommendations, stating that the Department of Finance had already designed and delivered public service wide training on the new rules and that it supports procurement training for delegates, noting that commonwealth entities would be reminded to ensure all staff are appropriately trained.[64]

Joint Standing Committee on Foreign Affairs, Defence and Trade

1.67In 2020, the Joint Standing Committee on Foreign Affairs, Defence and Trade (JSCFADT) conducted an inquiry into the implications of the COVID-19 pandemic for Australia’s foreign affairs, defence and trade. It found:

COVID-19 has … exposed structural vulnerabilities in some of the critical national systems that enable Australia to function as a secure, prosperous first-world nation. Many of these vulnerabilities are caused by supply chains that rely on just-in-time supply from the global market. In some cases, this is exacerbated by supply coming—in whole or substantial part—from companies that are subject to extrajudicial or coercive direction from some foreign governments.[65]

1.68The report discussed the limitations of the CPRs to provide options for government entities to favour domestic suppliers in commonwealth purchases which ‘restricts the ability to use procurement to generate and sustain sovereign capability—despite policies such as the 2016 Defence Industry Policy Statement specifically mandating that approach’.[66] Therefore:

… for procurement officials to act differently, the CPR requires a specific recognition that Australia’s essential security depends on a sovereign industry base to support elements of a range of critical national systems. The CPR must clearly articulate the link between long-term value for money and the role that procurement plays in generating and sustaining this sovereign industry base.

…

There is currently no provision in the CPRs for a purchasing authority to consider whether a particular purchase would contribute to the generation or sustainment of an Australian sovereign capability to supply a critical national system.[67]

1.69Three key recommendations from the JSCFADT’s report were:

Recommendation 14

The Committee recommends that Australian Government support for Australian industry sectors supporting identified critical national systems move away from purely grant-based assistance to the intentional use of procurement to build and sustain sovereign capability.

Recommendation 15

The Committee recommends that the CPRs and Accountable Authority instructions be modified to reflect Recommendation 14 by explicitly requiring procurement authorities to consider how the generation and sustainment of sovereign industry sectors that supply to critical national systems could be facilitated by:

Aggregation of demand across Commonwealth departments and where agreed, state government requirements; and

Phasing of procurement where the timeframe for delivery can be optimised to meet operational requirements and Australian industry capacity.

Recommendation 16

The Committee recommends that a new sub-paragraph should be added to paragraph 4.5 of the CPRs dealing with assessing value for money. The subparagraph should have the effect that:

officials must give a priority weighting to the extent to which a proposed project or individual procurement contributes to the generation or sustainment of a sovereign Australian industry capability which is providing nominated supplies to a critical national system.[68]

1.70In 2015, the JSCFADT’s Defence Sub-Committee conducted an inquiry into government support for Australian defence industry exports which also considered Defence procurement policies and the value for money assessment.

1.71The JSCFADT’s Defence Sub-Committee’s view in this inquiry was similarly of the view that Defence’s procurement policies could work better to identify and sustain the elements of defence industry that represent fundamental inputs to capability (FIC), stating that this would fundamentally change how the assessment of value for money is approached in procurement prioritisation. The report outlined:

The assessment of value-for-money should take into account:

The extent to which the procurement helps sustain a FIC element of industry;

The whole-of-life costs and benefits, including second order effects (where appropriate);

The value added by contractual models that allow for long term partnerships to drive productivity, innovation and efficiency instead of a default reliance on competition throughout the life of any given capability.[69]

1.72Of particular relevance, the JSCFADT’s Defence Sub-Committee recommended:

Recommendation 4

The Committee recommends that in areas where an aspect of industry is identified as a fundamental input to capability, Defence’s procurement and probity guidelines provide suitable pathways for long term partnerships to be the default approach to driving innovation, productivity and value for money rather than a primary focus on open competition. Defence should publicly report savings achieved by virtue of this revised approach to procurement.

Recommendation 5

The Committee recommends that where a procurement activity is linked to a fundamental input to capability, the Department of Defence develop guidelines that encourage identification and management of risk rather than avoidance of risk through defaulting to an offshore contract.

