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Thursday, 3 November 1983
Page: 2269


Mr HOWE (Minister for Defence Support) —by leave-I am pleased to be able to make a statement in addition to that made by my colleague, the Minister for Defence (Mr Scholes). I would like to inform honourable members about the state of Australia's defence industries and present some observations on the problems which I have perceived in those industries since I assumed responsibility for the Department of Defence Support.

This Government places a greater emphasis than its predecessor on the role of defence industry in its overall defence policies. Over the last eight months I have sought to identify how this role can be best developed, how defence industry is to contribute to Australia's overall defence capabilities and the part that it will play in the Government's economic and social plans for the future of manufacturing industry in Australia. The overall direction of the Government's policy on defence industry is the subject of a review to which my colleague has referred in his statement. I anticipate that at the completion of this review I will be able to bring to the House a statement on defence industry policy.

It is important to acknowledge the wider economic and social context in which defence industry has operated. Over the last decade, and particularly over the seven years of the previous Government, Australia has experienced a sharp decline in manufacturing industry. This decline has reflected weaknesses such as low levels of investment in plant and equipment, outmoded management practices, relatively high cost structures and the reliance on a small domestic market leading to inefficient scales of production. The sharp decline in Australia's manufacturing industry has raised questions about national economic and industrial independence. It has serious implications for defence policy because of the interrelationship between the state of economic activity in the manufacturing industry sector and defence preparedness. Past defence policies, particularly during the seventies and early eighties, have failed to develop an industry base which is relevant to the concept of an acceptable level of effective self-reliance in defence. To an extent, the problems I perceived when I first examined the state of defence industries reflected the problems of Australia's manufacturing sector as a whole, to which I have just referred.

The structure of the public sector defence industry which this Government inherited is not greatly changed from that which existed at the end of World War II. In the post-war period we have seen a gradual run-down in the defence industries-buildings and capital equipment have often not been maintained, funding has been sparse, one might say erratic, and insufficient attention has been given to maintaining the skills which are present in our work force. It has been a priority for me therefore to review these establishments and commence a process of reform and revitalisation to make them competitive and efficient. We cannot achieve results overnight but the decisions I have taken have reflected my concern with the most urgent problems.

As far as the private sector defence contractors are concerned, since assuming my responsibilities for the Department of Defence Support I have attempted to gain the views of industry and trade union leaders on the correct policies that we should pursue to tackle problems and develop our industries. This emphasis on consultation with business and the trade unions, rather than confrontation, has been central to the Government's overall approach to economic management. I took the opportunity provided by the National Economic Summit Conference in May to convene a colloquium in Sydney for a broad spectrum of companies involved in the defence industry to hear their views, and I was extremely impressed by their enthusiastic response, both in their attending that colloquium and in their willingness to contribute to the discussion.

A similar degree of enthusiasm has been evident when I have had the opportunity to address industry groups and when I have visited many private companies around Australia over the past six months. It seems that after seven years of Liberal Government rule business leaders in the manufacturing sector appreciate a government which takes their views seriously. It is part of my personal philosophy also that gaining first hand experience of industries in the work places themselves is fundamental to an understanding of their problems. This approach has won the ready acceptance of management, unions and association representatives. By way of comparison with the Australian situation, I spent three weeks in August examining defence industries in Holland, Sweden and Norway , and I shall be referring to some of the lessons of this study tour presently. Countries such as Norway, Sweden, and the Netherlands have, through positive planning and innovative policies, achieved a greater level of self-reliance in their defence industries. My colleague the Minister for Defence in his statement has referred to the need for a greater degree of self-reliance in defence policy . It is axiomatic that defence industries must play a significant role in this more self-reliant defence posture.

Mr Deputy Speaker, honourable members will be aware of the findings over recent years of a number of reports and committees, such as the Joint Committee on Foreign Affairs and Defence report on industrial support for defence needs and allied matters of 1977 and the Katter Sub-committee of the Joint Committee on Foreign Affairs and Defence of 1979. These reports concluded that the run-down in Australia's defence industries has meant that the gap in our technological self-reliance has been widening. These concerns about Australia's declining industrial and technological base were also clearly evident in the report of the Defence Review Committee in 1982, chaired by Mr John Utz, which recommended the creation of the Department of Defence Support portfolio. At least part of the reason for the concern about our technological self-reliance stems from past policies which have failed to move away from traditional dependence on overseas sources of supply of capital equipment for the Australian Defence Force. About 70 per cent of capital equipment is currently sourced from overseas.

