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Defence industry in South Australia: address to the Royal United Services Institute of South Australia, Adelaide, 12 March 1997

Brigadier Willet, Commodore Cooper, Air Commodore Conroy, Mr Groves, ladies and gentlemen.

Good afternoon and thank you for asking me to the 1997 Seminar of the Royal United Services Institute of South Australia.

I would like to begin by acknowledging the important role that the Institute plays in the national defence debate. This has been recognised by successive Ministers who have taken advantage of opportunities like this to launch major policy initiatives.

Last year my colleague Ian McLachlan used this forum to outline the Government's policy on international Defence relations.

This year, I would like to talk to you about the Coalition's Defence industry policy after 12 months in Government.

It is fitting, however that I should begin this address by highlighting some important facts about Defence industry here in South Australia.

South Australian Defence Industry

Out of the total $10 billion Defence budget, our investment expenditure on major capital equipment amounts to $2.2 billion, 62% of which is spent in Australia. A further $3 billion is support expenditure of which around 89% is spent in Australia.

Let me give you the latest available figures for South Australia.

In this State, the Defence sector directly contributes $270 million to the local economy. If you add the flow on to sub contractors and the community, that figure rises to $840 million. This represents about 3% of the Gross State Product, around the same as the wine industry

In employment terms, the South Australian defence sector accounts for around 20,000 jobs.

The Defence organisation has a small but important presence in South Australia, including DSTO, the Aircraft Research and Development Unit, and RAAF Edinburgh at Salisbury.

Large Defence contractors such as British Aerospace Australia, with 1800 employees, and the Australian Submarine Corporation, with 950 employees, are located here.

The $5 billion Collins Submarine project has expanded the primarily software-oriented South Australian knowledge base to include shipbuilding and other support skills.

South Australia is also host to a concentration of smaller hi-tech companies such as Celsius Tech and Vision Systems. These companies specialise in the increasingly important areas of information technology, electronics, communications, and systems engineering and integration.

These industries provide capabilities which are of the highest strategic importance to Defence, and many are fundamental to the self-reliant defence of Australia.

The defence industry in South Australia is very active, and promotes strongly its expertise and activities locally, within Australia, and internationally. South Australia is considered to be the Australian centre for systems engineering, electronic warfare and surveillance systems. These key skills and competencies stem from the research activities at DSTO in Salisbury.

Defence Teaming Centre

Last year Ian McLachlan opened the Defence Teaming Centre.

The Centre is an exciting, industry-led initiative created to assist members enter new markets and form alliances with interstate and overseas companies.

The idea is to create an environment similar to that of Silicon Valley. Indeed late last year, the Defence Teaming Centre signed a Memorandum of Understanding with the Silicon Valley Defense/Space Consortium.

The Defence Teaming Centre acts as a central liaison point for the larger prime contractors seeking sub-contractors in a variety of areas. It can identify potential local partners and put together a suitable group of SMEs as a single source for sub-contracting. It also provides a link between individual SMEs and the prime contractors.

Members include companies from South Australia, as well as interstate and overseas firms. While still in its infancy, the Defence Teaming Centre has the potential to become an extremely useful tool for the expansion and consolidation of the South Australian defence industry.

Economic Development Authority

The Economic Development Authority is a State Government department responsible to the Premier.

It works to facilitate interstate and overseas investment in South Australian companies from all industries, and assists local companies with exporting their goods and technology. It has been very successful in its work to date, and assisted with the establishment of the Teaming Centre.

The Economic Development Authority provides infrastructure support for local companies to undertake Defence projects, including land and facilities. For example, the Authority provided the Australian Submarine Corporation with its shiplift facility.

Lead In Fighters

Negotiations will begin shortly with British Aerospace Australia to provide up to 40 'Hawk 100' lead in fighter trainers to replace the ageing Macchi aircraft.

While most of the construction and support work will be undertaken at Williamtown in Newcastle, the South Australian connection will take on the software development work. Already, British Aerospace Australia has sent people from South Australia to the UK to start on the technology transfer process.

They are also adapting the 'Hawk's' cockpit to a configuration more closely aligned with our F/A-18, making the conversion from flying in the trainer to the operational aircraft easier and faster. The outcome of such activities is the acquisition and retention of high technology expertise in Australia, and the securing of a local capability for the provision of through-life support for the 'Hawk'.

Contract negotiations are underway with Kaman Aerospace for the delivery of eleven 'Sea Sprite' Helicopters in support of the ANZAC Ships.

At this early stage, the delineation of work around Australia has not been finalised, although CSC Australia, based in Technology Park, was part of the initial proposal.

