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Treaties tabled on 14 May and 4 June 2008

CHAIR —Although the committee does not require you to give evidence under oath, I should advise you that this hearing is a legal proceeding of the parliament and warrants the same respect as proceedings of the House and the Senate. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of the parliament. At the conclusion of your evidence, would you please ensure that Hansard has had the opportunity to clarify any matters with you. If you nominate to take any questions on notice, could you please ensure that your written response to questions reaches the committee secretariat within seven working days of your receipt of the transcript of today’s proceedings. Do you wish to make some introductory remarks before we proceed to questions?

Ms Skinner —Thank you for the opportunity to appear before you today with regard to the Australian-United States treaty concerning defence trade cooperation. Defence led the negotiation of the treaty in close cooperation with the Department of Foreign Affairs and Trade, Australian Customs Service and the Attorney-General’s Department. Those departments are represented here today to address any issues arising that fall within their responsibilities.

Australia’s security alliance with the United States is a strong foundation of Australia’s security policy. This important treaty will improve the interoperability between the Australian Defence Force and the armed forces of the United States by facilitating the timely movement of defence technology between the two countries for specified government end uses and through life maintenance. This will be achieved by establishing a framework for secure trade in defence equipment and technology between approved communities of government agencies and private companies in Australia and the United States. Members of the approved community will be able to trade in defence technology and services normally requiring permits issued by either government under our respective export control regimes.

The treaty will cover defence technology required for combined military and counterterrorism operations, joint research development, production and support programs and mutually agreed projects where our governments are the end users. The treaty will cover a significant majority of the defence technologies that are also controlled for export by Australia and the United States. Items such as nuclear, stealth, encryption or items that are covered by United Nations treaties such as chemical and biological technology have been excluded from treaty coverage because they are particularly sensitive. These excluded items will continue to require normal export licensing.

For Australia, removing the requirement to obtain individual licences for each transaction involving controlled defence technology will facilitate more efficient exchanges between Australian and United States defence companies. This will reduce costs and enable more timely delivery of capability to the ADF. The treaty is reciprocal in its application, but most trade in defence technology flows from the United States to Australia. The United States State Department advises that in 2006 it approved 2,361 licences and 312 technical data agreements for Australia. Each of these approvals can take up to three months or more to secure. The treaty will eliminate the need for many of these licences.

The treaty will also open new avenues for industry cooperation between Australia and the United States by allowing more effective partnering and technology sharing. A particular benefit will be timely access to US technology and the ability to share technical data without the need to obtain a licence. This will reduce lead times in discussing potential business opportunities and improve the prospects for Australian companies seeking to participate in United States defence programs.

The treaty is one of only two that the United States has negotiated. The other is with the United Kingdom. Both treaties are currently being considered for ratification by the United States Senate. Australia has indicated to the United States Senate its support for ratification by the US. An implementing arrangement has also been negotiated and was signed on 14 March 2008. This arrangement spells out in more detail how the obligations under the treaty will be implemented by the parties. The implementing arrangement is not a treaty-level agreement and does not need to be ratified but has been launched separately with the committee to assist understanding of the treaty.

Negotiation of the treaty demonstrates the importance that both the United States and Australia attach to our security relationship. Ratification and implementation of the treaty will reinforce an already strong security relationship and support cooperative defence and security activities between both countries into the future. In order to be able to comply with the provisions of the treaty, the government will need to consider legislation to amend the powers of our existing export control system. When we have taken all necessary steps to achieve domestic compliance we will be able to bring the treaty into force. Defence is already engaged in an Australia-wide program of outreach to Australian defence industries to familiarise them with the nature of the treaty and to provide them with advice on the requirements and benefits we envisage. Industry comment and suggestions to implement the treaty are being strongly encouraged during these outreach sessions. This outreach will continue during the implementation phase of the treaty. That concludes my opening statement. We would be happy to take any questions. Thank you.

Senator MARSHALL —I think this is a very important treaty but I am interested to know if there are any obligations that it puts upon us to take particular forms of technology or particular forms of weapons?

Ms Skinner —No. Participation from companies in the approved community is voluntary. Both countries have an exclusions list, and some technologies are excluded, but we are not under any obligation. It only facilitates us if there is a technology or piece of equipment that would be useful to us and necessary for a defence program.