…

Recommendation 7

The Committee recommends that where an industry-related fundamental input to capability has been identified, the Department of Defence prioritise Australian based procurement contracts so that relevant industry and Defence staff can develop competence in specific tasks via hands-on experience, or where this is not possible, through making the placement of Australian staff in original equipment manufacturers or foreign military engineering bodies a condition of contract.[70]

ANAO report into the procurement of Hunter Class Frigates

1.73The objective of the May 2023 ANAO report ‘Department of Defence’s Procurement of Hunter Class Frigates’ was to assess the effectiveness of Defence’s procurement of Hunter class frigates and the achievement of value for money. The ANAO report concluded:

The Department of Defence’s management to date of its procurement of Hunter class frigates has been partly effective. Defence’s procurement process and related advisory processes lacked a value for money focus, and key records, including the rationale for the procurement approach, were not retained.[71]

1.74The report noted in advice to government that:

At second pass, Defence’s advice to government on the selection of the preferred ship design was not complete. Defence did not draw the following matters to government’s attention.

Contrary to the requirements of the Commonwealth Procurement Rules (CPRs), a value for money assessment had not been conducted by Defence officials. Defence’s assessment was against the high-level capability requirements.[72]

1.75In regard to the Department of Finance, the ANAO noted that it had stated:

In its assessment, which was included in Defence’s second pass advice to government, the Department of Finance (Finance) drew attention to the 10percent reduction to tendered build costs and other limitations in Defence’s advice on costs. Finance did not comment on Defence’s lack of a value for money assessment, compliance with the CPRs or quality of advice regarding value for money.[73]

1.76The ANAO’s summary of entity responses provides responses from the agencies involved in the audit to the audit’s key findings.The Department of Finance explained its role in relation to those findings:

In relation to the procurement process conducted by Defence, a key Finance role is to issue and support the Commonwealth Procurement Rules (CPRs) which set out the rules that officials must comply with when undertaking procurement. It is the responsibility of the Accountable Authority to provide a framework and instructions to relevant entity officials to enable them to carry out procurement processes in a manner that is compliant with the CPRs. The CPRs do not include a requirement to consult Finance on compliance with the CPRs. However, Finance maintains and promotes a CPRs advisory function that entities can consult when undertaking procurements.

In formulating its advice to Government, Finance drew on information provided by Defence throughout the procurement process and in the lead up to the Government decision. This provided Finance with visibility of Defence’s assessment of a number of matters (including quality of the goods to be acquired, how well the goods would meet their intended purpose, relevant experience and performance history of potential suppliers and whole-of-life costs) that went to the consideration of value for money. Finance highlighted these Defence considerations in advice to Government.[74]

1.77In summarising, the ANAO notes that in both cases there is room for improvement in both agencies in their approaches, stating:

Defence’s general approach to applying the CPRs and the core principle of value for money in the Hunter class procurement, and the lack of understanding of CPR requirements reflected in its responses to the ANAO, suggests that further training and oversight may be required of Defence officials involved in high-level planning and advising on major capital acquisition projects, at all levels. There is also scope for more active engagement with the CPR policy owner, the Department of Finance, to ensure that procurement activity for major capital acquisition projects is compliant with both the letter and the spirit of the Commonwealth procurement framework.

The hallmark of Defence’s management of this procurement and related advisory processes is that they lacked a value for money focus, and in that sense the procurement did not comply with the core rule of the CPRs. The origins of this approach—which was reflected in the 2017 Tender Evaluation Plan—are not transparent, due to the shortcomings in Defence record keeping observed in this audit.[75]

1.78The ANAO report exposes a serious example of misalignment in the expectations of implementing national security procurement and effective implementation of the CPRs.

Defence procurement reviews

1.79Over the last two decades there have been a multitude of inquiries into Defence acquisition and performance in procurement. Three significant Defence procurement reviews were undertaken in 2003, 2008 and 2021.

1.80In late 2002, the ‘Kinnaird Review’ examined issues associated with major capital acquisitions in Defence. The review team’s report, the DefenceProcurement Review (DPR), was published in August2003. The report made ten major recommendations. A significant outcome was the strengthening of the two-pass approval process.[76]

1.81In 2008, the Parliamentary Secretary for Defence Procurement, theHonGregCombet AM MP, announced that he would conduct ‘... a formal evaluation of the effectiveness of ongoing reforms to the Defence Materiel Organisation (DMO) [that] were implemented following the 2003DefenceProcurement Review’.[77]

1.82In 2021, in response to further concerns about the procurement process for major Defence acquisitions, Mr David Mortimer was commissioned to undertake a review. Specifically, this review was sought to examine the Australian Standard for Defence Contracting (ASDEFCON)[78] suite of tendering and contracting templates and relevant procurement processes and practices designed to support the objectives of strengthening and refining the way Defence undertakes acquisition and sustainment, and partners to build a more resilient Defence industrial base.[79]

1.83These were just three of the many that occurred during the last twenty years. The ANAO, in its 2013 Capability Development Reform report, summarised the common themes that these Defence reviews highlighted as shown in Figure1.1.[80]

Source: ANAO, Auditor General Report No. 6 of 2013-14, Capability Development Reform: Department of Defence, 30 October 2013, pp. 19–20, www.anao.gov.au/work/performance-audit/capability-development-reform (accessed 28 August 2023).

