Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Government Clothing and Ordnance Factories - Senate Select Committee - Report - The future of Ordnance Factory Bendigo, together with transcript of evidence (2 vols)


Download PDF Download PDF

The Parliament of the Commonwealth of Australia

SENATE SELECT C O M M ITT E E ON TH E G O VERN M EN T C LO TH IN G A ND ORDNANCE FACTORIES

The future of Ordnance Factory Bendigo

March 1982

Brought up and

ordered to he p rin te d 9 M arch I9N2

Parliamentary Paper No. 49/1982

τ

Jw AUSTRALIA./^ -^>>>^<<<<<^

Senate Select Committee on the Government Clothing and Ordnance Factories

The future of Ordnance Factory Bendigo

L

SENATE SELECT COMMITTEE ON THE GOVERNMENT CLOTHING

AND ORDNANCE FACTORIES

THE FUTURE OF ORDNANCE FACTORY BENDIGO

MARCH 1982

Australian Government Publishing Service Canberra 1982

©Commonwealth of Australia

ISBN 0 644 01648 5

Printed by C.J Canberra Thompson, Commonwealth Government Printer,

Members of the Committee

Senator J.R. Senator J.N. Senator N .A . Senator J.R.

Martyr (Western Australia), Chairman Button (Victoria) Crichton-Browne (Western Australia) Siddons (Victoria)

Secretary

R.J. Diamond The Senate Parliament House Canberra

(Telephone: 062-72 6712)

CONTENTS

Page

PART A FACTUAL MATTERS ARISING FROM THE EVIDENCE IN RESPECT OF WHICH THE COMMITTEE IS IN GENERAL AGREEMENT

Chapter 1 Introduction 1

Background to the inquiry 1

Work of the Committee 2

OFB - background 3

Chapter 2 OFB - the issues 7

Chapter 3 Defence issues 9

Maintenance of production capability 11

Factors influencing option 12

Sale as a 'going concern' 14

Argument against the sale 17

Rationalisation and/or closure 20

Arguments against rationalisation 22

Retention in government control 23

Chapter 4 Commercial considerations 33

Economic performance of OFB 33

Consultant's report 37

Background to DMMR rate 38

Maintenance of production capability 40

Commercial work undertaken at OFB 42

Nature of commercial work undertaken 43

Legal considerations regarding commercial work 45

Chapter 5 Social implications 49

Sale as a 'going concern' 49

Employment (partial defence capacity) 51

Economic impact (total sale) 52

Economic impact (partial defence capacity) Rationalisation and/or closure 55

Apprentices 96

Skill base for Bendigo sub-region 58

Economic impact 58

Social impact 61

v

Page

PART B RECOMMENDATIONS 67

Chapter 6 Findings, conclusions and recommendations 67

PART C DISSENTING REPORTS 75

Senator Button 75

Senator Siddons 93

Appendixes

Appendix I What is ordnance? 129

Appendix II List of witnesses who appeared before the Committee 131

Appendix III Submissions presented to the Committee 133

Appendix IV Report to the Committee by the Committee Adviser Mr N.R. Stucley 135

Appendix V Joint Committee on Foreign Affairs and Defence - Conclusions and recommendations in relation to the ordnance/munitions industry

145

vi

Terms of reference

On 23 September 1981 the Senate resolved that a Select Committee be established to report ' on the future of the Government Clothing Factory at Coburg and the Ordnance Factory at Bendigo'.

The resolution which established the Committee and its powers read as follows:

'GOVERNMENT CLOTHING AND ORDNANCE FACTORIES - SELECT COMMITTEE - APPOINTMENT: Senator Grimes, at the request of the leader of the Opposition in the Senate (Senator Button) and pursuant to Notice of Motion not objected to

as a Formal Motion, moved -(1) That the Select Committee, established by Resolution of the Senate, on the future of the Government Clothing Factory at

Coburg and the Ordnance Factory at

Bendigo, be known as the Select Committee on the Government Clothing and Ordnance Factories .

(2) That the Committee consist of four

Senators, as follows:

(a) two to be nominated by the Leader of the Government in the Senate;

(b) one to be nominated by the Leader of the Opposition in the Senate; and

(c) one to be nominated by the Leader of the Australian Democrats.

(3) That the Committee proceed to the

despatch of business notwithstanding that all members have not been duly nominated and apointed and notwithstanding any vacancy.

(4) That the Chairman of the Committee be appointed by and from the members of the Committee.

(5) That the Chairman of the Committee may, from time to time, appoint another member of the Committee to be the Deputy-

Chairman of the Committee, and that the member so appointed act as Chairman of the Committee at any time when there is no Chairman or the Chairman is not

present at a meeting of the Committee.

vii

(6) That, in the event of an equality of

voting, the Chairman, or the Deputy- Chairman when acting as Chairman, have a casting vote.

(7) That two members of the Committee be

necessary to constitute a meeting of the Committee for the exercise of its powers.

(8) That the Committee have power to send for and examine persons, papers and records, to move from place to place, to sit in

public or in private, notwithstanding any prorogation of the Parliament or

dissolution of the House of

Representatives, and have leave to report from time to time its proceedings and the evidence taken and such interim

recommendations it may deem fit.

(9) That the Committee be provided with all necessary staff, facilities and resources and be empowered to appoint persons with specialist knowledge for the purposes of the Committee with the approval of the President.

(10) That the Committee be empowered to print from day to day such papers and evidence as may be ordered by it, and a daily

Hansard be published of such proceedings as take place in public.

(11) That, except where the Committee by vote otherwise decides, its hearing of

evidence be open to the public.

(12) That the Committee report to the Senate by the first sitting day in November 1981 on the future of the Ordnance Factory at Bendigo, and as soon as possible on the

future of the Government Clothing Factory at Coburg.

(13) That, if the Senate be not sitting when the Committee has completed its report, the Committee may send its report to the President of the Senate or, if the

President is not available, to the

Deputy-President, who is authorised to give directions for its printing and circulation and , in such event, the

President or Deputy-President shall lay the report upon the Table at the next

sitting of the Senate.

viii

(14) That the foregoing provisions of this Resolution, so far as they are

inconsistent with the Standing Orders, have effect notwithstanding aaything contained in the Standing Orders.'1

Membership of the Committee

The Committee's membership was contained in the following resolution of the Senate dated 24 September 1981:

'22 SELECT COMMITTEES - APPOINTMENT OF

MEMBERS: The President informed the Senate that he had received letters from the Leader of the Government in the Senate, the Leader of the Opposition in the Senate, and the Acting

Leader of the Australian Democrats nominating Senators to be members of the Select

Committees on the Government Clothing and Ordnance Factories, South West Tasmania, and Private Hospitals and Nursing Homes.

The Minister for Aboriginal Affairs (Senator Baume) , by leave, moved - That, the Senators indicated, having been duly nominated in accordance with the provisions of the

Resolutions passed on 23 September 1981 and 24 September 1981 be appointed members of the respective committees as follows -The Government Clothing and Ordnance

Factories:

Senators Button, Crichton-Browne, Martyr and Siddons.

South West Tasmania:

Senators Archer, Hill, Missen and Siddons.

