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Address to the 10th Annual Australian Defence Magazine Congress



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Transcript - Address to the 10th Annual Australian Defence Magazine Congress February 12, 2013

Thank you Katherine for the invitation to speak today, distinguished guests, senior officers, senior departmental

officers, CEO’s.

You’ve heard that I’ve come from a background of mining and crime, and only West Australians understand the full

synergy of that, so bear with me.

In talking to you this afternoon about enhancing partnerships and the dialogue between Defence and industry, I’ve

made a number of notes but I’ll try and depart from them as I can so that you can a proper feel from where I think we

need to be and what my position is on so many of these vast issues that confront us at this time in the national

security and Defence space are.

I see the relationship as potentially one of our major strategic assets. That’s not a given, it’s dependent upon mutual

trust and acknowledgement of the commitment to the national interest in a joint and collaborative way, as a joint and

collaborative objective. Now that’s a fair bit of motherhood there, I don’t think we have that now, and I think that’s due

to the fiasco of the 2009 White Paper.

Industry currently is perceived to be nothing more or less than an input to capability. I actually think it’s much more

than that. I don’t think everybody in the Department wakes up in the morning saying ‘how can we enhance industrial

performance to give us better capability’. It’s probably fourth or fifth order of business down the line.

I think that’s in stark contrast to our senior allies. They don’t think about developing capability without first consulting

and looking and what industry can do and being abreast of what they are actually doing, and having them at the table

at a very early stage. I think we can do much better in Defence.

We have to because we have an extremely limited number of personnel, we have obviously significant budgetary

constraints, and we have probably one of the biggest land and maritime environments to defend of any country in the

world. And as I say a population that is stretched to do that. We have to make every post a winner, we have to

leverage off each and every technological advantage Australian industry can provide and use it to our very best

advantage to the benefit of national security, to the domination of our region in the Defence space.

So why don’t we just go and buy everything from North America or Europe? Our island country has experienced

times when we have not been able to do that - when our lines of communications have been severed or under

pressure. Thankfully those times were a long time ago.

We need to be able sustain training in order to be ready, we have to be ready because we never know, as my former

boss used to say, when the next Exocet’s coming over the horizon. In a time of conflict we have to sustain, repair,

possibly construct, plant and equipment for our forces and resupply them with munitions and consumables. And it

strikes me that even at the beginning of our Afghanistan engagement there was a massive world-wide shortage of

munitions and we were able to manufacture and produce what we needed. Not many of understand that when we’ve

got people in combat the most important psychological thing you can do is give them a full pouch of ammunition and

make sure they see there is plenty of munitions around the place so they can see that force protection is at the

forefront particularly of Government and Departmental thought.

We are able to achieve that at Benalla and Mulwala. It is expensive, I note there is a large tender competition running

at the moment, but I hark back to the fact that this is an example of exactly the sort of preparedness and capacity we

need from Australian industry.

We also need to fill niche capabilities and unique specialist capabilities that other countries either don’t produce, or

sometimes refuse to provide us - electronic warfare, and counter-measures are a classic example of that. In other

words we need to be able to protect our own platforms.

A strong industrial capacity provides a vital component to our perception as a nation in our region that is, in itself, a

deterrent.

Defence acknowledges the importance of our industry through PIC’s and SIC’s. I have to say I am extremely

disappointed that PIC’s and SIC’s are more honoured in the breach. Priority Industry Capability is extremely important

for us and it’s a great sounding name, Strategic Industry Capability too. I don’t think, with $12 million in the last

Budget, we have done justice to PIC’s. I think industry is left hanging on the vine to some greater or lesser extent by

the fact that our high dollar and our predilection to purchase off-shore has meant a lot of work has not come to

Australian industry and I’ll come back to that again in line with my criticism of how we funded and proceeded with the

2009 White Paper and the Defence Capability Plan that flowed therefrom.

So self-reliance and operational capability are exclusively our sovereign business. No one’s going to hold our hand,

no-one’s going to help us. We’ve said that electronic warfare, phased array radars, combat clothing, are some of the

equipment we want to have produced here in Australia. We’ve said that shipbuilding, railways, strategic metals, exotic

materials, composite materials are also Strategic Industrial Capabilities. They certainly are, and we need to

acknowledge that if we are going to put the onus on industry to provide those things you have to deal with the

realities of commercialism. Those industries have to be sustainable.