Note: ticks indicate whether an issue was raised in a review.

1.84The ANAO noted that:

Many of the major reviews conducted in Defence over the last decade, [2003-13] including both the Kinnaird and Mortimer Reviews, recommended reforms to the two-pass system or related capability development issues. Accordingly, to inform this audit, the ANAO undertook the preliminary step of analysing the findings of major reviews since 2000. This analysis identified five reviews since the introduction of the two-pass system which were most relevant to capability development reform, and showed that these reviews included common, and often consistent, themes. These reviews and themes are in [Figure 1.1 above].[81]

1.85As Figure 1.1 highlights, these issues have recurred consistently. The ANAO stated that ‘most of the reviews acknowledged that Defence can demonstrate incremental improvements in some areas of capability development but finds it harder to demonstrate lasting change’.[82]

1.86The ANAO concluded that for:

… more than a decade, successive governments have invested substantial effort in reviewing capability development in Defence, with a view to improving the organisation’s effectiveness and efficiency in realising capability for the ADF. For its part, Defence has also put substantial effort into supporting these reviews and organising to give effect to the reform proposals accepted by government. While individual reviews have been initiated by particular circumstances, there has been a common underlying desire to see Defence projects soundly specified, and delivered within scope, on time and within the approved budget, despite their inherent complexity. As the 2011 Black Review observed, capability development is a process which ‘has a profound effect on Defence as a whole, and is where much policy and organisational risk concentrates.[83]

Recent government decision-making

1.87This section outlines recent government decision-making in relation to defence industry, particularly in response to the Defence Strategic Review 2023 (DSR), including the National Defence Strategy 2024, the Defence Industry Development Strategy, and the Advanced Strategic Capabilities Accelerator.

Defence Strategic Review 2023

1.88The DSR sets the agenda for reform to Defence’s posture and structure. The DSR provides direction on changes in Defence’s approach to capability priorities and processes. The review was led by former Minister for Defence, His Excellency Professor the Hon Stephen Smith and former Chief of the Defence Force, SirAngus Houston. The public version of the DSR was released on 24April2023.[84]

1.89The DSR described Australia’s changing strategic environment:

Australia’s region, the Indo-Pacific, faces increasing competition that operates on multiple levels—economic, military, strategic and diplomatic—all interwoven and all framed by an intense contest of values and narratives.

A large-scale conventional and non-conventional military build-up without strategic reassurance is contributing to the most challenging circumstances in our region for decades. Combined with rising tensions and reduced warning time for conflict, the risks of military escalation or miscalculation are rising.

At the same time, the effects of climate change across the region are amplifying our challenges, while other actions that fall short of kinetic conflict, including economic coercion, are encroaching on the ability of countries to exercise their own agency and decide their own destinies.[85]

1.90Within this environment, the DSR stated that Australia must sharpen its focus on what its interests are, and how to uphold them:

Our focus needs to be on: how we ensure our fate is not determined by others; how we ensure our decisions are our own; and how we protect our way of life, our prosperity, our institutions and our economy.

These interests demand we deploy all elements of our national power in statecraft seeking to shape a region that is open, stable and prosperous: a predictable region, operating by agreed rules, standards and laws, where sovereignty is respected. That statecraft includes deepening diplomatic engagement with the many other countries facing similar circumstances.

It also requires strong defence capabilities of our own and working with partners investing in their own capabilities.[86]

1.91Another key change in the strategic environment has been the loss of conflict warning time in which a country has to prepare its response, emphasising the need for accelerated capability development:

In the post-Second World War period, Australia was protected by its geography and the limited ability of other nations in the region to project power. Defence and the nation had a 10-year warning time as the foundation for planning, capability development and preparedness for conflict.

In the contemporary strategic era, we cannot rely on geography or warning time. Regional military modernisation, underpinned by economic development, has meant that more countries are able to project combat power across greater ranges in all five domains: maritime, land, air, space and cyber. Emerging and disruptive technologies are being rapidly translated into military capability.