Private Hospitals and Nursing Homes:

2

Senator Haines.'

ix

ENDNOTES

1. Journals of the Senate, 23 September 1981, p. 517 2. Journals of the Senate, 24 September 1981, p. 538

x

PART A FACTUAL MATTERS ARISING FROM THE EVIDENCE IN RESPECT OF WHICH THE COMMITTEE IS IN

GENERAL AGREEMENT

CHAPTER 1

INTRODUCTION

Background to the inquiry

1.1 A decision of the Review of Commonwealth Functions was

that the Government proposed to sell as a 'going concern' the

Ordnance Factory at Bendigo (OFB). The rationale for the decision

was that activities of a commercial kind are generally best

performed in the private sector.

1.2 On 26 August 1981 the Senate resolved that:

'That the following matter be referred to the Standing Committee on Finance and Government Operations: The Government's decision to sell the Government Clothing Factory a,t Coburg and

the Ordnance Factory at Bendigo. '

1.3 On 22 September 1981, the Chairman of the Standing

Committee on Finance and Government Operations, Senator P.E. Rae,

informed the Senate that '...the (Finance and Government

Operations) Committee is unable to undertake an inquiry into the

decision at this time because of the pressure of the work load 3

with which we are already faced.'

1.4 Senator Rae further stated that 'To delay a review would

unnecessarily prolong the state of uncertainty in winch all those

people affected by the decisions find themselves. Senator Rae

1

concluded by saying that 1 If the Senate is of the opinion that

the matter should be pursued, then to enable it to be conducted

expeditiously it may wish to consider the establishment of a

small select committee which could report in the near future. 1 ^

Work of the Committee

1-5 The Committee was charged with inquirying into and

reporting on the future of Ordnance Factory, Bendigo, by the

first sitting day in November 1981 and with inquiring into and

reporting on the future of the Government Clothing Factory at

Coburg as soon as possible. The Committee decided to conduct its

inquiry and present its report on Ordnance Factory, Bendigo,

before commencing its inquiry into the Government Clothing Factory at Coburg.

1-6 The Committee placed advertisements in the national

press and in the Bendigo press requesting submissions and

information relating to its inquiry into Ordnance Factory, Bendigo. In all, 24 submissions were received by the Committee.

1·7 The inquiry began with an inspection of the factory and

informal discussions with management and staff on Wednesday 7

October 1981. The Committee subsequently met on eleven other

occasions in public and private session. The Committee received

public evidence from 26 witnesses representing some seven organisations. A list of witnesses is attached at Appendix II of

this report.

1.8 With the considerable substance of the matter and the

need for it to be properly considered, the Committee sought an

extension of time to report to the Senate. On 29 October 1981,

the Senate resolved that the Committee report on the future of

Ordnance Factory, Bendigo, as soon as it possibly could. The

Committee was mindful of the reasons for the short reporting

time, and applied itself to the task of reporting as quickly as

possible.

2

OFB - background

1·9 Before World War II, all ordnance was produced at

Ordnance Factory Maribyrnong (OFM) but with the commencement of

hostilities, the pressure on capacity at OFM grew. Even though

OFM was expanded and orders were placed with private industry, it

was still unable to cope with demand. It was decided to establish an ordnance factory at Bendigo.

1.10 The factory began production of the heavier type of

ordnance in 1942. During the war, the factory was engaged in the

manufacture and reconditioning of 6" and 8" naval guns,

manufacture of 4" gun mountings for merchant ships, torpedo air

vessels and a wide variety of equipment for the Army.

1.11 Immediately after the war, Services orders were

drastically cut, and commercial work was undertaken in line with 1 the Government's policy of assisting in the re-establishment of industry and of fitting ex-servicemen for trained jobs'.®

1.12 The 1950's saw the Australian Defence Forces embark on a

policy of modernising and enlarging. Orders for a number of naval

4.5" gun mountings, turbine gear cases, complete with gearing for

the Battle and Daring class destroyers were placed on the

factory.

1.13 'During the 1960's , the factory undertook considerable

commercial work in the absence of significant orders from the

Services for Ordnance equipment. Commercial orders were accepted

mainly for large and difficult components of a specialised

nature.'^ In July 1960, a Department of Supply Working Party

reported on its investigation on the option of selling OFB,

deciding it was ' ... unlikely to produce a worthwhile result for

the Commonwealth'.

3

1.14 In October 1962, a Department of Supply Board of

Management for Production Sub-committee reported that

although the retention of Bendigo could not be supported on

current service requirements, the factory be retained at least 9 cost to the Defence vo t e . 1 Between 1964 and 1968 , some

modernisation of plant items and machinery occurred at the factory.

1.15 In the 1970's, the reduction in Defence orders

required the factory to actively pursue commercial and offset

work in an attempt to maintain a viable workload.110

1.16 In October 1977, the Joint Committee on Foreign Affairs

and Defence presented a report to the Parliament entitled,

1 Industrial Support for Defence and Allied Matters'. In November

1979, that Committee presented a further report entitled

'Australia's Defence Procurement'. A summary of the findings of

these reports in relation to the ordnance/munitions industry is set out in Appendix V.

1.17 In 1981, Mr D.H. Eltringham, Special Adviser on Defence

Production, Department of Industry and Commerce, made two reports

on the future development of the Australian defence production factories.

1.18 Presently the factory is engaged in a combination of defence and commercial work, with the latter predominant. Its

main strengths are in 'plant fabrication, including very heavy

plate forming and welding, heat treatment to heavy component

size, medium and heavy machining and assembly, specialised deep

hole drilling and open boring, precision gear-cutting over a wide

size range, sheetmetal component production, ammunition links and

cartridge clips, metallurgical and chemical laboratories (ΝΑΤΑ

Approved for mechanical testing) and apprentice training facility.'12

4

ENDNOTES

1. House of Representatives Hansard, 30 April 1981, p. 1831.

2. Journals of the Senate, 26 August 1981, p. 457.

3. Senate Hansard, 22 September 1981, p. 853.

4. ibid.

5. ibid, pp. 853-854.

6. Department of Industry and Commerce submission, p . 1.

7. ibid, p. 2

8. ibid, p. 3

9. ibid.

10. ibid, p. 2

11. 1 Industrial Support for Defence and Allied Matters' Joint Committee on Foreign Affairs and Defence, Canberra, October 1977. 'Australia's Defence Procurement' Joint Committee on Foreign Affairs and Defence, Canberra, November 1979.

12. Committee document.

5

: :

CHAPTER 2

OFB - THE ISSUES

2.1 OFB has operated as a government establishment since it

began production in 1942.

2.2 However, since the war years, the factory has not

received sufficient defence orders to maintain production at a

viable level. To enable the factory to maintain production at

approximately 50% capacity, it has been necessary for OFB to

tender for commercial work and indeed commercial work now makes

up about half the factory's production.

2.3 As set out in paragraphs 1.13-1.14, studies had been

undertaken of this problem and various recommendations made.

However, despite this fact, OFB remained in government control,

with no real attempt being made to arrive at a final solution to

the problem.

2.4 One of the background issues in the mind of the

Committee was the question of the need to maintain an industrial

capability of the type maintained at OFB and canvassed in the Joint Foreign Affairs and Defence reports. The findings of that

Committee in relation to the ordnance/munitions industry are

attached at Appendix V of this report.

2.5 The fundamental issue that concerns the Committee is

whether OFB, as presently operated, is fulfilling the need

mentioned above. In order to determine this, the Committee

identified the three main areas of concern in relation to OFB.