If we are going to look to the industrial base to be part of our insurance policy, which I think we have to do, then that

comes with some responsibility. And the responsibility is to provide a proper stream of work that people can plan for,

that people can invest toward, and that provides a security and consistency of commercial work that will see growth in

the sector. We have not done this. Shipbuilding is a classic and I’ll talk of the ‘valley of death’ and I’ll come back to

that in a moment, but we have not done this.

And one of the reasons we haven’t done this, is not because of Defence or the Department, but because treasury

and finance have been most reluctant to commit beyond the out years of any Budget to the sort of dollars that the

submarine project, the Air Warfare Destroyer project, that the Joint Strike Fighter project, demand to be put on the

t bl

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core business. But part of its core business requires, if you accept the propositions that I have stated, requires

industry to be capable and capable to respond and perform in a cost effective and timely way.

Defence wants in-country capability but usually abrogates the responsibility for commercial viability.

As I’ve said we’ve just put $12 million last year out of a $24 billion budget on the table for PIC’s. There’s a massive

disconnect between the wants and needs of Defence and the commercial realities of costs, investment, employment

decisions over time, by individuals and corporations.

In other words Defence wants the industrial base and its products without the responsibility for its sustainment -

that’s nothing new and probably acceptable.

But we do really need to work harder to get the DCP running properly. And when we put the DCP on the table, we’ve

got to live up to it. The damage caused by saying to business ‘here is the plan’ and then not funding it, is substantial.

We know that many Defence contractors have not survived the last four years. There are 5,000 jobs that have gone

in Defence industry. There are many very able corporations that have diversified away from Defence, and this is to

the national detriment, in my respectful opinion.

So we are rapidly nearing the circumstances that we saw when we endured the East Timor engagement. Our lines of

communication sustainment were stretched, we had to go back and get people to provide provisions and supply us

with things like the HMAS Jervis Bay. Thankfully the Tasmanians had the capacity to provide that vessel, Austal are

similarly able to things in a similar vein not just for us but for our allies.

Gorgon, at $56 billion has 40 trillion cubic feet of gas, some of you have heard me say this before. 40 trillion cubic

feet of gas will keep 1 million people going in electricity for 800 years. Wheatstone next door is 36 trillion cubic feet.

Browse is three times bigger than Gorgon, in 20 years we’ll be providing at least 20 per cent of all of China’s energy

needs, not to mention South Korea, Japan, Taiwan etc.

With that income, with those royalties, comes a massive responsibility for Canberra. When I talk to the security

officers for those platforms and that investment they say ‘haven’t seen a patrol boat for a long time’ or ‘no planes fly

over us’. The action and our economy is hostage to the continuation is hostage to the continuation of mineral,

agricultural, coal and LNG exports. We are extremely vulnerable to maritime security.

We’ve got to get off our butts and start to live up to providing some security so that as a nation we can continue to

grow economically. What we’ve seen with Rizzo and amphibious ships and HMAS Success scares the living

daylights out of me. What we’ve seen with submarines, causes me great concern - we must do better and industry

has a huge role to play in that. We are dependent upon a fall-back position that says industry; you have got to do

your share.

I know that many of you talk to me and say; we are hanging on by a thread, because investment has stalled. You

cannot take $25 billion out of this portfolio over four years and expect that everything will continue to be rosy in the

garden. Everybody, including the Department, including the uniforms, is hollowed out. They never say that in

Estimates but we all know it has to be that way.

So let’s turn to the DCP - it’s been a major disappointment to Australian industry. Unreliable, delayed, prejudiced by

FMS purchases and significantly underfunded.

2009 White Paper, which had bipartisan support, which I think is very important - we sought to take the politics out of

Defence funding. I think that’s a good thing, so that we could all go forward with a plan - $275 billion worth of

acquisitions. It took me a long while to get the then CDF to commit to that number, that’s what was in the 2009 White

Paper.

It has been abandoned. People have been left in the lurch. Frigates, aircraft, submarines, all unfunded. A question on

notice - $200 billion - unfunded future liability in Defence. So this has all been so much window dressing, and I’ll talk

in a moment about what we are going to do about it.