DSTO and Industry

The Defence Science and Technology Organisation at Salisbury has been an integral part of the South Australian scientific community since it was established just after World War II.

The ties between the South Australian defence industry and DSTO in research and development are obviously very strong, with close relationships created with various companies in nearby Technology Park.

DSTO's primary objective is, of course, to support the ADF. This means that its primary objective for its interaction with industry is to help industry become better able to support the capabilities needed to defend Australia.

DSTO's secondary industry objective is to contribute through industry to national wealth creation, including through the support of exports.

DSTO's industry interaction is provided through mechanisms such as technology transfer, collaborative arrangements and fee for service activities carried out on a contractual basis.

Contracting out research and development work to industry for tasks which can more effectively be resourced from outside the DSTO also provides a tool for developing industry.

In 1995/96 DSTO placed contracts to the value of $14.1 M with industry and the universities - this represents about 10% of the RD part of DSTO's budget.

DSTO's industry alliances and other reciprocal arrangements with industry are part of the Government's focus on strengthening the partnership between Defence and Australian industry

The alliances, of which there are now 19, help Australian companies to better understand Defence's Science and Technology capabilities and its priorities for RD.

They also help DSTO to gain a better appreciation of the capabilities and commercial requirements of industry.

Much of DSTO's work is in areas of rapid technological change such as information technology and communications. It is in these areas in particular that DSTO is looking for industry involvement early in the development process.

In July last year, I opened the Command and Control Information Systems Interoperability Laboratory at DSTO's C3I Research Centre in Fern Hill. Complementing its research activities at the Centre, DSTO is also exploring ways to work more closely with companies to maximise returns from both its own and their RD efforts.

Requests for proposals will shortly be sought from industry in an effort to find a company or companies to work with DSTO in the Command and Control Information Systems Interoperability Laboratory in a strategic alliance type of arrangement.

The aim is to move away from a supplier/buyer type arrangement to one where there is a recognition of mutual benefit and mutual risk, with DSTO not simply procuring services from industry in an arms length arrangement.

Also in July last year, I was at DSTO Salisbury to participate in the finalisation of an industry alliance between DSTO and the Vision Abell consortium, which was selected to further develop and to commercialise DSTO's Starlight Information Security Technology.

The alliance with the Vision Abell consortium will facilitate the sharing of information, expertise and facilities in this very important area of information security.

In November 1996, I had the pleasure of presenting the Minister's Award for Achievement in DSTO to Mr John Curtin, a DSTO Research Leader. The Award recognised Mr Curtin's excellent research in the field of Electronic Support Measures.

As you would all know, electronic warfare is one of the key areas of modern technology in which a capability edge is vital for success in battle.

Mr Curtin developed a concept for an Electronic Support Measure system for the P3-C Orion Maritime Patrol Aircraft. The concept was well matched to the role of the Orion in the Australian area of operations, and was in advance of any system then commercially available in the world, in terms of its frequency of coverage, direction finding capability, and signal processing.

Mr Curtin's work is a good example of DSTO working with the Defence customer and industry to develop advanced technology capabilities for our national defence.

Another such example is the ALR2002, a radar warning receiver designed to provide the crew of the F-111 C with sufficient advance warning of radar or missile radio frequency guidance signals. This should allow them to evade or counter missile threats.

The concept demonstrator of the system was developed by DSTO in conjunction with the Air Force and British Aerospace Australia. That company is now developing a fully engineered radar warning receiver to fit to our fleet of F-111s initially, and then other aircraft in the RAAF fleet.

DSTO also has extensive links with universities and other research agencies, both in Australia and overseas. DSTO is an active participant in the Cooperative Research Centre program, being a member or affiliate of eight CRCs.

On 20 February 1997, DSTO signed agreements with four of Australia's leading universities to establish Centres of Expertise in defined technical disciplines and enable them to undertake specific research in airframe technology for the ADF.

The Centres are at:

. Monash University which will study structural mechanics jointly with the Australian Defence Force Academy;

. the University of New South Wales which will investigate vibration analysis;

. RMIT which will research aerodynamic loading; and

. the University of Sydney which will work on damage mechanics.

The Centres will open the way for the ADF to tap into the storehouse of advanced scientific and engineering expertise that exists in the universities, complementing the know-how already provided by DSTO.

A Sustainable Defence Industry

A sustainable defence industry is an essential point for Defence self reliance. It is also important for other reasons. The industry plays a significant role in the Australian economy and is a substantial employer of Australian citizens.