These were the defence, commercial and social issues.

7

2.6 As a defence establishment, albeit run by the Department

of Industry and Commerce, an area of prime concern to the

Committee was the effect the sale of OFB would have on

Australia's ability to be self reliant in the provision of heavy

ordnance given the inability of overseas manufacturers to

maintain supply in a conflict situation. Chapter 3 sets out the defence issues.

2.7 The Committee examined the commercial aspect of OFB1 s

operations in order to determine the cost of OFB, as presently

run, to the Australian taxpayer. Chapter 4 sets out the

commercial issues.

2.8 Chapter 5 examines the possible socio/economic effects

on the people of Bendigo given the options set out in paragraph

2.9 below.

2.9 In order to consider the above issues, the Committee

examined the evidence in terms of the options available to OFB. These are:

1. Sale as a 'going concern';

2. Sale as a ' going concern', maintaining partial defence capacity;

3. Rationalisation and/or closure; and

4. Retention in government control.

8

CHAPTER 3

DEFENCE ISSUES

3.1 The fact that OFB's capacity to produce heavy ordnance

is greatly in excess of current defence requirements is

undeniable. What has to be assessed however is whether the cost

of maintaining the unused capacity is justified. In addressing

this issue the Special Adviser on Defence production, Mr D.H.

Eltringham, made the following comment:

'... that to establish and maintain in

Australia a capability in the widest possible range of essential defence products is a more cost effective and strategically sensible use of limited defence industry funds than to

increase capacity in any one capability above the functional minimum^ by it in peacetime towards wartime levels . 1

3.2 He adds that:

'This is a significant change in the approach to the defence production factories in that it reduces the emphasis on maintaining capacities which were believed necessary for war and

increases the range of capabilities. It is consistent with the "core force" concept of the Armed Services, (usually understood to be a force that is modest in size, well equipped

and mobile; that is intended to cope with

contingencies that might arise at short

notice; and that forms the basis for expansion in the event that larger forces are needed) . 1

3.3 This report is the latest in many reports over the past

two decades which have reviewed the capacity of the ordnance

factories vis-a-vis the workload available to utilize the

capacity. The reviews have generally concluded that there is a

continuing defence need for this type of capability but that the

9

capacity which existed in the two factories was in excess of any

likely defence peacetime requirements. A summary of the major

reviews is set out in the following paragraphs.

3.4 In July 1960, a Department of Supply Working Party

examined the option of selling OFB, but concluded that it was

unlikely to produce a worthwhile result for the Commonwealth

because of the following disadvantages to the buyer:

(i) the book value of the assets;

(ii) the limited number of firms large enough to absorb the

establishment;

(iii) the location and its possible transport and staffing

problems; and

(iv) the need to maintain a defence capability in those

production areas not duplicated elsewhere in Australia.

3.5 In October 1962, the Board of Management for Production

Sub-committee of the Department of Supply recommended that,

although the retention of Bendigo could not be supported on

current service requirements, the factory be retained at least

cost to the Defence vote.

3.6 In December 1973, the Munitions Manufacturing Policy

Review proposed to concentrate ordnance work at OFB by transfers

from OFM, but retaining at Mari byrnong heavy forging and

projectile forging activities. The Department of Industry and

Commerce suggested that a significant reason for proposing to

concentrate facilities in Bendigo was the regional development

policy of the government of the day.

3.7 The reviews have shown that there has been approximately

a 50% excess to capacity since at least 1960. In the past five

10

years, the defence workload has only accounted for between 32% and 47% of the total workload.

Maintenance of Production Capability

3.8 It was put to the Committee that an essential aspect of

the operation of all the munitions factories was that they had an

inbuilt capacity to quickly incease production in the event of

either a conflict or an increase in defence orders for some other reason.

3.9 The cost of maintaining that capacity is very high in

OFB's case. As set out in paragraphs 4.27-4.31 a subsidy is paid

to OFB to compensate for the cost of this underutilization of

capacity. This is a charge to the Department of Defence under the

appropriation item 1 Maintenance of Production Capability'.

3.10 Underutilization of available capacity has occurred as a

result of a lack of defence orders being placed in Australia and

possible restrictions in seeking commercial work.

3.11 The problems of lack of defence orders was canvassed in

the Joint Committee on Foreign Affairs and Defence report into

Industrial Support for Defence Needs and Allied Matters (October

1977) . This Committee criticized the inadequate workload

currently being allocated to the Australian munitions industry.

They recommended '... that critical workload levels should be

established for each of the factories and that the Defence

purchasing system should be instructed that, wherever possible,

munitions items must be purchased from local factories unless

there are clear and overwhelming national interest reasons for

overseas purchase . 1 ^

3.12 OFB has sought to reduce the amount of its subsidy by

actively seeking more commercial work, but according to evidence

given to the Committee their success in this field has been

limited by:

11

(i) perceived legal inhibitions;

(ii) staff ceilings;

(iii) their tendering success rate.

3.13 The perceived legal problems in relation to commercial

work are discussed in greater detail in paragraphs 4.39-4.43.

3.14 In the opinion of Mr B.E. McMahon, Member, Association

of Professional Engineers, Australia, a factory maintained as a

defence establishment must retain some reserve capacity for any

defence work that may arise. He stated: '... we would be severely

embarrassed in my opinion if we had to turn defence work away or

extend defence deliveries because of commercial work we had undertaken. '^

3.15 As outlined in paragraph 2.9 above the Committee has

examined the issues in terms of the possible options available. These are:

1. Sale as a ' going concern';

2. Sale as a 'going concern', maintaining partial defence

capacity;

3. Rationalisation and/or closure; and

4. Retain in government control.

Factors influencing option

3.16 Mr Eltringham, in an interim report to the Secretary of

the Department of Industry and Commerce, outlined the factors

which influence the options that are available. They include:

12

' (i) The need for physical security of

warlike and dangerous items the

cost of providing physical security; and the political consequences of

government delegating control and responsibility to private enterprise.

(ii) The need for security of knowledge, techniques and other classified

information; and the cost of providing intellectual security.

(iii) The cost of acquisition of equipment, training of staff and related

investment; the need for continuity of knowledge and exercise of skills; and the financial return on such investment in physical and human capital which, for defence orders, is sometimes low or negative over long periods.

(v) The possible level of orders in

relation to the capacity of the

investment ...

(vi) The problems of having a single

customer, Defence, with uncertain and changing needs, including inflexibility of orders in terms of the precise

nature and quantity of the product and the timing of delivery; ...

(ix) The potential gains from private

enterprise operation including greater cost consciousness and profit

motivation; competitive tendering, leading to lower prices; economies of scale from combined defence and

commercial production; a more

aggressive approach to product

development and marketing; and

a greater flexibility in capital

acquisition, personnel practices, and wages and industrial relations;

(x) The potential additional costs to usual private enterprise operation

including the need for complex

13

planning, procurement, contractual, budgeting and other practices to be compatible with the planning and

procedures of the Defence and Finance Departments; externally dictated product specifications limiting product modification and alternatives and thereby limiting market growth; foreign policy considerations and licensing arrangements limiting overseas sales; and land use, personnel and other

practices unsuited to private

enterprise.

(xi) The empathy of available entrepreneurs for the task including knowledge,

experience and enthusiasm.