By international standards Australia has a sophisticated, capital intensive Defence Force which requires close industry support of its technology. Past preference for overseas capital equipment has reduced the opportunities available to local industry to develop state of the art technology and consequently local capability to support important elements of the Force has declined. In the three countries which I visited-chosen because economically and socially they are similar to Australia-it was clear that their governments placed defence self-reliance as a clear objective. Mr Deputy Speaker, I now table a report of this visit for the information of honourable members.

An important feature of the defence industries of these countries is that both the public and the private sectors are more commercially oriented than are their Australian counterparts, as evidenced by their specialisation and export orientation. Despite some individual differences among these countries, the problems for them, and Australia, are very similar: Small domestic markets; peaks and troughs in domestic defence procurement; the dominance of major international suppliers; and a reluctance to pursue indiscriminate arms sales.

With one major exception the solutions adopted by those countries are very similar, but they differ from past Australian practice. The exception concerns preference for domestic sourcing-Sweden endeavours to be entirely self- sufficient in defence material, whereas Norway and the Netherlands, though preferring local procurement, consider material acquisitions on a case by case basis. The Netherlands and Norway-unlike Sweden-are not prepared to pay a large premium for local production.

Both the Netherlands and Norway regard their defence industries as an important part of their defence capacity, and more importantly regard defence industry as a highly innovative segment of manufacturing industry vital to their national economies. The general policy of these governments is that within their respective countries there is minimal domestic competition for defence equipments. Their aim is to produce defence products which are competitive world wide, although financial assistance has been provided by governments to industries experiencing difficulties, and a small premium is sometimes paid for local manufacture in order to maintain employment levels. Whilst the Government is anxious to see a greater degree of self-reliance, we have to recognise that if the defence sector of Australian industry is to get increased orders, it must , as must any other sector, become more competitive internationally.

Each country encourages defence industries to diversify into the civilian market as part of its policy of organising defence industry along commercial lines and its attempt to achieve international competitiveness. A balance between defence-civilian production has the following advantages in their view: It smooths the inevitable peaks and troughs in domestic defence procurement in small countries; it assists in the adoption of technology; and it transmits commercial cost-effectiveness concepts into defence decision making.

Export of defence equipment was strictly controlled in all these countries, although they are anxious to seek suitable export markets. Technological innovation, in both product and manufacture, were seen as vital to their national interest. Trade union support for innovation was apparent particularly following full tripartite consultation between workers, management and government on the introduction of new technology.

It is important to note the long history of industrial democracy in these countries. There is no doubt that it assists their industrial development and promotes structural change with minimal disruptive effects. Central to this success is a shared concern between management and workers in these countries about the need to be competitive. This has been achieved by greater attention to planning than has occurred in the past at least in Australian defence industries . The experiences of these countries and the success of the policies which they have implemented reinforce my belief about what we must do to improve the health of Australia's defence industry.

While the defence industry in Australia represents only a small part of manufacturing industry, it employs more than 15,000 people in its public enterprises and a further significant number in private industry across a wide range of manufacturing and service companies. My Department is currently investigating the extent of private sector involvement in Defence manufacturing both directly and indirectly. We need more basic data on the contribution of defence production to the national economy. A point that has often been made about the defence industry is its potential for the acceleration of technology transfer into manufacturing industry as a whole. The government-owned defence research and development laboratories have provided opportunities for Australian leadership in specialised technologies. The transfer of these laboratories to the Department of Defence has brought with it the need to work hard at strengthening the relations between them and defence industries, so that the flow of ideas-in both directions-becomes mutually beneficial.