Senator MARSHALL —What about areas where we do have a difference of opinion with the United States, such as on landmines and cluster bombs? Does this treaty in any way restrict our ability to continue the arrangements that are underway in those areas? It is certainly my hope that we ban those sorts of weapons.

Ms Skinner —No, the arrangements under this treaty do not in any way inhibit government decision making in relation to things like cluster munitions.

Ms PARKE —So, landmines are not one of the excluded items in the Mine Ban Convention, which we have already signed up to in Australia?

Ms Skinner —They are not one of the excluded items.

Ms PARKE —Can you tell us why?

Ms Skinner —The US has not chosen to put those types of technologies on the exclusion list, I assume because they are only a conventional weapon. It would be up to Australia to decide that it wanted to purchase them, and clearly we would not choose to under the current treaty arrangements with landmines.

Ms PARKE —If you have excluded other items which are covered by UN conventions ,why would you not exclude landmines which are covered by the Mine Ban Convention?

Mr Perks —Australia’s policy approach would be embodied in our treaty obligations with respect to landmines, and if the government elects to go down this path, to clusters as well under the new cluster treaty that is being developed, the obligation would be adopted by the government of Australia. The US has not included those items in its list of exempted items because they are not party to the landmines treaty or, in the case of clusters, have not participated in the negotiation of the cluster treaty.

Mr SIMPKINS —What areas will licences cover in the future if most have been eliminated through this treaty?

Mr Perks —Essentially the articles covered by the treaty are those represented in the control list of the US government, which they call the US military list. Australia has a similar list, which is based on much the same sources, called the Defence and Strategic Goods List. Essentially the two lists are pretty much equivalent in content. They cover conventional weapons. In the case of the Australian list, they cover dual use technology as well. Basically they are the things that are developed for a military purpose—aircraft, ships, engines and spare parts, software, plans, maintenance, manuals; those kinds of things and technical information that is required in order to use and operate that equipment. All those things are covered by the export control system, and those are the licences that will be affected by the treaty.

Mr SIMPKINS —Are we expecting significant improvements with the whole acquisition process in regard to this treaty? Obviously, there have been some issues in the past.

Mr Clarke —The treaty does two things. Firstly, it assists us in the long-term sustainment of the products that we buy from the US. For example, if we buy a platform like the F18 airplanes that we have right now, to be able to sustain those platforms and get a company to maintain them for us we have to get a licence to do that from the US. Under this treaty, if the company is in the approved community that licence is no longer required, and so the Australian company would become much more competitive in their bidding for that sort of sustainability activity. So, that does substantially improve Australian companies’ access to opportunities for sustainment of defence equipment. That is one of the prime aims of this treaty. Secondarily, it also allows them to bid into global supply chains in the US. If you take the F18 example that I used, it is possible for Boeing in the US to come to an Australian company without a licence—one that is in the approved community—and ask it to bid for work. That is another advantage that we would obtain out of this activity. Australian companies are beneficiaries here much more than they are under the existing licence systems, which take time—up to three months or more—and if the FMS cases are involved, I think we have taken on average greater than 12 months to get a retransfer licence.

Mr SIMPKINS —You are saying that particularly in the area of maintenance and—

Mr Clarke —Sustainment, absolutely. But it also applies to new acquisitions. I do not want to mislead you here at all.

Mr SIMPKINS —How are the costs that are involved, which are going to be borne from within Defence’s budget, going to play out?

Ms Skinner —We have a cost of around $84 million over the forward estimates being invested in this area in Defence, both in the Defence Security Authority and in the Strategic Policy Division that currently manages the policy oversight and licensing arrangements in the department. Those costs have been received through the budget, and those processes will be set up over that period of time.

Mr SIMPKINS —They have already been allocated?

Ms Skinner —That is right.

CHAIR —What is the government’s expectation in terms of timing of approval by the United States Senate? Are you thinking that this could be dealt with prior to the November congressional elections or do you think it will have to wait until 2009?

Ms Skinner —We would hope that it would be dealt with prior to the elections in November, but it is not possible for us to project that. We would be hopeful of that. Otherwise, it would be dealt with next year.

CHAIR —As a general characterisation, do you think that the obligations on the parties are of an equal nature or do you think that Australia is accepting less than equal status in the hope of securing greater access to a larger US defence industrial sector?