(xii) The origin (local or overseas) of the ownership, control and technical

expertise ... of domestic production facilities and the likelihood and

consequences of changes in tho s g

aspects in the event of an emergency.'

Sale as a 'going concern1

3.17 The attitude of the Department of Defence to a sale of

OFB is summed up in the following quote by Mr D.D. Wood, Acting

First Assistant Secretary, Defence Industry and Material Policy

Division, Department of Defence:

'Now the Government has made a decision that it wishes to sell the Bendigo Factory as a

going concern I think the position of the

Department of Defence is that, provided

certain of the defence capabilities of the Factory are protected, in that sale, it can accept that decision.'

However in a sense this view was qualified by the view of Mr J.F.

Vickery, Acting Assistant Secretary, Department of Defence, when

he seated:

1 One thing we should keep in mind is that a lot of the things Bendigo does make are only parts of equipment; the Factory makes very few total equipments. So when you are considering

14

the capability of Bendigo, you have to say, for example; "All right, if Bendigo did not exist, how would that affect us in some sort of a threat situation?" It would mean perhaps

that our capability for making those parts may not be as good as it was. But we would still

be importing lots of others, for example, for ships. Bendigo might make the gun and the

propellor shaft, but there are lots of other parts for that ship which we would have to

import. So there are a few extra things which we would have to import - and it is very

difficult t^D put a measure on that

requirement.1

3.18 Both the Department of Defence and the Department of

Industry and Commerce expect the purchaser to enter into an

agreement with the Commonwealth to meet a range of Defence

requirements under mutually acceptable conditions. The Department

of Defence believes matters covered by the agreement would

include the following:

'(i) the retention of "specified capabilities" for a period to be negotiated;

(ii) an undertaking by the purchaser to satisfy at agreed prices current and future orders which will involve the "specified capabilities";

(iii) arrangements for the completion of all current Defence orders under mutually acceptable price and delivery conditions;

(iv) Commonwealth assurances relating to the placement with the purchaser of orders involving the

"specified capabilities";

(v) quality control arrangements ; . , 8

(vi) maintenance of required security arrangements.

3.19 Defence expects the 'specified capacity' to include the

following:

(i) the overhaul of the 4.5 inch naval gun mountings;

(ii) the manufacture of:

15

(a) gun barrels,

(b) propeller shafts,

(c) links and chargers for small arms ammunition,

(d) 5001b bomb bodies,

(e) GMLS Mk 13 components.

(iii) the manufacture, in conjunction with OFM of the

105mm UK light gun and ammunition announced by

the Minister for Defence on 2 December 1981.

3.20 The Defence Department submission stated that: '...

where the purchaser is willing to retain and utilize particular

items of equipment for defence purposes but does not wish to

purchase such equipment, the Commonwealth's normal practice would

be to negotiate leasing arrangements for those items. Certain

items of equipment provided by Defence for specific defence tasks

(e.g. the propellor shaft lathe) are expected to remain the

property of the Commonwealth and be leased to the purchaser under q a hire/loan agreement.1

3.21 The Departmental submission added that, if the purchaser did not wish to manufacture the particular defence items, the

Commonwealth would retain the equipment and move it to another

location. Although this course would involve considerable cost.

3.22 Whilst the Department of Industry and Commerce was

confident that it could enforce its agreement with the purchaser

regarding the 'specified capacity', the view of the Department of

Defence emerges from the following extract:

'Senator Siddons - A private company could buy that Factory and decide that it was going to

16

I

go broke if it continued to maintain it. There is no way you could force it to keep

operating, as far as I can see.

Mr Wood - This is in the area of concern and

of danger. Certainly we can put a tag on some items of plant. We can keep Commonwealth

ownership of some of them. We do have another Ordnance Factory which has some of these

capabilities. It has not got them all, but it could redevelop some of them if it had to. I refer to the Ordnance Factory at Maribyrnong which has ^ number of the capabilities that are here . 1

Argument against the sale * ( i )

3.23 The defence arguments for retaining OFB forwarded by the

Area Committee and the combined groups of Professional Engineers

and Officers can be summarised under four headings:

(i) the factory is not excess to capacity;

(ii) capacity will be lost;

(iii) capability will be lost; and

(iv) asset stripping will occur.

3.24 The Area Committee and the combined groups of

Professional Engineers and Officers reasons as to why the factory

is not excess to capacity can be found at paragraphs 3.43-3.55.

3.25 The loss of capacity refers to the fears of the two

groups that certain machinery in the factory will be unattractive

to a private operator and that he will sell off that capacity.

The Professional Engineers described the current manufacturing

facilities at the factory under three headings which are

summarised as follows:

17

(i) general machine tools and equipments which are

attractive to private enterprise for general

manufacturing activities;

(ii) specialized machine tools/testing equipment and

instrumentation that is not attractive to private

enterprise because of its low utilization; and

(iii) support facilities such as the Metallurgical and

Metrology Laboratories, Inspection Departments,

Instrument Certification and General Quality

Assurance provisions necessary for defence production.

3.26 In their view the facilities mentioned in points (ii)

and (iii) above could not be justified for general private

enterprise activities and would be scaled down considerably.

3.27 In evidence, the Area Committee pointed to the example

of the recent purchase of a factory in the Bendigo region by

Thompsons-Byron Jackson, who proceeded to rationalise into a

specific field and close many of the support fields required.11

3.28 The other example used to demonstrate that capacity

would be lost if the factory were sold was the former ball

bearing factory at Echuca. This factory was sold to private

enterprise in 1959 and operated for twenty years before overseas

competition forced it to close. Australia now has no capacity to

manufacture ball and roller bearings.

3.29 It was argued that capability would be lost because

(i) skills would be lost at sale;

(ii) skills would be lost through rationalisation; and

18

(iii) skills would be lost through under-utilisation of

machinery.

3.30 In the event of a sale, skills could be lost through

senior personnel taking their skills overseas. As Dr J.R.

Barclay, Assistant Manager, Quality, stated 11 would have to look

at the full range of opportunities. That would include overseas 12 employment.' Also, skills could be lost through professional

staff transferring to other public service jobs not necessarily

involved in ordnance production. Mr F.A. Mu s k , Member,

Association of Professional Engineers, Australia, pointed out,

'... we are public servants. It is reasonable and I believe

people in Canberra have commented that we will be found

employment elsewhere within the Public Service. I submit to you

that we are part of the technology at the Ordnance Factory

Bendigo.'^

3.31 It was further argued that if a private operator was to

rationalise the factory to meet his requirements in the

commercial world, then much of the defence related equipment

would be sold, thus the factory would not only lose the

equipment, but also the skills to operate that equipment.

3.32 Similarly, where machinery is under-utilised, the skill

to operate that machinery would be lost, with the private

operator less concerned with maintaining those skills.

3.33 The fear that asset stripping would occur if the factory

was sold was expressed by most groups giving evidence to the

Committee. The Area Committee pointed out that the present book

value of the factory of $ 15m was considerably less than the

replacement value. Their submission to the Committee stated that

' The replacement value of everything at the Factory starting from

scratch, is estimated by Factory Management to be upward of $200

million.'14 If asset stripping occurred, there would be a loss of

capacity and capability.

19

Rationalisation and/or closure

3.34 As outlined in the submission of the Department of

Industry and Commerce two available options for OFB were:

(i) closure of the factory; and

(ii) progressive wind-down of the factory, with the

view to closure.