The reality has been virtually the opposite of what was promised, with no apparent consideration for the adverse

impact this had had on industry, the cost of which must ultimately be recovered by those survivors in future programs

or in different parts of industry, away from Defence.

They’ve got to make some move to recover, as I say we’ve lost 5,000 jobs, we’ve endured the largest reduction of

Defence funding in the last Budget since the Korean War. A loss of 10.5 per cent. No other portfolio took a hit of this

nature.

We’ve got in excess of 20,000 public servants in the Defence Department and when I talk about structural reform,

people in the know in Defence say ‘well that project will probably take four years to second pass’. Now this is simply

unsustainable.

The structural disfunctionality - the recent Senate report sets it all out. This whole thing is embroiled, enmeshed,

enchained in process.

We want a DCP that has quarterly to six monthly updates. We want a time frame that you can bet on. We want to

know if a project is committed to come forward or if a tender is to be announced on a certain date we want to know

why it has not. There are 21,000 public servants running 59,000 uniforms with about 22,000 reservists at the

moment. I was in Korea before Christmas and I note that they’ve got 600,000 soldiers run by 3,000 public servants.

Now the DCP is a priority. We’ve got to have a funded plan that we can support and if can’t make the time frames we

have committed to we have got to ask the hard questions as to why. Industry needs at least that.

So we all know the outcome of the 2009 White Paper. It’s left a trail of damage, it’s got pockets in Sydney and

Melbourne particularly, hanging on by a thread. The lack of commercial understanding by Government is no better

reflected in the way we’ve gone about ‘rebaselining’ the Air Warfare Destroyer project. Now ‘rebaselining’ is a really

interesting piece of Humphrey Appleby description.

We’ve delayed it for two years. Now the primes are going to be hurt by that but they can probably battle on. The

SME’s - this is hiatus that’s really causing them some grief, particularly in Adelaide.

It will be fatal for a number of them. At the stroke of a pen the Minister has probably put several businesses out of

work - historically successful businesses, while we try and chase and avoid the valley of death.

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a couple of examples. I’ve been doing Defence now for 11 years. I just happened by chance be thrust into it by

Senator John Hogg when I first became a Senator - I didn’t even know what the DMO stood for when I went to my

first committee meeting.

But one of those meetings took me down to Bendigo where I met the Bushmaster manufactures. In 2005, the

Bushmaster, which has been blown up 50 times with nobody dying, in Afghanistan and Iraq, was on the verge of

being a cancelled project. After much argy bargy with the Department and the contractors involved -it was revealed

scope creep was the issue. 8 seats to 10 - a different number of axels, power to weight ratio went out the window. It

appeared to me that nobody in the Department understood what these changes meant in terms of the design

functionality of the vehicle.

When we call for tenders for a sonar system and we specify 10 kh, if someone has a product that’s 11 or 10.5 or 9.5

we specify that it a mandatory requirement, they’ve got to go and the knock on effect of those hydrophones being

moved get the wavelengths right and all that sort of stuff, these things are apparently not understood. Accordingly

we’ve got to really look at streamlining the way we analyse the work that we want industry to do so that we give a

cost effective baseline to the stuff we are asking them to do.

Admittedly we are asking them to present a football team of business management expertise, promotional stuff on the

tender document - you need a wheelbarrow to cart it into to put the tender in, millions of dollars spent - there’s got to

be a better way. We really want to try to capture the competitive nature, the value for money, without the massive

reams of paper and work that industry is put to to get a job.

The other thing is that the Commonwealth and the States regulate massively for occupational health and safety,

corporation and environment regulations, taxation, accounting regulations and then we compete against countries

that do not have these constraints, and we lose.

The playing field is not level. It is very rarely level, even with our senior allies they seem to do things much more

effectively that we do. One example is a loader used in heavy air lift. The manufacture is very clever manufacture, he

licenced an American manufacturer - seen at RIMPAC - they loved it. After a number of merges and acquisitions

there’s a competition on shore in Australia for that particular product, he loses out to a foreign manufacturer. In other

countries this does not happen, the Americans very rarely go to a foreign manufacturer for any product.