…

The 2020 Defence Strategic Update ended the long-standing assumption in Defence planning that Australia would have a 10-year warning time.

Ending warning time has major repercussions for Australia’s management of strategic risk. It necessitates an urgent call to action, including higher levels of military preparedness and accelerated capability development.[87]

1.92The DSR found that the ADF’s current force structure is ‘not fit for purpose for our current strategic circumstances’ and needed to transition from a balanced force to a focused force and from a joint force to an integrated force. The DSR recommended that the IIP be rebuilt in line with the force structure design priorities outlined in the review. This will require that certain projects be ‘immediately delayed or cancelled to enable funds and workforce in the forward estimates and planning decade to be reallocated to higher priority capabilities’.[88]

1.93On capability acquisition, risk and accountability, the DSR stated:

Timely and strategically relevant capability acquisition is critical in the coming period. Defence’s current approach to capability acquisition is not suitable given our strategic circumstances, and there is a clear need for a more efficient acquisition process. The increasing volume and complexity of capability projects is overwhelming Defence’s capability system, its limited workforce and its resource base.

Although the cancellation or postponement of projects in the IIP is made extraordinarily difficult, little scrutiny is given to projects entering it. Defence has had an over-reliance on bottom-up proposals forming the bulk of new entries into the IIP, and a surprising lack of top-down direction or genuine joint-assessment of pre-Gate 0 proposals.

Once projects have entered the IIP, capability managers have too much latitude to make design changes, tinker with capability outcomes, and indulge in the quest for perfectionism. These behaviours result in delay and strategically significant capability outcomes not being achieved in a timely manner, or at all.

Clear direction from the Government and clear expectations placed on Defence for acquisition and delivery are critical to resolving this issue. To achieve this, in the first instance a threshold judgement must be made at the joint senior level, and agreed to by the Government, on what minimum viable capability is required and what is readily available.[89]

1.94Furthermore, on off-the-shelf procurement and Australian industry content, the DSR argued:

When capability is readily available there should be an emphasis on getting it into service without delay and achieving value for money. Defence must, where possible, acquire more platforms and capabilities via sole source or off-the-shelf procurement, and limit or eliminate design changes and modifications. When subsequent design changes or enhancements to capabilities are proposed, we recommend these be independently tested by sceptical and trusted advisers …

Australian industry content and domestic production must be balanced against timely capability acquisition. Previous government direction to meet mandated Australian industry content skewed the capability acquisition process so that capability outcomes were secondary to creating opportunities for Australian industry—even when a clear rationale was lacking …

Defence must consider Australian industry content when it makes sense and delivers capability outcomes on time. It is essential to ensure Australian sovereign defence industry capability is supported where it makes strategic sense.[90]

1.95The DSR also noted that project teams and managers must have the appropriate skills and experience to effectively deliver Defence’s major projects, noting that the ‘erosion of the [Australian Public Service (APS)] workforce in CapabilityAcquisition and Sustainment Group (CASG) has significantly degraded these skills’.[91]

1.96Following the release of the DSR, on 24 April 2023, the Minister for Defence, the Hon Richard Marles MP and the Minister for Defence Industry, theHonPatConroy MP announced that the government would begin implementing the key recommendations of the DSR:

The [DSR] recommends significant reforms to the way Defence is structured, postured and operates, to respond to our current strategic circumstances—including reprioritisation of the Defence Integrated Investment Program (IIP). That is why the Government has agreed to the Review’s recommendation that the Defence IIP be rebuilt to align with the priorities outlined in the Review.[92]

1.97Furthermore, the government has directed Defence to immediately begin work on:

removing unnecessary barriers to acquisitions;

streamlining strategically important projects and low-complexity procurements;

making faster decisions in the delivery of Defence projects; and

developing practical solutions in close consultation with defence industry.[93]

1.98The government will invest $19 billion to implement the immediate priorities identified in the DSR over the next four years, delivered within Defence’s existing resourcing and a $7.8 billion reprioritisation of the Defence Integrated Investment Program. Funding includes:

$9 billion for the nuclear-powered submarine program through AUKUS;

$4.1 billion for long-range strike capabilities: $1.6bn for accelerating long-range strike capabilities and $2.5bn for local production of guided weapons;

$3.8 billion for northern base infrastructure;

$400 million to support ADF personnel through a new continuation bonus; and

$900 million on defence innovation.[94]

National Defence Strategy 2024

1.99As part of the DSR and noted in Defence’s 2023–24 Portfolio Budget Statement, the government has indicated that it intends to bring forward its inaugural National Defence Strategy in 2024, which will:

… encompass a comprehensive outline of Defence policy, planning, capabilities and resourcing, including reprioritisation of the Integrated Investment Program to align with the intent and recommendations of the Defence Strategic Review. The Government has included a spending provision in the Contingency Reserve for increased Defence funding over the medium term to implement the Defence Strategic Review.[95]

Defence Industry Development Strategy

1.100On 24 April 2023, the government announced that it would release a DefenceIndustry Development Strategy later this year which will set out:

the strategic rationale for a sovereign defence industrial base;

more targeted and detailed Sovereign Industrial Capability Priorities;

a plan to grow industry’s workforce to deliver a viable industrial base and increase Australia’s defence exports;

reforms to defence procurement to support the development of Australian defence industry and respond to the Review;

mechanisms to improve security within defence businesses; and

a detailed implementation plan.[96]

1.101In a speech on ‘Defence Industry in a post-DSR world’, the Minister for Defence Industry, the Hon Pat Conroy MP, discussed the need to reform Defence’s procurement process in light of the changing strategic environment as highlighted in the DSR. The Minister stated that more risk needs to be embraced in defence contracting to increase its speed, noting sole sourcing as an option:

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.

…

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 …

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 ChiefInformation 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.[97]

1.102The Minister for Defence Industry also discussed a reshaping of the SICPs and a greater focus on exports which will be detailed in the Defence Industry Development Strategy when it is released:

At the moment under the current SICP regime there are 14 SICPs, but eight of them aren’t even defined in any real detail … 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 …

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.[98]

Advanced Strategic Capabilities Accelerator

1.103On 28 April 2023, the government announced its plans to invest $3.4 billion over the next decade to establish the Advanced Strategic Capabilities Accelerator (ASCA). In a joint statement, the Hon Richard Marles MP and theHonPatConroy MP outlined:

The Defence Strategic Review concluded that we need more effective support for innovation, faster acquisition and better links between Defence and industry to deliver the capabilities the Australian Defence Force (ADF) needs.

ASCA will be a key element of the Defence innovation, science and technology program. Priorities for the program are hypersonics, directed energy, trusted autonomy, quantum technology, information warfare and long-range fires.

It will focus on defined missions, solving the most relevant technical issues, and taking a more flexible and agile approach to procurement. This will ensure game-changing ideas are developed into capabilities that give the ADF an asymmetric advantage.

This is the most significant reshaping of defence innovation in decades that will deliver vital capabilities for the ADF, as well as create more jobs in the Australian defence industry commercialising the technologies. It will support innovative Australian solutions to the challenges we face.[99]

1.104The operating model for ASCA begun being developed, tested, refined and progressively implemented over 18 months from 1 July 2023. ASCA is being guided by the Vice Chief of the Defence Force, the Chief Defence Scientist and the Deputy Secretary, Capability Acquisition and Sustainment Group. It will replace the Defence Innovation Hub and Next Generation Technologies Fund, which the DSR identified are no longer fit for purpose in Australia’s current strategic environment.[100]

1.105As the Defence Innovation Hub and Next Generation Technologies Fund are phased out, there are a number of impacts to contacts, including:

Active contracts and contracts currently in negotiation, will continue to be managed in accordance with the agreed contract Terms.

The Defence Innovation Hub portal closed to new proposals at 5pm AEST 2June2023.

Proposals submitted via the Defence Innovation Hub portal before 5pm AEST 2 June 2023 will continue to be evaluated and considered for Defence investment.

Proposals in draft state in the Defence Innovation Hub portal will not be evaluated.

The Next Generation Technologies Fund will not release new Call for Submissions.

Next Generation Technologies Fund Call for Submissions that have closed will continue to be evaluated and considered for Defence investment.[101]

1.106The next chapter provides a discussion on definitions and an overview of the key issues raised in submissions.

Footnotes

[1]See: www.aph.gov.au/Parliamentary_Business/Committees/Senate/Foreign_Affairs_Defence_and_Trade/PerformanceofDefence47 (accessed 21 August 2023).

[2]See: www.aph.gov.au/Parliamentary_Business/Committees/Senate/Foreign_Affairs_Defence_and_Trade/PerformanceofDefence47/Terms_of_Reference (accessed 21 August 2023).

[3]See: www.aph.gov.au/Parliamentary_Business/Committees/Senate/Foreign_Affairs_Defence_and_Trade/PerformanceofDefence47/Submissions (accessed 21 August 2023).