3.35 The Department stated that the option of closure was not

practicable in the short term, because of important defence work

in the factory which could not be relocated without significant

disruption to production and cost penalty. However, Mr Wood

stated in evidence to the Committee that:

1A number of the facilities at Bendigo could be shifted, and re-established in other

factories; re-establishing in itself is an expense, and it has the requirement to

re-establish the skills that go with it. If one were asked to do it I do not thirjk^ that they would be insurmountable problems.1

This was supported by the submission from the Department of

Defence which concluded that:

1OFM duplicates some of the capabilities of OFB and could absorb the others not available in private industry if it were decided to

transfer from OFB'.

3.36 The functions presently undertaken at OFB that cannot

easily be relocated are:

(i) Manufacture and Overhaul of Guns and Gun Mounts

In particular, the ' Overhaul of the 4.5 inch mounting is restricted to OFB, the original

20

manufacturer. The building space, height and lifting requirements for this mounting could not currently be met at OFM. However, the 4.5 inch gun is fitted to destroyers, which will

reach the end oJL their life in the late 1980s - early 1990s.'

(iij Ships' Propellor Shafts

1 Defence has just founded a special long bed lathe valued at $ 1.7m to improve OFB's

efficiency in this field. Thej^ is a

continuing need for the capability.'

Mr Wood added 'It is a very big lathe. It has a very big foundation and quite a bit of money has gone into setting up that foundation. That major task would all h^ve to be done again if

the lathe were moved.'

(iii) Gear-making Facilities

'Another area of uniqueness which is not

mentioned there is the gear-making facility at Bendigo. At present the only possible work for that is the follow-on destroyer gearboxes. We have a proposal from Bendigo for that. It is a fairly expensive proposal. The full

manufacture requires some $7m to set up. As I understand it, it could not manufacture the gearboxes in time for the first two of the

follow-on destroyers. It could only

manufacture three gearboxes for later

destroyers , which of course have yet to

receive any government approval and funding. It is one of those instances where we are

caught in the middle, in limbo. It needs

upgrading to do those.'

3.37 Their second alternative, they believe, would need to be

given very serious consideration, with a wind-down period of

approximately five years, which would allow for:

(i) existing orders to be completed;

(ii) specialised plant necessary for defence purposes

to be relocated; and

21

non- (iii) staff to be progressively reduced by replacement or redeployment within the Public

Service.

Argument against rationalisation

3.38 The Professional Engineers and Officers stated in their

submission that the two existing ordnance factories have separate

and differing areas of expertise and therefore cannot be

considered as duplications of each other for the purposes of

rationalisation.

3.39 Their submission points out that OFM does not have all

the capabilities required for the full range of munitions

production. Indeed they argue for rationalisation of OFM to OFB.

The only facilities existing at OFM which are lacking at OFB

would not necessarily require the transfer of this equipment because:

1 (i) the forging plant is obsolescent (World War I vintage) , evidenced by the fact that OFM is

seeking its replacement.

(ii) Comsteel Pty Ltd, Newcastle has a modern, general purpose forging plant ...

(iii) Suitable furnace and heat treatment facilities exist at OFB.

(iv) Projectile manufacture 2 jle n ds its e l f to

rationalisation e l s e w h e r e .'

3.40 The Area Committee's arguments against rationalisation

from OFB to OFM are summarised as f o l l o w s :

(i) defence work demands high skill and dedication

from tradesmen and extensive professional and

technical s u p p o r t . It is claimed that OFM has

problems recruiting staff;

22

(ii) OFM has no experience in heavy ordnance

manufacture;

(iii) OFM has physical problems. The land itself is

reclaimed and whether it is an adequate

foundation for machine tools of high precision is

questioned; and

(iv) consolidation into the metropolitan area must

constitute a strategic weakness in the nation's defence structure. ^

Retain in government control

3.41 The submission of the Department of Industry and

Commerce to the Committee stated that, if the factory was not

sold, then the Department would have to examine the option of

continuing as at present.

3.42 The Department argues that, whilst being the least

disruptive option, continuation does not offer any long term

solution to the problem of excess ordnance capacity, and the

associated problems of providing appropriate work for the factory

and the heavy subsidisation necessary to maintain the workforce.

3.43 The submission from the combined groups of Professional

Engineers and Officers rejects the Government's claim that OFB is

surplus to current defence requirements and that excess ordnance capacity exists. They claim that '... consideration as to whether

Australia is maintaining skills across the broad spectrum of

defence manufacturing was not given in sufficient detail, as ■ 2 3

recommended by previous parliamentary studies. '

3.44 This group and the Area Committee argued that the

factory is fulfilling a vital role in Australia's defence

23

preparedness, and would play an even greater role if Australia's

defence procurement was genuinely directed at increasing local

production, and the Australian Industry Participation (AIP) and

Australian Offset Production (AOP) programmes were actively pursued.

3.45 From the evidence, it appears that the problems in

finding work for the ordnance factories are:

(i) the high cost per unit of equipment; and

(ii) the time span in which to produce the equipment.

3.46 The problem of finding work for the factories is

illustrated by a statement by Mr N.S. Currie, Secretary,

Department of Industry and Commerce: '... as defence equipment

gets more expensive, as our orders get smaller and smaller, there

is a threshold at which it is uneconomical to set up to build

that material in Australia for the numbers that we are able to 24

buy in a rapidly escalating cost situation.'

3.47 Mr T.A. Roberts, Manager, OFB, added to this: '... the

things that Australia want are generally a very small part of an

enormous overseas requirement, so you are adding a small quantity

to a big quantity and it has been to our detriment that it is

much more economically attractive to buy these small quantities , 25 overseas.'

3.48 The Professional Engineers and Officers argue that the

time scale in defence procurement within Australia tends to leave

little or no time for Australian factories to undertake the

extensive work of tooling up for production. They maintained that

the actual manufacturing process only constitutes 5%-10% of the

defence procurement process.

3.49 Mr Roberts supported this view by saying that '... if it

had been possible for Australia to forecast its requirements over

24

longer periods and if it had been possible to have sufficient

lead-in time, there would have been more than adequate work to

keep a very viable group of ordnance factories busy.'2®

3.50 The Professional Engineers and Officers argue that the

decisions to purchase new equipment are invariably made close to

the end of the useful life of the equipment being replaced and

the only option left is to purchase the equipment from

established manufacturers overseas.

3.51 This group and the Area Committee maintain that there is

sufficient potential work in current and future defence projects

to maintain OFB's defence workload at a high level for many years

to come. They believe that the workload to the factory can be

increased through:

(i) actively pursuing AIP/AOP opportunities; and

(ii) streamlining defence procurement procedures.

3.52 AIP/AOP opportunities have been actively pursued by OFB,

with little assistance from Munitions Supply Division, Department

of Industry and Commerce (MSD), the Professional Engineers and

Officers claimed. They stated that the AIP content of workload

had risen from zero in 1975-76 to 15% of the total workload in

1980-81. It is also claimed that, if the AIP/AOP programme was

actively pursued by both the Department of Defence and the

Department of Industry and Commerce, there would be a viable

workload for the factory.

3.53 Both the Department of Industry and Commerce and the

Department of Defence maintained that the type of orders placed

with overseas companies in the medium to heavy ordnance fields

were not the type that gave the Departments much leverage in

encouraging overseas companies to place AIP/AOP work with

Australian companies.

