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Targeting the Dfence industry skills crisis: speech to the Defence Procurement to the ADM Skills Conference.



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THE HON. GREG COMBET MP Parliamentary Secretary for Defence Procurement

www.defence.gov.au

Monday, 8 September 2008 080908

SPEECH BY THE PARLIAMENTARY SECRETARY FOR DEFENCE PROCUREMENT TO THE ADM SKILLS CONFERENCE:

TARGETING THE DEFENCE INDUSTRY SKILLS CRISIS

Adelaide, 8 September 2008

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SPEAKER: The Hon. Greg Combet MP

Thank you very much for inviting me to give the keynote address at your conference.

I was appointed Parliamentary Secretary for Defence Procurement 9 months ago with the specific duties of managing projects of concern (which are over budget and/or behind schedule), overseeing current and future projects,

reforming the DMO and developing skills and industry policy.

I will obviously be focusing on the last task in this speech, but my approach to skills policy has been informed by my involvement in remediating projects of concern and overseeing current and future procurements.

The important message about skills is that if we do not tackle the skills shortage we will not be able to deliver all current projects in a timely way, and the efficient completion of future projects will also be endangered.

Quantum of the Problem

Some of you would have heard me discuss the skills challenge previously. However this address gives me an opportunity to go into some detail about the size of the problem. In my address to the National Press Club last week I announced that on current projections we need to introduce nearly 18,000 new workers into the industry over the next decade. This is just to maintain current levels of local industry content.

It is currently estimated that the defence industry employs 21,300 personnel. This is broken down into 8,600 engineers or other professionals and the remaining 12,700 are tradespeople and production workers. There are a further 10,400 defence industry personnel indirectly employed within Small to Medium Enterprises (SMEs).

Over the last five years, the sector has grown from 19,500 personnel to 21,300. This represents an average growth rate of 2.2% per annum over the past five years. Industry should be congratulated for this achievement;

however there will be a challenge over the next decade.

The DMO estimates that by 2018/19 the core industry workforce will need to number approximately 27,500. However while the workforce only needs net growth of around 6,000, current attrition is running at 6% so the vast majority of the new workforce is required just to replace workers leaving the industry. These assessments are based on a continuation of the recent average productivity growth rate of just less than 1 per cent.

One particular aspect of the skills crisis that I’d like to highlight is the shortage of engineers. As a trained engineer this is very close to my heart.

Unfortunately, more engineers in Australia are leaving the workforce than are joining it. New research by Engineers Australia (EA) shows the number of working engineers in Australia has dropped by about 6,500, more than 2.5 per cent, between 2001 and 2006.

The body representing engineers in Australia predicts 70,000 engineers will retire by 2011. Research from EA in April this year showed the number of engineering graduates was failing to rise with the boom in engineering construction in Australia.

In 1994 there were about 26 engineering graduates per $30 million in constant dollars of engineering construction. The number of graduates has decreased to just 18 per $30 million in 2005.

An Engineers shortage is just one aspect of the much larger shortage in the defence industry. So there is a challenge out there, and that is even before we acknowledge that the national market for skilled labour is very tight and for a lot of the skills we are in direct competition with the mining industry.

Broader Labor Government Skills Agenda

The very tight labour market throughout Australia we are now experiencing is what makes attracting an average of nearly 1,800 workers per year into the defence industry difficult. If there was more labour in the market generally it would be easier to attract people to defence.

The Government recognises therefore that one way to help resolve the crisis in the defence industry is to lift the general supply of skilled workers in the economy.

It was a central theme of our election manifesto and I was particularly proud of Labor’s $19.3 billion commitment to education and training in the last budget.

Key initiatives include:

• $2.4 billion over the next five years on early childhood initiatives. • $1.7 billion on improving infrastructure in schools. • $577 million to improve literacy and numeracy outcomes. • $1.2 billion Digital Education Revolution • $1.8 billion to strengthen Australian universities. This will result in the doubling of undergraduate scholarships to 88,000 and more than double the number of postgraduate scholarships to 10,000. • $2.5 billion over the next decade to establish Trade Training Centres in secondary schools. • $1.9 billion over the next five years to fund up to 630,000 new training places targeted at current skills shortages. • $11 billion Education Innovation Fund.

These are all general initiatives that are helping to address the skills crisis following the years of inaction we had on this issue from the previous Government.

They will help relieve some of the pressure on the defence industry, but we also recognise that the defence industry faces unique challenges in attracting, training and retaining skilled workers.

Implications if we do nothing

What will be the implications if we do nothing on this front? Well we are beginning to see it now. Last year industry needed nearly 1,700 skilled workers and only added 650. This led to industry under-performance and is one of the reasons why the Government had to reprogram $1.066 billion of defence acquisitions.

