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Defence and industry: future directions under a Coalition Government

* Introduction

* The Need for Change

* A Sustainable Defence Industry

* A Proposed Agenda

* Intellectual Property and Defence Procurement

* Procurement Rules

* Defence Acquisition, Planning and Industry

* Defence Exports and International Materiel Cooperation

* The Way Ahead

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Distinguished international guests, ladies and gentlemen.

This seminar, Force Development, Acquisition and Defence Industry: New Approaches, is set to make an important contribution to the Government's remoulding of the relationship between Defence and industry and the establishment of a genuine partnership between the two.

New, innovative and flexible approaches are required to meet the challenge of developing the sustainable defence industry needed for self reliance.

The Need for Change

The changes in Australian Government policy which occurred after the Coalition election victory last March provides one of the best

opportunities for such new approaches.

The principles of free enterprise make me ever- conscious that the $10 billion we spend each year on protecting Australia is neither Defence's money nor the Government's money. It belongs to the Australian taxpayer. We have been elected to ensure that every penny is spent wisely.

This is therefore the main reason for which I have set out to improve our relationship with industry and our procurement practices. I have said on previous occasions and I say again, Australia's approach to development and acquisition faces two fundamental challenges:

* Firstly, the time frame associated with major technological change is now shorter than the time frame associated with many defence acquisitions; and

* Secondly, we can no longer assume that we understand a technological field so well that we can sit down at the start of a project and define a durable `user requirement'.

I understand that you will be exploring these issues among others over the next two days. I think you will find that the implications of these challenges are yet to be fully understood.

One implication that is clear is that defence must modify its traditional approaches to force development and acquisition.

Failure to do so would eventually leave us with dated military systems and a fragmented Australian industry base.

In other words, Defence and industry in Australia must now look to new ways of doing business if we are to develop a viable and dynamic partnership past the year 2000.

A Sustainable Defence Industry

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

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

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.

Out of the total $10 billion Defence budget, our investment expenditure on major capital equipment amounted 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. This expenditure is spread over many industry sectors, notably Information Technology, Electronics and Communications; Ship Construction and Repair; Vehicles; Aerospace; and Munitions.

A Proposed Agenda

During the course of this seminar you will hear from a range of eminent international and Australian speakers, with wide- ranging experience in both the Government and private sectors. They will talk about changes and challenges, mechanisms and strategies, cultures and policies.

Let me open today's proceedings by presenting some of my views on the major challenges for Defence and industry, and the key areas in which we are making progress and where we must forge ahead.

I want to address three issues in particular, namely:

* Intellectual Property and Defence Procurement;

* The consideration and involvement of Australian industry in Defence acquisition and planning; and

* The involvement of Australia's South- East Asian neighbours in our acquisition process through materiel cooperation.

Intellectual Property and Defence Procurement

We noted in our pre- election policy that foreign ownership of intellectual property was a major problem. Australian control of intellectual property is critical for the ongoing development and support of the ADF and local industry, and indeed the sustainability of the industry as a whole.

The previous Government may have been good at buying hardware, but it was rather careless when it came to the control of the intellectual property.

As I have said before, Australia has spent billions of dollars building the Collins submarines, the Anzac frigates and the Minehunters. However, the intellectual property belongs to the Swedes, the Germans and the Italians respectively.

So much of the IP which underpins our defence capabilities is owned by other nations. This problem is mitigated, provided that Australia can establish appropriate conditions of access to the IP, including its further development.

There is a growing recognition that both Australian owned companies and local subsidiaries of overseas majors need greater autonomy in intellectual property matters if they are able to meet defence demands on a sustainable, commercially viable basis.

This will also be an essential means of increasing Australia's defence exports and materiel cooperation, two key levers for expanding the markets and improving the international competitiveness of Australia's defence industries.

Procurement Rules

One important means of improving our bank of IP in Australia is through securing the commitment of overseas companies to the Australian economy.

A company's commitment to Australia can be demonstrated in a number of ways. The five principles I set out in a speech last year seem to have become known as "Bishop's Procurement Rules". And these rules are particularly relevant to this seminar.

Given your focus on issues such as the relationship between

Australian- based subsidiaries and their overseas parents, and the importance of Australian RD for intellectual property generation, I think I might restate them:

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 guidelines are, of course, quite broad. I would hope that you will explore these issues over the next two days, and I look forward to hearing the results of your deliberations.

Defence Acquisition, Planning and Industry

When I took up the Defence Industry, Science and Personnel portfolio in March 1996, I saw a need for substantive change in at least three major areas of the Government's defence industry policy:

1. We needed to bring Australian industry into the Defence planning process much earlier;

2. We needed to provide industry with much clearer guidance on the types of industrial capabilities which are integral to Australia's future self- reliance; and

3. We needed to break down the artificial barriers which exist between the design, production and through life support phases associated with major defence capabilities.

Indeed, the first two of these issues were spelled out in our pre- election policy Australia's Defence.

The implementation of our proposal to consider industry issues as an integral aspect of all Defence's Major Capability Studies has been a key development.

At the next stage of the acquisition process, we now regularly brief industry on our plans for major capability development prior to the selection of specific options. Sometimes, as for projects like AEWC, this includes the release of industry issues papers which are offered for comment to Australian companies.

This early consideration of industry and related factors means that very few of our major defence projects now proceed without detailed

consideration of through- life support issues.