[4]Department of Defence (Defence), ‘Types of procurement’ (accessed 22 August 2023).

[5]Defence, 2018 Defence Industrial Capability Plan, p. 11 (accessed 8 August 2023).

[6]Defence, Submission 34, p. 2.

[7]Ai Group, ‘Defence industry in the 2023-24 Budget’ (accessed 21 August 2023).

[8]Acting Prime Minister, the Hon Richard Marles, ‘Press conference – Parliament House, Canberra’, 14March2023 (accessed29August 2023). Note: AUKUS is an acronym for the trilateral security pact between Australia, the United Kingdom, and the United States, announced on 15September2021, focused on the Indo-Pacific region.

[9]NATO Review, ‘Defence spending: sustaining the effort in the long-term’, Camille Grand, 3July2023 (accessed 29 August 2023).

[10]Department of Finance, Submission 14, p. 2.

[11]Note: ‘gross value added’ represents the additional economy value added through the creation of a product or the provision of a service. It removes the costs of intermediate inputs used to create the product or service from the amount received by the seller. It is the standard indicator to assess the contribution of an industry or sub-sector to the broader economy.

[12]Australian Bureau of Statistics (ABS), ‘Australian Defence Industry Account, experimental estimates: estimates of the defence industry’s direct contribution to the Australian economy’, 16December2022 (accessed28July2023).

[13]ABS, ‘Australian Defence Industry Account, experimental estimates: estimates of the defence industry’s direct contribution to the Australian economy’, 16December2022 (accessed28July2023).

[14]ABS, ‘Australian Defence Industry Account, experimental estimates: estimates of the defence industry’s direct contribution to the Australian economy’, 16December2022 (accessed28July2023).

[15]ABS, ‘Australian Defence Industry Account, experimental estimates: estimates of the defence industry’s direct contribution to the Australian economy’, 16December2022 (accessed28July2023).

[16]Defence, Department of Defence Annual Report 2021–22, p. 4.

[17]Australian Trade and Investment Commission, ‘Defence’ (accessed 21 August 2023).

[18]Defence, Submission 34, p. 2.

[19]Defence, Department of Defence Annual Report 2021–22, p. 38.

[20]Joint Select Committee on Government Procurement, Buying into our future: Review of amendments to the Commonwealth Procurement Rules, June 2017, p. 135.

[21]Australian Government response to the Joint Select Committee on Government Procurement report: Buying into our Future: Review of amendments to the Commonwealth Procurement Rules, November2017, p. 10.

[22]Defence, ‘Types of procurement’ (accessed 22 August 2023). Original emphasis.

[23]Defence, ‘Procurement framework’ (accessed 22 August 2023).

[24]Department of Finance, ‘Commonwealth Procurement Rules’, 13 June 2023 (accessed16August2023).

[25]Department of Finance, ‘How to use the Commonwealth Procurement Rules’, 13June2023 (accessed16August2023).

[26]Department of Finance, Submission 14, p. 2.

[27]Department of Finance, Submission 14, p. 2.

[28]Department of Finance, Commonwealth Procurement Rules, 13 June 2023, p. 3.

[29]Department of Finance, Commonwealth Procurement Rules, 13 June 2023, p. 11.

[30]Department of Finance, Commonwealth Procurement Rules, 13 June 2023, pp. 11–12.

[31]Department of Finance, Commonwealth Procurement Rules, 13 June 2023, p. 12.

[32]Department of Finance, ‘Consideration of broader domestic economic benefits in procurement’, July2022, p. 2 (accessed 16 August 2023).

[33]Department of Finance, ‘Consideration of broader domestic economic benefits in procurement’, July 2022, p. 8 (accessed16August2023).

[34]Defence, ‘Defence Industrial Capability Plan’ (accessed16August2023).

[35]Defence, ‘Sovereign industrial capability priorities and plans’ (accessed16August2023).

[36]Defence, ‘Fact sheet: Sovereign Industrial Capability Priorities’, p. 1 (accessed16August2023).

[37]Defence, ‘Sovereign industrial capability priorities and plans’ (accessed16August2023).

[38]Defence, ‘Fact sheet: Sovereign Industrial Capability Priorities’, p. 1 (accessed16August2023). See, also: Defence, ‘Sovereign Industrial Capability Priority Grant’ (accessed16August2023).

[39]Defence, Defence Capability Manual, 3 December 2021, p. 4.

[40]Defence, Defence Capability Manual, 3 December 2021, pp. 5–7.