We are seeing this in some of the problem projects where overstretched companies are diverting skilled personnel from one project to remediate a project going wrong.

Let me make it also clear that if we do not meet this challenge and cost and schedule risk increases, the pressure to procure more acquisitions overseas will increase. If we are to maintain a significant defence industry and optimise Australian industry involvement to support ADF equipment acquisition and sustainment, we must address these skill issues.

Some may answer, so what!

They would argue that we can continue to acquire more and more equipment off shore. However, it should be noted that large portions of the global defence industry are severely overstretched. In most developed nations, the sort of skills the defence industry needs are in very high demand.

The second and more important reason why we should worry about the skills crisis is that over 80 per cent of sustainment activity is undertaken by local industry and this is unlikely to decline significantly over the next decade. A decline in industry capacity around sustainment can not be readily filled by offshore suppliers and thus the end result of an inability to meet the skills challenge is a decline in capabilities available to the ADF. We have no choice on this; we can not allow this to occur. Maximising the capabilities of the ADF is our highest duty.

SADI Failure

The last government failed the skills challenge. In the lead up to the 2004 election, John Howard announced the establishment of the Skilling Australian Defence Industry (SADI) program. As was typical of the last government, the focus was on headlines rather than actually achieving the desired outcome. This program was rushed out and was poorly constructed. The result being that in the initial years of operation the program was significantly underspent.

Since coming to government we have worked with the DMO and Industry to make the SADI program more effective. The SADI program does fulfil some valuable functions. It has been very successful at delivering upskilling opportunities. The 50th SADI agreement was recently signed, meaning that there has been a total commitment of $117 million to additional training in the defence industry. As part of this, Government has committed over $30 million and this will deliver over 10,000 upskilling opportunities.

However, SADI has failed to significantly grow the defence skills pool. That is why we are examining ways to improve and expand the operation of SADI. These reforms will be targeted at three areas: æ Growing the supply of labour; æ Creating and enabling work pathways by improving access to training; and æ Enhancing skills to grow defence industry capability.

In 2007 a Defence and Industry Joint Training Task Force was formed. It delivered a report in late 2007 that the previous Government failed to act on. It had representatives from a wide cross section of industry, relevant parts of the Department of Defence and other key stakeholders.

The JTTF report highlighted the nature of the challenge and proposed 4 key strategies:

1. Expanding existing training initiatives; 2. Taking better advantage of under utilised or untapped sources of labour;

3. Improving employee movement; and 4. Branding the Australian defence sector

Unlike the previous Government, we recognise the significance of the challenge and are actively considering the proposals advocated by the Joint Training Task Force in the context of the White Paper.

Industry Responsibility

Government clearly has a role in meeting this challenge, but the onus must reside with the defence industry. At the end of the day, individual companies must invest in training - I hear the occasional complaint from industry that pulling workers out of their normal duties to undertake training is a burden in terms of lost productivity.

I instead urge business to think of it as a key investment in the future capabilities of their business. It is vital to increasing industry capabilities and increasing the chance of winning future defence work.

This skills challenge must be met across the entire spectrum of firm size in the industry. On average, SMEs do not undertake anywhere near the level of training that is undertaken by larger companies. According to the Australian Bureau of Statistics 98 per cent of companies employing more than 100 workers conduct structured training, whereas for small business it is only 39 per cent.

There are a number of reasons for that, for example cost of training, access to training packages and providers and availability of staff etcetera. However, industry must lift its performance on this issue. Our policy approach in this area will take into account the unique challenges SMEs in the defence industry face. In the end, government will assist, but industry must invest.

White Paper Focus

As I mentioned a moment ago the skills challenge is being considered in the White Paper Companion Reviews. For the first time in a generation we have an opportunity to align industry and skills policy in the overall strategy for defence in a White Paper. We had industry policy statements in 1998 and 2007 positioned in between a 2000 White Paper that devoted a total of 9 pages to industry issues. While space constraints will always prevent a truly detailed analysis of industry issues being presented in the public White Paper it is odd that the previous White Paper did not publish some sort of guidance to industry at roughly the same time.

The new White Paper will evaluate the strategic challenges facing Australia over the next 22 years and it will develop the appropriate force structure. It will determine the 2009/19 Defence Capability Plan and this will guide capital acquisition and sustainment. This will be the real determinant of what industry capacity we need to have.

To a significant degree industry and skills policy will be developed as a result of the analysis and decisions made in the White Paper. This does not necessarily mean that all announcements need to be delayed until the White Paper, but the analysis of Australian defence industry capacity conducted as part of the White Paper process should be included in the policy formulation process.