This is a good start but there is a long way to go. If we are serious about the early consideration of industry issues in force structure planning, then we need to identify and quantify further what we actually mean by industry involvement in the force development process - identify who "industry" is, at what stages we involve them and by what practical measures.

Real progress can also only occur if such processes are matched by better longer term guidance on defence needs of local industry so as to assist industry in planning investment. Here too we are addressing the issue on a number of fronts.

Through its Australian Industry Involvement Program for each major acquisition, Defence is now identifying those capabilities in Australian industry that it considers strategically important. These priorities are expressed through Industry Objectives and address both individual projects and longer- term industry development goals.

Each year a Compendium of these objectives is published to provide industry with an overview of our priorities across all our projects. This is backed up by a wide range of other documentation that Defence releases to industry such as the new unclassified version of the pink book.

Defence Exports and International Materiel Cooperation

Publications, process change and improved guidance are all essential. But in most cases, they focus very much on business activity within Australia.

In an increasingly interdependent global Defence economy, I have been keen to see Defence's interaction with industry taking on an international flavour.

We will only achieve the sustainable industry we require if defence companies are able to diversify into civil and overseas markets.

Defence exports also support Government policy objectives in a number of other obvious ways. Consistent with our strategic and foreign policy aims our Defence industry will receive unprecedented Government support in its export drive. It can also count on my personal commitment: I will help in any way I can, with letters of support, telephone calls, visits or whatever is required, in accordance with our policies on human rights and national security.

One vital and necessary ingredient in improving our exports from their low base is for companies to take a Team Australia approach in the

international market. This includes active participation from

Australian- based foreign firms in Australian stands at international trade shows. This would of course be in accord with our procurement principle number 5, i.e. demonstrated independence of action.

International materiel cooperation is a good avenue for Australian companies wanting to become more involved in exports and the creation of intellectual property. Such cooperation can occur in two forms: joint development projects and joint acquisition projects.

Joint development projects occur primarily with our traditional Allies.

One key issue to be examined by this seminar is the use of Defence- led collaborative development projects.

In addition to the benefits they offer to industry in terms of IP generation and technology transfer, these projects can lead to lower development costs, greater operational efficiency and interoperability, as well as stronger international defence relationships.

The ANZAC frigate program with New Zealand and the Nulka missile decoy system with the US and Canada are recent examples.

A good question for you to look at is: Should we do more of these projects and, if so, how, where and with whom?

The second form of cooperation I mentioned was joint procurement projects, where two nations combine their purchases to realise economies of scale.

This form of cooperation can be a feature of relations with our regional neighbours.

The first thing to remember is that we cannot expect countries in the Region and elsewhere to accept any fewer benefits for their defence industry than we seek for our own. So the key challenge is to identify mutually beneficial cooperative ventures.

These ventures can and should take place across the entire process of systems development and through- life support, including cooperation in acquisition, logistics and in- service support.

Whilst in the past our collaborative efforts have focused primarily on our traditional partners, I believe emphasis on joint procurement with our nearer neighbours has merit. We have a number of defence cooperation agreements in the region with Malaysia, the Philippines, Thailand, Singapore and Indonesia.

Naval programs with Malaysia and the Philippines are two possibilities which I discussed with my hosts when I visited those countries last year. Both governments expressed considerable interest in increasing the scope of cooperation with Australia.

One way of progressing our relationships is through seminars such as the one currently taking place in Manila, which resulted from my visit to the Philippines last year. This seminar is addressing Australia's force structure and capital equipment acquisition processes and its applicability to the AFP Modernisation program.

Through such seminars, we also identify the opportunities by Australian industry to involve themselves as early as possible in regional force development planning.

Notwithstanding this growing regional focus, as we look to increase our involvement in materiel cooperation, Australia is particularly interested to learn more about the trend towards multi- national cooperation and consortia in the Northern Hemisphere.

The Way Ahead

In the coming decade, the relationship between Defence and industry in Australia will be influenced by competition on two fronts:

. the need to maintain competition as an essential element of our push for a sustainable defence industry; and

. competition resulting from the massive downsizing of defence industries in Europe and the United States.

This down sizing is also leading to intense competition for export markets. This is being felt particularly in Asia, where many defence budgets are growing.

Such competition poses significant challenges for Australia. As both Defence and industry look to realise greater efficiencies and find better ways of doing business, we must closely monitor overseas approaches to development and acquisition.

More than that, we must be prepared to adopt or, more specifically, to adapt measures that would improve Australian procurement practices.

Of course, we must recognise that Australia is different from other nations in terms of our size, our industrial and RD capabilities, our security environment, and our legislative and institutional frameworks. But we are a stable, advanced nation with a well- educated workforce and as such an attractive place to serve as a regional hub for foreign firms wanting to do business in the region.

Let us not forget that world's best practice means just that. Just because something is being done overseas does not mean it is better. For example US procurement reforms are actually moving towards the Australian system, and away from intrusive, legalistic and high- cost purchasing regimes.

I also acknowledge that, compared to the private sector, defence agencies have to cope with purchases that are among the largest and most complex imaginable.

However, that is no excuse for poor performance. We said in our policy before the election that we would ensure that the Department develops better project management skills and no doubt the Defence Efficiency Review will address this point.

In opening the seminar let me say that the next two days provide us with a series of opportunities.

Opportunities to learn from others' experiences, opportunities to consider our approach in the global context, and opportunities to explore new ways of doing business. While we have made some progress in the last year there is still a long way to go.

I wish you a successful seminar I look forward to considering any innovative outcomes.