Ms Skinner —I think the obligations on the companies at either end are equal and reciprocal. We will have an ability to look into the US if we have a concern with goods that have been transferred from Australia and we will work with them if they have a similar request. The underlying weight, though, is that we bring more goods from the US, so there will naturally be more interest in our system because the weight of effort is the goods coming to Australia. But the treaty outlines a reciprocal arrangement.

Senator BUSHBY —You have noted there is an estimated cost of about $27 million for implementation of the treaty. A large part of that is involved in security assessments for our applicants and making sure that those who join the approved community are appropriate, which is obviously a very good thing to do. But, on the other side of it, have you put any thought into what that actually means for applicants in terms of how onerous the application process will be for them, particularly given that some of them will be small and with limited resources?

Mr Clarke —We have looked at that. Our estimates are that initially it will cost industry around about $50 million to do that. We base that on the fact that many of the companies who would be involved in the approved community already have approval under DSB for the security levels that are needed to do this. That does not mean that they do not have to set up separate record-keeping arrangements. They will have to do that. There is a compliance cost in that. For newer companies to become members of the approved communities who are not already DSB approved, of course there would be a cost for compliance. But of course that is where they made the treaty voluntary. If a company determines on its own business case that that total cost is greater than the benefit they might receive, it continues to do licensing under the direct ITARS process, and that capacity still remains under this approach. We have made it as voluntary as possible. Of course, it is our hope that in the longer term, in four to five or six years, the Australian defence sector will be largely an approved community. That gives them the benefits not only of giving technology to and using technology from the US but of being subcontractors to Australian based primes as part of the approved community, only on notification, without a requirement for a licence transfer again.

Senator BUSHBY —I understand you are saying that you are making it voluntary, there is no obligation, but there may be small businesses out there who have something to offer but do not necessarily have the resources to be able to get to the point where they can become a member of the approved community. What might be done to assist them to get across the line?

Mr Clarke —At the moment we have not anticipated anything other than a company making it on their own commercial grounds. That said, you would be aware, of course, that companies who charge for defence business are charged the costs of administration and activity as part of a normal G and A. We do not expect to have complete pass-through, but we expect productivity gains and benefits because this clearly generates benefits for companies as well. Often it gives them some rigour around their own internal management systems which may not have previously existed, so they become better off.

Senator BUSHBY —Which is often a—

Mr Clarke —A synergistic event—

Senator BUSHBY —Small businesses usually need that more than larger ones.

Mr Clarke —A little bit.

Ms PARKE —The implementing arrangement provides that the inclusion of Australian entities or facilities in the approved community will be jointly determined by the Australian Department of Defence and the US Department of State. Will the Australian Department of Defence be involved in determining which entities or companies are included in the United States approved community?

Mr Perks —No, we will not be involved in vetting American companies for inclusion on the list. The American system is already quite rigorous and they have a greater degree of regulatory control over defence industry companies in the US than Australia does.

Ms PARKE —Do you think that that still puts us on an equal footing with the US in the agreement?

Mr Perks —I think on the balance of advantage we have regarded this as being a positive step which has benefits for us. There is obviously an asymmetry between the US economy and our own and that is echoed in the defence industry sector of the economies and there will be those differences between the two countries.

Senator MARSHALL —You told us that one of the potential benefits may be that US defence asks Australian companies in the approved community to actually bid for work. Is that purely a theoretical possibility?

Mr Clarke —No, it does happen now and as part of my division’s work, we actively pursue opportunities for Australian companies with the US global supply chains.

Senator MARSHALL —What is that worth to us? Do you expect that to grow? Have you done any modelling about the impact of this treaty on that side of the business?

Mr Clarke —My memory is that the Australian exports have been around about $600 million per year globally. I do not have a figure with me immediately for that which is directly related to the US, but there has been no doubt that, as US companies come to Australia and note the capacity of Australian industry, there has been a growing interest in our ability to provide more diverse sources for their global supply chain. For example, in the Joint Strike Fighter program, we have seen a serious interest in companies like GKN in Victoria providing support. They are part of a team right now in the US tapping on the doors of Boeing, supported by us, with a sense of new business in the Boeing global supply chains. The current policy framework is underpinned by the view that Australian defence industry will be internationally competitive, and is so, but it just needs the opportunity to get through the door. The treaty breaks down one of those barriers that preclude them bidding in the current arrangements, and that is the advantage of it.