[41]Australian National Audit Office (ANAO), Auditor General Report No. 6 of 2013-14,CapabilityDevelopment Reform: Department of Defence, 30 October 2013, p. 16, www.anao.gov.au/work/performance-audit/capability-development-reform (accessed28August2023).

[42]Note: contestability is a mechanism that supports Defence decision-makers by providing independent review of capability proposals to ensure they are aligned with strategy and resources and can be delivered in accordance with government direction. Contestability is an integral part of managing capability and aims to improve the quality of advice provided to senior Defence committees and to government, and hence confidence in decision-making by ensuring proposals are subject to appropriate scrutiny. See: Defence, Defence Capability Manual, 3 December 2021, p. 24.

[43]Defence, Defence Capability Manual, 3 December 2021, p. 17.

[44]Defence, Defence Capability Manual, 3 December 2021, p. 40.

[45]Defence, Defence Capability Manual, 3 December 2021, p. 42.

[46]Defence, ‘Capability Acquisition & Sustainment Group’ (accessed 8 August 2023).

[47]Defence, ‘Capability Acquisition & Sustainment Group’ (accessed 8 August 2023).

[48]Defence, Department of Defence Annual Report 2021–22, p. ii.

[49]Defence, ‘Capability Acquisition & Sustainment Group: Accountability’ (accessed8August2023).

[50]The Hon Richard Marles MP and the Hon Pat Conroy MP, ‘Quality of Defence spending top priority for Albanese Government’, joint media release, 10 October 2022 (accessed21August2023).

[51]Defence, ‘Office of Defence Industry Support’ (accessed 25 July 2023).

[52]Defence, ‘Australian Industry Capability Program’ (accessed 17 August 2023).

[53]Defence, ‘Australian Industry Capability Program’ (accessed 17 August 2023).

[54]Department of Finance, ‘Buy Australian Plan’ (accessed 18 August 2023). See: Industry, Science and Resources Portfolio, Portfolio Budget Statements 2022-23, Budget related paper no. 1.11, p. 15.

[55]Department of Finance, Submission 14, p. 3.

[56]Department of Finance, Submission 14, p. 3.

[57]Department of Finance, ‘Buy Australian Plan’ (accessed18August2023).

[58]Joint Select Committee on Government Procurement (JSCGP), Buying into our future: Review of amendments to the Commonwealth Procurement Rules, June 2017, p. xxv.

[59]JSCGP, Buying into our future: Review of amendments to the Commonwealth Procurement Rules, June2017, p. 137.

[60]JSCGP, Buying into our future: Review of amendments to the Commonwealth Procurement Rules, June2017, p. 132.

[61]JSCGP, Buying into our future: Review of amendments to the Commonwealth Procurement Rules, June2017, pp. iv–v.

[62]Australian Government response to the Joint Select Committee on Government Procurement report: Buying into our Future: Review of amendments to the Commonwealth Procurement Rules, November 2017, p. 5.

[63]JSCGP, Buying into our future: Review of amendments to the Commonwealth Procurement Rules, June2017, p. 139.

[64]Australian Government response to the Joint Select Committee on Government Procurement report: Buying into our Future: Review of amendments to the Commonwealth Procurement Rules, November 2017, p.6.

[65]Joint Standing Committee on Foreign Affairs, Defence and Trade (JSCFADT), Inquiry into the implications of the COVID-19 pandemic for Australia’s foreign affairs, defence and trade, December2020, pp. xix–xx.

[66]JSCFADT, Inquiry into the implications of the COVID-19 pandemic for Australia’s foreign affairs, defence and trade, December 2020, p. 115.

[67]JSCFADT, Inquiry into the implications of the COVID-19 pandemic for Australia’s foreign affairs, defence and trade, December 2020, p. 117.

[68]JSCFADT, Inquiry into the implications of the COVID-19 pandemic for Australia’s foreign affairs, defence and trade, December 2020, p. 119.

[69]JSCFADT, Defence Sub-Committee, Principles and practice–Australian defence industry and exports, November2015, p. xxii.

[70]JSCFADT, Defence Sub-Committee, Principles and practice–Australian defence industry and exports, November2015, pp. xxv–xxvi.

[71]ANAO, Auditor-General Report No. 21 of 2022–23, Department of Defence’s Procurement of Hunter Class Frigates, p. 9.

[72]ANAO, Auditor-General Report No. 21 of 2022–23, Department of Defence’s Procurement of Hunter Class Frigates, p. 10.