I would like to refer to an example of complementary technology transfer. Projects Barra and Mulloka have been directly responsible for the enhancement of local capabilities for the design and manufacture of ceramic components, integrated circuits and thick film hybrid circuits. Of course, once a technology has been developed there is a need for a continuing commitment to marketing and product development. Government development of the defence support industry segment should be carefully targeted for maximum effectiveness in terms of market possibilities as well as for relevance to force needs and exports. Where the defence industry's technology is adaptable to commercial-non-defence- applications these opportunities should be pursued. In cases where the applications of defence technology are limited, and not attractive to the private sector-for example munitions manufacture-the public enterprises should be run in the most efficient manner possible.

There are a number of policies being pursued by the Government which have the potential to assist in defence industry development. For example: Designating elements of equipment procured overseas to be manufactured in Australia; the selective investment in local defence manufacturing and repair capabilities associated with particular defence projects; offset policy applied to civil and defence contracts, encouraging both improvement in capability from technology transfer and export opportunities of equivalent technology; and preference for local content in government purchases. This Government proposes in future to use these policies in an integrated way to increase local industry involvement and to supplement these with progressive arrangements in its dealings with both the public and private sectors of the industry.

An integration of current defence related policies into an Australian defence industry development policy has the potential for providing the Government with a powerful means of bringing new technology into the country, arranging overseas market access for Australian products and providing design and manufacturing work to the industry. With this broad purpose in mind, the Government has agreed to the establishment of a defence industry development committee, involving membership from relevant Government departments, trade unions and private industry. The terms of reference are currently being fixed.

I would like to turn to a review of the defence industries under the control of the Department of Defence Support. The Department manages 13 establishments under three divisions-dockyards, munitions and aerospace. As I suggested in my earlier remarks, the structure of the public sector defence industry which this Government inherited is not greatly changed from that which existed at the end of World War II. I will add a qualifying remark. I do not say that particularly to deprecate the efforts of the previous Government. I think that in certain areas there has clearly been very significant investment-for example, the dockyards and in relation to the FA18 program in the Government Aircraft Factories. But if one looks over the period-one has to look at most of that period Australia was under conservative governments-one sees that investment has tended to be sporadic. In many establishments where investment has occurred it has been very small and has not been relative to the scale of the problems faced by those establishments and so on. I make the point that, over a very long period, we have allowed our defence industry to run down. Of course, the corollary to that is that it is not possible in a short period to reverse that trend; nor is it possible to reverse that trend without setting objectives and careful planning.

Clearly the factories as they exist will not meet current force requirements; nor do they represent the optimal use of resources. It is unlikely that some sections of the public sector defence industry will achieve competitiveness with overseas industry. However, within the constraints of existing size and distribution of facilities there is considerable scope for improvement in both efficiency and strategic relevance. To narrow and eventually close the gap between the capabilities of the Government-run factories and dockyards and the requirements of force support would require careful investment, change in management attitudes and reskilling of the work force.

One of my priorities is a carefully planned program of reforms in the public sector industry. This program takes account of the appropriate use of new production technology, improvements to working conditions and work force retraining. The task of revitalising the defence industry sector is under way. This was commenced after wide consultations and was designed to reduce management and work force uncertainty so that future initiatives could be more soundly based. I do not have time in this speech to comment on everything, but I would like to deal briefly with the aerospace and shipbuilding areas.

Aerospace

To review briefly the aerospace division first; this industry is principally composed of two private companies and the Government Aircraft Factories, which together employ some 5,500 workers and provide a wide range of capabilities for the manufacture, repair and overhaul of aircraft engines, airframes and components. The initial challenge facing me when assessing my portfolio was to arrest the dramatic slide in productivity and industrial relations at the Government Aircraft Factories due in part to the previous Government's policy of retrenchments after the cessation of Nomad production. The Government established a tripartite task force to develop a recovery plan for GAF and has implemented a cost awareness program which will involve all employees in new measures to reduce costs and achieve greater financial accountability.

Substantial investment in production capability for the FA18 new tactical fighter program has been made in the three major factories; outlays for this purpose amounting to $52m have been provided for in 1983-84. The FA18 program will provide a substantial work load for the aerospace industry for four to five years, but the Government is aware that significant work load requirements exist in the industry in the medium and longer terms. To this end a review of overall capability in the aerospace industry and future defence requirements will be undertaken.