This is why achieving a sustainable defence industry is the key to the Government's industry policy. We are still a long way from that goal.

I define a sustainable defence industry as one comprised of firms which can lose an important Department of Defence contract and still stay in business.

There are factors working against a sustainable industry.

. Firstly, Defence is a monopsonist i.e. a purchaser with monopolistic characteristics. The influence that a single buyer may have can indeed distort the market so that decisions on production and investment are distorted and firms completely dependent on defence to survive may fail if a decision on a project does not go their way.

. Secondly, Defence procurement has historically operated in a project-centric environment. That is to say that tenders are evaluated on value for money on the basis of a single project rather than taking a wider, long term view.

. Thirdly some overseas contractors have attempted to circumvent Australian Industry Involvement rules. They set up a variety of shop fronts which will inevitable die. They do this because it is not in their interest to create potential competitors in Australia.

. Fourthly the Government has inherited a weak and fragmented industry base, from which it is very difficult to build. The previous Labor administration was keen on buying big ticket items, but hopeless at developing an industry policy.

Procurement Rules

We have addressing these problems in a number of ways. For example, I have outlined a number of principles which overseas contractors must follow if they wish to do business in Australia.

These principles have become known as Bishop's procurement rules.

A company's commitment to Australia can be demonstrated by having:

1. Significant local facilities and plant - which sees investment in Australia for the long run;

2. Significant employment of Australian citizens - which demonstrates a commitment to the people of Australia;

3. Successful participation in major defence contracts - which demonstrates an ability to work productively with Defence towards a common goal;

4. Significant levels of research and development in Australia which helps ensure that innovative goods and services are identifiably Australian; and

5. Demonstrated independence or action - which means Australian-based subsidiaries can show substantial autonomy of action and finance. This includes the ability to compete against the parent company in exports to a third country.

These 'Rules' are based on a requirement for long term industry relationships and commitment by industry to Australia.

There are several companies in South Australia that are following these rules to the benefit of Defence and Australia. British Aerospace Australia, for example, has invested significantly in South Australia and Australia through facilities, research and development, employment, and has won several major Defence contracts independently of its parent company.

Another example is Celsius Tech Australia, which has recently been given more autonomy by its parent company regarding its operations within Australia, and has been given greater scope to expand its business within the region.

Celsius Tech Australia has most recently won contracts for the development of the Australian Army Command Support Systems, and the Navy's Mine Warfare Systems Centre.

Defence Industry Seminar

In February, the Defence Industry Committee hosted a successful international seminar in Canberra.

The seminar brought together Defence and industry's top level managers, including a select group of overseas representatives, to explore new approaches to force development, acquisition and defence industry.

South Australia was well represented at the seminar with active participation by Celsius Tech Australia's newly appointed Managing Director, Mr Nick Hammond, the Group Chief Executive of British Aerospace Australia, Mr Robin Southwell, the Managing Director of Vision Abell, Mr Lloyd Groves, and the Managing Director of the Australian Submarine Corporation, Mr Hans Ohff.

The broad outcomes from the seminar, which are currently being refined into specific actions, underline two positive developments.

Firstly, there is a growing awareness of the centrality of a dynamic and evolving Australian defence industry to this nation's future self-reliance.

Secondly, there is a growing commitment in both Defence and industry to adopt new, more imaginative, flexible and cooperative business practices as a means to encourage sustainable, cost-effective industry development in Australia.

Defence Needs of Industry Study

In our pre election policy, Australia's Defence, we said that "the Department of Defence must make its long-term needs known to industry so that industry can plan for its own and Defence's future needs. Long terms planning will improve industry's perceptions of Defence".

As a consequence, Defence carried out a Defence Needs of Industry Study in the latter half of 1996.

As part of this process, areas within Defence which deal directly with industry were asked to identify and classify their future capability needs.

Once these requirements were defined, consultation with industry was undertaken. For those requirements defined as strategically important, Defence Industry Associations were asked to provide a broad indication of their members' ability to provide the capability.

Toward the end of last year, discussions were held with the South Australian Industry Associations as part of a national program of consultation. The results of the study are currently being analysed, and will be used to assist both Defence and industry with issues associated with long term planning, development, investment and acquisition.

Conclusion

This Government is committed to ensuring we have a sustainable defence industry to support the self reliant defence of Australia.

However, underpinning that self reliance is the recognition that people are the essential ingredient for the operational capability of the ADF. They are putting their lives on the line so that we can live in a free and prosperous nation. They deserve the very best we can offer them. I promise that I will continue to work tirelessly to ensure that is precisely what they get.