Austral had to go to Alabama. And the resistance in the first instance was substantial, their product won the day. But

the fact is they are loyal to their own people. Now yes there’s a premium, but in the Defence space I think we should

be paying it. Because the indigenous capability that flows from that is really important to us. Look I’m going over time,

but scope creep is an issue. By the time we get to specify on a project the technology has moved on, we’re chasing

our tail and the Government wants to move the goal post.

Let me get to some of things we want to do, we’ve talked about an industry ombudsman, we’ve talked about no cuts

in Defence. What we want to do is listen to the way that industry particularly wants to see things streamlined but also

bearing in mind that the DMO and Defence has an obligation to deliver value for money.

These are not mutually exclusive.

The main message I want to leave with you is we’ve got another Budget to come. People are saying what are you

going to promise. Well look at our track record, under John Howard we were very close to 2 per cent of GDP in

Defence, this year we are down to 1.49 per cent, we were last there in 1937. We want to have a 3 per cent indexed to

2.5 per cent real growth factor in Defence, we supported the 2009 White Paper plan - that is still our plan.

Just when we are going to be able to fill these massive black holes that have been left to us if we win in September is

anybody’s guess. But bear with us, we are really earnest, we’re not going to tell you everything’s going to be rosy in

the garden, but you might have a DCP that you can actually bet on. Thank you Katherine.

QUESTION: Minister Smith made a comment this morning about what he termed an outbreak of bipartisanship in the

Defence portfolio, he based that view on comments by Mr Abbott at the Press Club promising no cuts in Defence. My

question to you is in two parts, do you agree with the Minister that there has been an outbreak of bipartisanship in

Defence, and secondly did you just make a commitment to increase Defence funding in the first term of government?

JOHNSTON: I made a commitment to try - that’s our aspiration and I stick with it. How can I put this nicely, not much

is believable that comes from this Government. They told us that they had a plan and we all committed to it, we were

suckered. Industry and Defence are in a shockingly parlous state, remember everything in Afghanistan is a no win no,

loss basis. Now you have a look around and you talk to people in the Department - things are really difficult. Two

years ago they were saying yes, we can make some savings here there and everywhere, today they are saying ‘just

forget it, we are just hanging on, we need some more funding’. The recurrent costs, our sustainment, particularly in

Navy are killing us. Now the bipartisanship that I want to see is that I want to engage, if I was the Minister, engage

with the other side to do things with me, to give them the benefit of the sort of knowledge that the Minister has.

He’s got 90 personnel in three offices, my one person is sitting just down here. Now everything we see, do and know

about is given to us from either industry or within the Department. It’s a winner take all tribal environment in Canberra,

in Defence I don’t think that’s acceptable quite honestly, particularly when we’ve got people in the field.

QUESTION: (Inaudible)

JOHNSTON: If we’re doing the best we can there is a risk factor in everything we do. This is a complex difficult space

to be in. What we want to do is have the capacity to be regionally dominant. There is downside in that and the Sea

sprite is a very good example, that was a legacy program from 1994, I think we should have dealt with it sooner than

we did, the problems of it were not as transparently understood until very late in the program. But the thing about that

program is we were chasing a pretty good capability - two Penguins off our Anzac frigate is not a bad third

dimension, those Penguins missiles would have done a hell of a lot of good for our Anzacs and I think something our

neighbours would have stood up and taken some notice of. That was an ambition I thought was pretty legitimate

given the armaments of the Anzac frigate and the Seahawks that we fly of it.

I thought there was some potential there, it’s the nature of Defence business, I’d rather see us put our hand up a little

earlier, we didn’t do that, in the future there’s a lesson to be learned there but given that we’ve had 100’s of billions of

dollars of projects over the last 10 years there are going to be some that are pretty much shockers and that’s one of

them. I make no apology but we’ve got to avoid it in the future.

QUESTION: With the Government due to release the new White Paper around the June timeframe if the Coalition

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JOHNSTON: We’ll look at that, we’ve already seen a draft of it, as many of you know, the funding issues in it if they

are replicated in what we’ve seen are unacceptable. It’s not a funded document, the DCP accompanying it something

that we haven’t seen, my leader Tony Abbott has said that we will re-do it in 18 months and we will re-do it so that it is

reliable and bankable.

QUESTION: (inaudible)

I’d like to do it a lot quicker, I want to under promise and over deliver.

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