I would like to mention progress on the basic trainer project because to some extent I believe that the development of this Australian-designed aircraft represents the hope of the Australian aircraft industry. The three majors of the aircraft industry are involved in the management of this project through the Australian aircraft consortium. The Australian-designed plane will meet a key requirement of the Royal Australian Airforce by the end of this decade. Additionally, I believe that this project has export potential. The Government is anxious therefore that the project remain efficiently managed and meet its time schedule. A sum of $5m has been appropriated to the project in 1983-84. The basic trainer project is crucial in building up design and development capacity in the Australian aerospace industry. Two other projects worth mentioning in this regard are the Ikara anti-submarine missile system and Project Winnin, both of which have undergone further development work this year. The Government will also be taking steps to increase the effort being put into the marketing of Australian-designed aerospace products such as Ikara, and Jindivik. Under this Government honourable members can expect to see some exciting projects emerge from the Australian aerospace industry.

Shipbuilding

The area of naval shipbuilding and repair provides an example of the Government 's faith in Australian industry's capacity. Performance at the Williamstown Naval Dockyard has been improved to allow the efficient construction of two Australian frigates for the Royal Australian Navy. The $830m package announced recently by Mr Scholes and myself will ensure employment for more than 2,000 employees at Williamstown for the next 10 years. There will be some $200m work for private industry. It will increase Australia's capability to undertake major refits and modernisations of FFG class vessels and sustain a capacity to undertake major repairs including battle damage. It will help retain shipbuilding skills unique to ship construction, contribute to Austalian self- reliance in supply of equipment and materials, introduce modern shipbuilding management systems, further the maximising of local involvement in defence purchases and retain a warship building capacity in Australia.

The modernisation of Garden Island Dockyard is continuing with budgeted expenditure for 1983-84 in excess of $26m. This project will continue over many years and provide improved workshop amenities and facilities to permit the dockyard more efficiently to service the fleet. The project also provides for the establishment of a separate fleet base for operative ships. The Government is examining the possibility of utilising the Captain Cook Dockyard at Garden Island for the docking of commercial vessels where that dockyard can provide facilities and services not otherwise available. I have also visited and been impressed with the potential of private dockyards such as North Queensland Engineers and Agents Pty Ltd in North Queensland, Carrington Slipways Pty Ltd in New South Wales and Australian Shipbuilding Industries Pty Ltd in Western Australia. These yards have demonstrated efficiency and complement the major yards.

I recognise that the private sector has an important role in the defence industry. This is so particularly in areas such as electronics, systems engineering and computer software applications. The approach we must take for the development of this sector is different from that which might apply to the public sector enterprises. A recent example of defence industry initiatives taken by my Department is the investigation of air traffic control facilities. By analysing the combined requirements of the RAAF and the departments of Aviation and Science and Technology, a greater potential market may be identified and subsequently exploited by Australian industry. We would also be seeking to investigate and pursue export opportunities. In this regard I am strengthening the offsets policy and its administration to increase its effectiveness. The offsets policy should facilitate industry adjustment and growth through the transfer of technology and provide market access for exports.

Since 1970 more than $600m-worth of orders have gone to Australian firms under the Federal offset policy by which local industries are given the opportunity to participate in contracts won by overseas suppliers. We have made it clear that we intend to achieve the 30 per cent offset goal which was first stated in 1970 but which far too frequently has not been honoured in the past. Current contracts from Commonwealth departments and statutory authorities and those projected over the next 10 years could produce $2 billion-worth of orders for Australian industry. Valuable opportunities now await Australian companies prepared to compete for offset orders. Finally, let me say that defence industry in Australia faces enormous challenges in the years ahead. This statement clears some of the ground and makes some preliminary observations. A review of defence industry policy and strategies is necessary and will be carried out. Over the next 12 months I hope to be able to report in greater detail on all of the major aspects of this strategically important field. I present the following paper:

Australia's Defence Industries-Ministerial Statement, 3 November 1983.

Motion (by Mr Scholes) proposed:

That the House take note of the papers.

[COGNATE PAPER:

DEFENCE BUDGET

Ministerial Statement]