25

3.54 As Senator Siddons stated, the overseas supplier of

that equipment ... is in the magnificent position of being able

to say that the cost of this component of the total package is

some ridiculously low figure. He is also in the magnificent

position of being able to say that he can produce this in such

and such a time - and quote an unrealistically short time - and 27

put these competitive requirements on local production.1

3.55 As was mentioned earlier, the combined groups of

Professional Engineers and Officers stated that the defence

procurement procedure allows only a small proportion of the total

time in the procurement process for tooling up and manufacture.

It was argued that, if more time was allowed to tool up, then

Australian manufacture could compete, thus more goods would be

manufactured in Australia and, more particularly, at O F B . T o

illustrate this point a 'simplified' procurement chart prepared 29 by Mr Eltringham is shown below.

26

Minister approves equipment proposals in context of FYDP

Project included in FYDP

Government approves acquisition of new capabilities

Approve EAS

Minister and Government approval

DSDC DFDC

EAS review

j Contract

| performance | | and customer |

DFSC

Order placed

Staff

requirement

Final contract negotiations

Service

DFDC

Analysis in defence central

Additional industry information

Single service evaluation

Project

development and procurement

Final industry proposals

DORC

Project development

Equipment acquisition strategy

Update information projects not for Year 1 decision

Feasibility studies

Strategic guidance and capability documents

Industry information

Capability summaries

Staff objects Staff targets

I interface I

Simplified equipment procurement process

K e y :

DPI -

DFSC -

DFDC -

FYDP -

DORC -

EAS -

DSDC -

Project brief

Defence Force Structure Committee

Defence Force Development Committee

Five Year Defence Program

Defence Operational Requirements Committee

Equipment Aquisition Strategy

Defence Source Definition Committee

27

3.56 In explanation of the procurement process diagrammed

above, Mr Eltringham made the following points:

1 The chart which presents the procurement process in a little more detail is by no means exhaustive in its treatment of actions and processes leading up to the acquisition of new major equipment, particularly as each project

places its own specific demands on the system. It d o e s , however, provide an overflow in

simplified terms of the procedures involved in the consideration and approval of major

equipment projects. Individual projects will not necessarily proceed through each step nor is the order shown on the chart invariable.

As the chart shows, the Service Capability Summaries are derived from the Strategic Assessment and the Defence Capability

Documents. The Capability Summaries set the framework from which Staff Objectives, Staff Targets and Staff Requirements are developed. These documents are progressively refined through DORC, taking account of appropriate feasibility studies, and information obtained from industry.

A project will enter FYRP [Five Year Rolling Program] considerations through presentation of the project brief (DPI). The chart

illustrates the cyclic nature of the program processes through which annual higher level approval and endorsement of the FYDP by the Defence Committees, the Minister and Cabinet are sought. It is in this annual program

review that the detailed analysis of the

requirement, costs, numbers and all of the many factors which go into the selection of an equipment are considered and reconsidered in detail. It is only after successful

negotiation of this critical path that

machinery to obtain Government approval is initiated.

Once Government approval to proceed with those projects reaching the first (or Budget) year of the FYDP has been obtained, the management and administrative machinery of the Equipment Acquisition Strategy is reviewed by the DSDC and the Project Management and Acquisition Plan updated. The final acquisition phase is

then initiated by the appropriate Chief of

28

Materiel in concert with DIMP [Defence

Industry and Materiel Policy Division]. This will generally involve the soliciting of formal tenders from industry, evaluation of the response by the single service and

recommendation to the DSDC, thence to DFDC, the Minister and the Cabinet. When all

requisite approvals have been obtained the equipment is contracted on behalf of the

Government.

The placement of the order is by no means the end of the acquisition process. Often the task of evaluating and progressing contract

performance and maintaining an efficient and effective customer interface requires

considerable ingenuity and effort. Service Project Directors, working closely with the appropriate Chief of Materiel, DIMP and the Chief of Supply play a major role in taking a project successfully from the " initiation"

stage through the often difficult and complex phases to final delivery.'

29

ENDNOTES

1. Committee document.

2. Committee document.

3. 'Industrial Support for Defence and Allied Matters', Joint Committee on Foreign Affairs and Defence, Canberra, October 1977, p. 63.

4. Evidence, p. 267.

5. Committee document.

6. Evidence, p. 26.

7. Evidence, pp. 69-70.

8. Department of Defence submission, pp. 9-10.

9. ibid, p. 10.

10. Evidence, p. 44.

11. Evidence, p. 276.

12. Evidence, p. 218.

13. Evidence, p. 241.

14. The Area Committee submission p. 28.

15. Evidence, p. 68.

16. Department of Defence submission, p. 11.

17. ibid, p. 4.

18. ibid, p. 5.

19. Evidence, p. 55.

20. Evidence, pp. 56-57.

21. Combined groups of Professional Engineers submission, p. 14. and Officers

22. The Area Committee submission, p. 10.

23. Evidence, p. 236.

24. Evidence, p. 130.

25. Evidence, p. 197.

30

26. Evidence, p. 20 9.

27. Evidence, p. 131.

28. Evidence, pp. 231-232.

29. D.H. Eltringham, 1 Defence Procurement in Australia' Defence Force Journal, May/June 1977.

30. ibid, pp. 35-36.

31

CHAPTER 4

COMMERCIAL CONSIDERATIONS

4.1 The sale of OFB as a going concern will depend on the

factory's commercial viability as perceived by a private buyer.

4.2 The Committee has received evidence from the Department of Industry and Commerce regarding expressions of interest for

O F B , however, due to the confidentiality of the tendering

process, it is not proposed that that aspect be pursued in this

Report.

4.3 The Committee does wish to highlight the economic

performance of OFB and to analyse the reasons for that

performance.

Economic performance of OFB

4.4 The accounting system and pricing policy employed in

relation to OFB and other munitions establishments is not

commercially oriented. The system essentially reflects the

factories' government ownership and accounting in terms of income

and expenditure.

4.5 The fact that OFB is a defence establishment and carries

excess capacity for that reason has led to an accounting system

that is geared more toward subsidy payments for mainaining that

capability than for properly accounting for work that goes

through the factory.

4.6 A result of the pricing policy is that defence work is

charged out at $11.80 per direct manhour - the Defence Munitions

33

Manhour Rate (DMMR) . An explanation of the DMMR is set out in

paragraphs 4.20 - 4.25. It is understood that similar commercialy

operated heavy engineering firms have a charge rate of around $45

- $60 per manhour. Clearly, on this basis alone, it is difficult

to gauge the performance of OFB by an examination of its trading statements.

4.7 Workload through the factory also affects economic

performance. The Department of Industry and Commerce's submission

to the Committee showed the following figures in relation to

direct production hours at OFB:

000 's

1975/76 1976/77 1977/78 1978/79 1989/80 1980/81

Defence 111 79 131 145 105 99

Other Govt 94 36 41 25 28 25

Commercial 147 168 114 137 139 149

TOTAL 352 283 286 307 272 273

4.8 In evidence to the Committee, the Secretary of the

Department of Industry and Commerce, Mr Currie, stated that '...

right now the Ordnance Factory, Bendigo, is at 47 per cent of

normal.'^ In relation to normal capacity, Mr Currie described it

as '... the output from a one-shift normal operation ...' In a

written response to a question by Senator Crichton-Browne in

regard to yearly capacity as against utilisation figures (see

above table), the Department of Industry and Commerce indicated

that a normal one shift capacity at OFB would be 640,000 to

650,000 manhours.

