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Speech to the Defence Industry Policy Roundtable, Sydney.

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THE HON DR BRENDAN NELSON Minister for Defence


OPENING REMARKS Defence Industry Policy Roundtable Sydney Wednesday, 17 May 2006

It’s a great privilege to be the Minister of Defence and it seems to me as a relatively new civilian coming to the task that Defence Industry Policy is something that we’ve left drift in recent years. It is by definition an extremely complex task. It’s about national security. In many ways it also involves enormous sums of taxpayers money and their interests and welfare are forefront in my thinking every day. It’s also about making sure we have a capability in Australia which can be sustained in terms of Defence and to make sure also that we appreciate the technological complexity that’s involved in Defence Industry and the nature of the companies and industries from which we derive our equipment.

Over the next three months it’s my intention that Bruce Billson will run a consultation which as I say will run for about three months. I have asked Dr Henry Ergas and Mark Thompson and also Kerry Clarke to support the consultation and prepare a discussion paper on the substantive issues that will inform it and I also invite industry, large and not so large if you think it appropriate and you’re able to agree on an appropriate nominee for a fourth person to join that group in supporting the consultation and the preparation of the documents that will inform an industry policy which I might then take to my colleagues for consideration and adoption.

This area as you know is very complex which is reflected by the history. We’ve had industry wide assessment of one sort or another in 1986, 1992, 1994 and again in the Kinnaird process in 2002-2004 which again represents where we are today. We’ve had Industry reviews in 1970, 1984, 1986, 1988, 1989, 1990, 1991, 1994 and 1997 and we’ve had Industry policies released in 1983, 1987, 1993, 1997, 1998 and 200. So in other words the consideration of Defence Industry policy has been a fertile field for people who like to have a lot of meetings and think about a lot of things and basically not have a great deal come from it.

The issues that we are going to discuss today which will inform the process over the next three months are basically Defence capability and Industry capability, sustaining that capability, ensuring that the Australian taxpayer through the Government and DMO gets good value for money and also see how we can better have Defence working with Defence Industry - how can Defence be more user friendly from your perspective.

It’s also been constructive for me to have a look at the profile of the Industry in the short time that I’ve been in the portfolio. Clearly in making decisions about Defence procurement we make decisions that have a significant impact economic and social not just on companies and their employees but also on entire regions on the country.

At the moment about 60% of the $7.4 Billion a year we’re investing through the DMO basically goes to twelve companies and of the top ten, eight are essentially foreign owned or foreign controlled and none are listed on the ASX. In the four years to 2004, the top twelve companies with whom we contracted had a return on equity of 36.8% and return on sales of 7% averaged over those four years. In contrast the top six companies around the world, predominantly listed in the US and in Europe had return on sales of 5% and return on equity of 18%. So my early understanding is that the profitability of our companies that are predominantly based in Australia is strong.

In terms of developing policy, I am certainly convinced that there is a need for a policy. I think the vagaries which you have to deal as businessmen and women is basically the political dimension that’s applied to just about every decision that’s made. Whilst not wanting anything that’s too prescriptive out of all of this is should be broadly consensual and should give you and us some reasonably clear ideas as to where the flags are in terms of decision making.

Now Steve Gumley and his team and David and the capability unit have done in my view an outstanding job in long overdue reform as a product of the Kinnaird reforms and many of the issues that I and Angus Houston have to deal with on a day to day basis in the media are a product of decisions that were taken some time before that.

It’s extremely important that we appreciate that profitability actually relates to capability and it’s very important that we have competition and we don’t create an environment where we have monopoly providers. I don’t think that’s in the interest

of taxpayers. I think what’s in the interest of Australian taxpayers is that we have a reasonable and a desirable degree of competition and that we’re not frightened of foreign ownership or indeed control of our prime contractors.

Thank you very much for being here today. I mean business with this. I don’t like wasting anyone else’s time and I certainly don’t like wasting my own and I wouldn’t have moved in this direction unless I was determined to see something come out of it. I think there’s a real place for it. If in the end there can’t be broad consensus about it then nothing will happen and we’ll go on as we are.

I’m convinced there is a place for what we are about to do.