[73]ANAO, Auditor-General Report No. 21 of 2022–23, Department of Defence’s Procurement of Hunter Class Frigates, p. 10.

[74]ANAO, Auditor-General Report No. 21 of 2022–23, Department of Defence’s Procurement of Hunter Class Frigates, p. 14.

[75]ANAO, Auditor-General Report No. 21 of 2022–23, Department of Defence’s Procurement of Hunter Class Frigates, pp. 56–57.

[76]ANAO, Auditor General Report No. 6 of 2013-14,Capability Development Reform: Department of Defence, 30October2013, p. 16, www.anao.gov.au/work/performance-audit/capability-development-reform (accessed 28 August 2023).

[77]Defence Materiel Organisation, Going to the next level: the report of the Defence Procurement and Sustainment Review, 2008, p. vii.

[78]Note: Australian Standard for Defence Contracting (ASDEFCON) provides a suite of tendering and contracting templates and a set of proforma documents for use by procurement officers when drafting solicitation documents and contracts for the acquisition of goods and services by Defence.

[79]Former Minister for Defence Industry, the Hon Melissa Price MP, ‘Red tape slashed following Defence Procurement Review’, 27 December 2021 (accessed30August2023).

[80]ANAO, Auditor General Report No. 6 of 2013-14,Capability Development Reform: Department of Defence, 30October2013, pp. 19–20, www.anao.gov.au/work/performance-audit/capability-development-reform (accessed28August2023).

[81]ANAO, Auditor General Report No. 6 of 2013-14,Capability Development Reform: Department of Defence, 30October2013, p. 18, www.anao.gov.au/work/performance-audit/capability-development-reform (accessed28August2023).

[82]ANAO, Auditor General Report No. 6 of 2013-14,Capability Development Reform: Department of Defence, 30October2013, p. 21, www.anao.gov.au/work/performance-audit/capability-development-reform (accessed28August2023).

[83]ANAO, Auditor General Report No. 6 of 2013-14, Capability Development Reform: Department of Defence, 30October2013, p. 22, www.anao.gov.au/work/performance-audit/capability-development-reform (accessed28August2023).

[84]The Defence Strategic Review is available at: www.defence.gov.au/about/reviews-inquiries/defence-strategic-review (accessed21August2023).

[85]Australian Government, National Defence: Defence Strategic Review 2023, p. 5.

[86]Australian Government, National Defence: Defence Strategic Review 2023, p. 6.

[87]Australian Government, National Defence: Defence Strategic Review 2023, pp. 24–25.

[88]Australian Government, National Defence: Defence Strategic Review 2023, pp. 53–55.

[89]Australian Government, National Defence: Defence Strategic Review 2023, p. 91.

[90]Australian Government, National Defence: Defence Strategic Review 2023, pp. 91–92.

[91]Australian Government, National Defence: Defence Strategic Review 2023, p. 92.

[92]The Hon Richard Marles MP and the Hon Pat Conroy MP, ‘A strong partnership with industry to implement the Defence Strategic Review’, joint media release, 24April2023 (accessed25July2023).

[93]The Hon Richard Marles MP and the Hon Pat Conroy MP, ‘A strong partnership with industry to implement the Defence Strategic Review’, joint media release, 24April2023 (accessed25July2023).

[94]Ai Group, ‘Defence industry in the 2023-24 Budget’ (accessed21August2023).

[95]Portfolio Budget Statements 2023-24, Budget related paper no. 1.4A – Defence Portfolio, p. 9.

[96]The Hon Richard Marles MP and the Hon Pat Conroy MP, ‘A strong partnership with industry to implement the Defence Strategic Review’, joint media release, 24 April 2023 (accessed25July2023).

[97]The Hon Pat Conroy MP, ‘Defence Industry in a post-DSR world’, speech, 14June2023 (accessed 1August2023).

[98]The Hon Pat Conroy MP, ‘Defence Industry in a post-DSR world’, speech, 14June2023 (accessed21August2023).

[99]The Hon Richard Marles MP and the Hon Pat Conroy MP, ‘Government announces most significant reshaping of Defence innovation in decades to boost national security’, joint media release, 28April2023 (accessed 25 July 2023).

[100]The Hon Richard Marles MP and the Hon Pat Conroy MP, ‘Government announces most significant reshaping of Defence innovation in decades to boost national security’, joint media release, 28April2023 (accessed 25 July 2023).

[101]Defence, ‘Advanced Strategic Capabilities Accelerator’ (accessed 25 July 2023).