4.9 On this basis, it can be seen that, over the past six

years, OFB has only achieved approximately 50% utilisation. The

cost of OFB under-utilising the factory's capacity and charging

for defence work at the low DMMR of $11.80 is reflected in the

34

Maintenance of Production Capacity (MPC) ' subsidy', which in

effect balances the factory's books. The exact nature of this

'subsidy' is discussed in greater detail at paragraphs 4.26 -4.31. In relation to OFB's economic performance, however, the

Committee points out that the pricing policy - the DMMR - and the

subsidy payment - the MPC - affect each other inversely. The

lower the DMMR, the greater the MPC.

4.10 The result in financial terms of the problems outlined

above has been that OFB operates at a deficit. Appendix 1 to the

submission from the Department of Industry and Commerce shows

that, in the three year period ending 31 May 1981, the deficit was:

$M

1979 1980 1981

Deficit (MPC subsidy) 4.8 4.9 6.0

notional costs 2.4 2.3 2.5

7.2 7.2 8.5

4.11 A private operator of OFB would have to pay many charges

that OFB currently does not. Some of these charges are reflected

in the above figures for notional costs. The following items are

included in OFB's notional costs:

- Audit fees

- Administrative support - Depreciation

- Interest on capital - Superannuation

- Repairs and maintenance - Insurance

- Other expenses.

35

4.12 Not all charges accruing to a private operator are

included in the above list. For example, two highly significant

expenses to a private operator would be company and payroll tax.

4.13 Analysis of OFB's financial statements reveals that, at

31 May 1981, fixed assets based on historical cost were S15.8m. The notional depreciation charge contained in the trading

statement for the period was $ 0.39m. Clearly, if fixed assets

were shown at a depreciated value, the figure would be very low.

4.14 Without a current valuation as to fixed assets, it is

not possible to arrive at any figure in regard to return on

investment. Whilst this has not been a critical consideration

with the factory under government control, it certainly would be if the factory were privately operated.

4.15 The Committee understands that OFB is currently being

valued by an independent firm of valuers. The Committee has not sought details as to the results of the valuation process

however, it is understood that it would have to be on a basis

other than replacement cost.

4.16 As a government enterprise, the operation of OFB has not

been financially successful. However, as indicated above, this

has been the result of the pricing policy and under-utilisation

of facilities. If lower overseas costs of defence procurement are

disregarded the factory could be made financially viable under

either government or private ownership given a greater workload.

If the factory were to be sold, a private operator would need to

bring a substantial workload of his own to OFB to augment

whatever defence work was available. Should the factory remain a

government enterprise, then it would be essential to increase the

defence workload to more fully utilise the factory's resources.

The alternative to more defence work would be more commercial

work. However, as outlined in paragraphs 4.39 - 4.43, the

3 6

Department of Industry and Commerce perceive legal problems in

relation to commercial work undertaken at OFB when it exceeds the amount of defence work.

Consultant's report

4.17 The Committee sought an independant opinion as to the effects of the pricing policy on OFB1s financial operations. The

consultancy firm of Neil R. Stucley and Associates provided the

Committee with information in regard to the following two points:

- establish a true manhour rate at the factory based on

the real costs involved as shown in the financial

statements and other information provided.

- the potential cost to the taxpayer by way of reserve

capacity maintenance subsidy should the factory be sold

to a private operator.

4.18 The consultant's report is attached as Appendix IV. The

main points made were that in order for OFB to break even a

manhour rate of $33.30 per hour would be necessary. In regard to

the potential cost to taxpayers following a sale to a private

operator it was calculated that if 1981/82 estimated defence

manhours were achieved then the subsidy would be $4,920,000.

4.19 The following letter accompanied the consultant's report

to the Committee setting out the main findings:

The Secretary Select Committee on the Government Clothing and Ordnance Factories Parliament House

CANBERRA 2600

Dear Secretary,

This letter is to add comments and opinions to the facts set out in our report.

37

Volume: The factory has not been able to increase its volume to even get near its potential capacity despite a low hourly rate compared to commercial establishments. We are told that staffing ceilings have restricted volume.

Break-Even Chart: The break-even chart in the report contains some assumptions, and is based on 1980/81 figures. A significant change since then has been an increase in the DMMR by 26% for 1981/82.

The chart shows a break-even point for 1980/81 at about 345,000 man hours ($11 m. volume in the chart represents 273,000 man hours). It is possible that vigorous marketing and the removal of staffing ceilings could allow this to be obtained. It is a 26%

increase in volume on 1980/81. Of course, the price increase in the DMMR for 1981/82, a program aimed at fixed cost reduction and increasing productivity, would reduce this break-even point further from 345,000 man hours.

Subsidy: The DMMR is an average of a number of factories. We did not have details of the calculation of the DMMR, or how it varied between factories. It doesn't appear to have achieved its original objective of increased defence work for the factory. We believe, whoever owns the factory, defence work should be sold at a realistic man-hours rate, and that any subsidy for "maintenance of productive capacity" (the tital is a misnomer) be based on calculated fixed costs incurred in retaining plant, machinery and personnel at the factory.

Defence Costs: Even with the subsidy, defence were getting their requirements at an extremely competitive rate in 1980/81, assuming that the factory productivity was high. The "real" hourly rate of $33 illustrates this.

Finally, our thanks to the Committee for entrusting this short assignment to us. As Secretary to the committee, please feel free to ask for further comments or information as necessary. Best wishes to the Committee for a satisfactory conclusion to a difficult and complex task.

Yours sincerely,

NEIL R. STUCLEY

Background to DMMR rate

4.20 The defence munitions manhour rate (DMMR) was introduced

in 1976/77 to all munitions establishments as a result of a

report of the Inter-departmental Committee on Munitions Factories

Workload and Employment Problems.

38

4.21 The DMMR was the rate charged to the Defence Department

for direct worker costs per hour. This rate is very low, as it

takes no account of factory overheads, employer superannuation

contributions etc. The aim of the DMMR rate was to make the

munitions factories competitive with low cost overseas suppliers.

4.22 It is claimed that the DMMR has been successful in

increasing the manhours at the munitions factories. However, Mr

L.J. Shanahan, Assistant Manager, Administration, OFB, stated,

'We believe this system has increased the workload for factories

overall but for Ordnance Factory, Bendigo it has had the least

effect ...'^

4.23 The Department of Industry and Commerce in their

submission to the Committee described the DMMR thus:

1 (xiv) For work performed for the Department of Defence the quoted price is the

estimated cost with direct labour

costed at the "Defence Munitions

Manhour Rate" (DMMR). This rate is

designed to recover all direct costs of production workers, including their personal overheads. When the factory operates at a level above the 1977/78

base labour level an incremental cost is added to cover increased overheads generated by the higher level of

production.

(xv) This basis for charging Department of Defence for its work commenced in

197 6/77 and it was agreed between the Ministers for Defence, Industry and Commerce and the Treasurer. The rate is set by agreement between the

Departments of Industry and Commerce, Defence and Finance prior to the

commencement of the financial year and remains fixed for the whole year

irrespective of any cost variations which may occur during the year. This has administrative benefits

particularly for the Department of

39

Defence which does not have to provide additional funds on numerous individual orders to cover price increases.