Senator MARSHALL —Do you have a feel for what we can expect as a direct economic benefit as a result of this treaty?

Mr Clarke —I have not estimated a number. My approach has been to continue to improve on what we have got. It is a continuously improving program. That is what I have got in mind. Have I set myself a target? We have set ourselves a target globally that the proportion of money that is spent in Australia should remain at around 65 per cent of the total defence expenditure budget. That includes flow-through through the US back into global supply chains, so it goes both ways. But those are the sorts of targets that we are setting ourselves. It is currently around 62, I think, in last year’s numbers, from memory. We will continue to try to press that growth.

Senator BIRMINGHAM —In terms of the costs to industry that you were highlighting in response to Senator Bushby, are most of those one-off costs or is there a significant ongoing cost to industry?

Mr Clarke —There is obviously an ongoing compliance cost. There will be two parts of that. I will let my colleague from the security agency talk about auditing, but in the short term there is a compliance cost in that companies will have to track the products and technology that moves in the approved community. If company A passes a piece of information or technology to company B, that has to be tracked in a register in both companies so that should we be required to audit that for some purpose downstream we will know where that information has gone to and what purpose it is being used for. So, yes, there is an ongoing compliance cost for that. I will let people talk about auditing in a separate process.

Mr Scully —For new starters who join the approved community there will be an initial start-up cost to meet the security requirements. Those requirements are related to the Defence Industry Security Program which all companies who currently engage with Defence are members of. As to the types of things that they will be required to do, as we have discussed, one is that we vet their people; security clear their people. There is a cost to that. If they are going to store material, they have to ensure that their facilities meet the defence protective security policy so that they can store information and material securely. Likewise, if they are dealing with information technology, electronically passing information, they will have to ensure that their systems meet our security standards as well. That is the initial start-up. We do require that they maintain those standards and we will review their compliance with them either on a regular basis or on a risk managed basis.

Senator BIRMINGHAM —In terms of maintaining records of materials and information that is passed between organisations within the community, how broad is that definition from a perspective within the treaty? Is there some clear definition for those bodies to know exactly what it is that they have to track? Is everything to be tracked or are there levels of classified material within there?

Mr Clarke —For items which relate to the existing licensing system, licensed under ITARS, the licence comes with the terms and conditions which a company has to comply with. It has to notify and the product or technology has to have a certain end-use only. Under the community, that restraint will be lifted. But as a product or technology is released from a US company to an Australian company, we would expect to have similar sorts of tracking information: the purpose it was being used for, who had access to it, how you were going to secure it, those simple sorts of top-end things. If company A then passes that to company B, we would expect the same sorts of framework to exist. We have not absolutely fleshed out the detail of that yet but we want to make sure that we are at least compliant in terms of the existing licensing regulations without the rigour that is necessarily applied under the US department US DOD-State arrangements. We want to get the flexibility but we do not want to lose the tracking capacity.

Senator BIRMINGHAM —That will be detailed in the implementation plans and so on that are being developed in consultation with industry?

Mr Clarke —Yes, exactly.

Senator BIRMINGHAM —Just in terms of consultation with industry, it indicates that industry are only consulted on the terms of the treaty after negotiations of those terms were complete. Are there areas of concern or discontent from industry expressed at all in those consultations?

Mr Clarke —Your committee has highlighted the one which is obviously of most interest. Firstly, they are interested in how much of their existing licensing activity is likely to affect them, as in, ‘How does it affect me?’ Secondly, they are interested in the compliance costs. What does it really mean? What are you asking us to comply with? What is the framework? Those two issues are the ones that have primarily been the focus in the consultations that we have had so far. We are continuing to look at those, of course. This treaty will continue to be a live document though. The way we use it and the exemption list will continue to be discussed between the US and Australia and, I presume, the US and the UK to try to continue to improve the process. So, if we come up with an obstacle we will attack it mutually as we do always.

Senator BIRMINGHAM —I have a number of questions on how the treaty impacts on the recruitment of staff by defence industry, and so on, but it might be easiest if I put those on notice, being mindful of the time.

CHAIR —Yes, that would be appreciated. Thank you very much for coming along.

[10.53 am]