Productivity

Part of the industry policy considerations involve the addition of a further foundation for the policy - and that is the promotion of defence industry productivity. This is vital if we are to supply the capabilities that the ADF require and maintain a sustainable defence industry.

Lifting defence industry productivity will also relieve some of the skills pressure. The impact of improved productivity on industry capability is also important. Greater productivity will mean we can produce more with less,

reducing cost to Government of acquisition and sustainment. It will also increase the competitiveness of Australian industry, helping it compete against imports and win entry into global supply chains.

Defence productivity initiatives were neglected under the previous government, consistent with their broader theme of productivity neglect. In contrast, boosting productivity is one of the central themes of the Rudd Labor Government.

Earlier this year, the Prime Minister stated that in a decade’s time, Australia should aim at realising productivity growth rates that not only keep pace with, but exceed, those of our principal competitors in the OECD. This means implementing a national program of action on productivity growth.

The Government is implementing a series of election commitments designed to boost productivity in the wider economy. In addition to the education revolution, one of the most important initiatives is the $200 million Enterprise Connect Network which will help businesses: æ Benchmark their business process and performance against best practice æ find and adapt the latest research and technology and get help in solving identified problems; and æ cut through red tape to identify sources of government support for their innovative activities.

These general initiatives will assist in lifting defence industry productivity. However, we recognise that the defence industry faces unique challenges that threaten competitiveness and inhibit productivity growth. Some obvious challenges include small production runs, the need for higher quality and the security requirements.

A key issue for defence industry SMEs is their ability to access the latest production processes and technology. This is a neglected part of the

innovative process with less than half of the defence companies surveyed in a 2004 paper planning to introduce new production processes.

This failure to continually benchmark and improve production performance has a huge impact on the competitiveness and productivity of businesses. I understand that many defence primes complain that they deal with SME subcontractors who have a great product, but have cash flow problems or have antiquated production methods. While some mentoring occurs, defence primes are more likely to use this as an excuse to reduce their commercial interactions with SMEs.

This is an area where government can help. It’s known as the ‘8th day problem’, that is improving financial management and scouring industry for the latest production processes and technology is something SME owners would only be able to do if they had 8 days in a week. Well Government can’t grant you an 8th day, but we can implement policies that provide one stop shops for these sorts of services.

The national system of Enterprise Connect and Manufacturing Network centres is an excellent start. As is the $42 million Small Business Advisory Service, however more can and should be done to address the unique challenges the defence industry faces, and this is also on our agenda.

Procurement Reform

I’d like to conclude with some comments about the reform of procurement that is under consideration by Mr David Mortimer.

At the Press Club last week I identified a number of areas of interest to the Government - most importantly the need for greater commercial disciplind in procurement and sustainment.

Another issue that has been canvassed in the context of procurement reform - and that I know is of interest ot many of you - is whether the DMO should become an executive agency. For those of you with long memories let me make it clear that an executive agency is not a Department of Supply and we will not be returning to that concept. An executive agency would mean that the DMO remains in the Defence portfolio but that it reports and is accountable

directly to the Defence Minister, rather than through the Department. This was recommended by the last review of defence procurement undertaken in 2003.

The 2003 Kinnaird Review argued that an executive agency would achieve greater clarity of responsibilities and accountabilities between the DMO and Defence, assist the recruitment of people with commercial skills, and help foster a more independent and business like culture.

Mr Mortimer will be considering this issue. I have not approached my role with any pre-conceived view as it is the outcomes in procurement rather than the institutional structure of the DMO that is important.

However, I do believe that if it can be shown that an executive agency will deliver greater transparency and accountability, as well as better performance in terms of cost and schedule on major procurement projects, we have the responsibility to consider such an approach. Performance against a soundly constructed budget for major acquisitions will be one of the Government’s considerations.

One of the reasons that the 2003 recommendation to make the DMO an executive agency was not acted upon involved apprehension that it may make the DMO, and in particular its role in sustainment, less responsive to the needs of the ADF.

These remain valid concerns, and I want to make it very clear today that the Defence Minister and I would not support any changes that diminish the authority of the Chief of the Defence Force and the Service Chiefs over sustainment or rapid acquisitions. As I highlighted earlier these are very important aspects of the DMO’s work supporting ADF operations and it is important that the ADF leadership retains strong influence over sustainment of defence equipment.

I will therefore await Mr Mortimer’s conclusion in regards to institutional structures that need to be put in place to achieve the best results for the ADF and Australian taxpayers.

Conclusion

Thank you for this opportunity to discuss these matters and I’m happy to answer questions.

Media contacts: Rod Hilton (Greg Combet): 02 6277 4771 or 0458 276 619 Defence Media Liaison: 02 6265 3343 or 0408 498 664