(xvi) As the additional costs which arise during the year, such as the effect of National Wage increases, are not

recoverable through the manhour rate, they are a charge to the Department's appropriation for Maintenance of

Production Capability.

(xvii) The rate is an average rate for the

eight munitions factories, each of the eight factories for 1981/82 is pricing Defence work at Sll.80 per hour.1^

4.24 As pointed out by Mr Shanahan in evidence quoted above,

the DMMR has not achieved its goal in relation to OFB of

increasing workload through the factory. A possible reason for

this is alluded to in the submission from the Department of

Industry and Commerce. In discussing the appropriation item -

Maintenance of Production Capability - which reflects other

charges not accounted for by the DMMR, the point is made that this item '... reflects the under-utilization of available

capacity and also the consequences of the approved pricing policy. '6

4.25 The consequence referred to in the above quote is that,

whiist the DMMR allows a low charge rate to the Department of

Defence for a particular order, the remainder of the costs of an

indirect nature incurred at OFB were charged to Maintenance of

Production Capability, which in turn was a charge to the

Department of Defence - often referred to as a subsidy.

Maintenance of Production Capability (MPC)

4.26 This is an appropriation item which, as discussed above,

takes account of charges not recovered within the DMMR. According

to Mr Shanahan, 'A more appropriate title would be defence

capability costs . . . ' 7

40

4.27 It is argued that, because OFB is set up as a defence

stablishment, surplus capacity is necessary. This was the view

put by Mr McMahon of the Association of Professional Engineers,

Australia , when he stated 1 We are primarily a defence

establishment and I believe that we need to reserve capacity for

defence work which may arise. We would be severely embarassed in

my opinion if we had to turn defence work away or extend defence

deliveries because of commercial work we had undertaken.' The

overhead costs and other direct and indirect charges resulting

from this surplus capacity which are not recovered by the DMMR, income from commercial work (which does include a charge for such

items) or other income, are allocated to MPC. This then becomes

the amount of the ' subsidy' to be paid by the Department of

Defence.

4.28 As explained in the previous section on DMMR, this

appropriation item not only reflects the cost of excess capacity

at OFB but also a proportion of the indirect costs not

recoverable under the DMMR. Therefore, whilst it may logically be

expected that, if OFB were 100% occupied with defence work, the

MPC costs would be zero, this is not the case.

4.29 MPC reflects not only the costs of surplus capacity but

also the indirect costs of production not recovered with the

DMMR. It was explained by Mr Shanahan that '... fixed charges and

many variable charges would be charged to an appropriation and

that the labour for work performed for the services, in these

factories, would be charged at a rate which would only recover

the estimated direct labour cost of the direct worker. In other

words, it did not have added to it overhead rates for indirect

salaries or indirect wages, expenses, etc, but only labour g

overheads for a direct worker ...'

4.30 This was not made clear in the submission from the

Department of Industry and Commerce, which described the MPC as

fo 1 lows :

41

' (viii) Factory expenditure from its Trust Account, which is not recouped from customers or is not recoverable from appropriations such as:-

. Production Development . Re-arrangement of Capital Facilities

is recouped from the appropriation, Maintenance of Production Capability - Munitions Industry.

(ix) The Trust Account (working capital) must be accounted for precisely and the recoupment from Maintenance of

Production Capability restores the working capital exactly to the amount recorded as the outstanding advance.

(x) The amount received from the

Maintenance of Production Capability Appropriation is in effect a subsidy. It reflects the under-utilisation of available capacity and also the

consequences of the approved pricing policy.'iu

4.31 In regard to the overhead costs of maintaining surplus

plant , it could well be argued that the descriptive term

1 subsidy' used in part ' x 1 of the Department's submission above

is correct. That other indirect charges accounted for in the MPC

are termed as a subsidy is misleading. In recent years, the MPC

has been:

1976/77 1977/78 1978/79 1979/80 1980/81 1981/82 (Est.) $M $M $M $M $M $M

3.736 4.730 4.838 4.877 5.961 4.700

Commercial work undertaken at OFB

4.32 Although set up as an ordnance factory to carry out

defence work, OFB has not had sufficient defence orders since the

42

war years to maintain production at a level considered desirable

(see paragraph 3.7 above).

4.33 In the immediate post-war years, '... Service orders

were drastically cut but immediately a programme of commercial

work was undertaken, with reduced staff, under the Government's

policy of assisting in the re-establishment of industry and of

fitting ex-servicemen for trained jobs. ' ^

4.34 OFB's situation in regard to defence orders has not

changed significantly since. In the 1950's defence orders

increased '... when a policy of modernising and enlarging the

Australian Defence Forces was embarked upon ...' This situation

was changed in the 1960' s when the factory had to undertake a

greater percentage of commercial work to maintain production levels and continued into the 1970's. Figures provided by the

Department of Industry and Commerce indicate the following

percentages of defence work carried out in OFB since 1975/76:

1975/76 1976/77 1977/78 1978/79 1979/80 1980/81 1981/82 (Est.)

32 28 46 47 39 36 39

4.35 As detailed earlier normal production hours at the

factory would be regarded as 6 4 0,000 - 650,000 manhours. The

1980/81 figure above of 39% defence work accounted for only

99,000 production hours at OFB. Clearly without commercial or

other work the factory could not continue in operation.

Nature of commercial work undertaken

4.36 OFB tenders for a wide range of heavy engineering works.

However, evidence provided to the Committee by the Department of

Industry and Commerce indicated that OFB had only a 9-10% success

rate on tenders. In general the type of tenders won by OFB are

for low volume work of a complex nature. Examples of this include

'500 ton steelworks ladle cranes ... valves, hoists and gates for

hydro-electric schemes; cement kilns; ball, rod and autogenous

mills; ... motor car body framing gates for the automobile

industry, ships' propeller shafting, ... bucket wheel dredger 1 3 crawlers and components, ...' Senator Crichton-Browne asked the

following question in order to determine the reason for the low

tender ' success' rate and the nature of the work received as a result of tenders:

'Senator Crichton-Browne - What is the factory geared for and why does it accept a

specialised type of work of such low volume and very much offset and one-off work?

Mr Roberts - Generally speaking, that is the work that other people do not find

competitive. Usually when they are breaking into new markets, they will use our skills and capacity . . . ' J 4

4.1’ 7 Following up on this point Senator Cr ichton-Browne put

the following proposition to Mr Ryan and Mr Roberts:

'Senator Crichton-Browne - What you really are saying is that you do work nobody else wants, primarily?

Mr Ryan - In many cases, yes.

Senator Crichton-Browne - Why is that? If you are trying to supplement defence work with commercial work, and you are having problems with your defence work, why compound the

problem by going into another area which will be uneconomic?

Mr Roberts - This gives us a chance to

practise skills ...

Senator Crichton-Browne - That is a luxury, is Tt not? " " ’

Mr Roberts - And to improve our technology. It gives us a chance to up the art. Yes, I think it is proving that this is one of the problems we are facing. It is expensive.'^5

44

4.38 No specific reason was given for the poor performance in

obtaining commercial work by tender except that the proposition

was put that the factory's prime role was to undertake defence

work and that commercial work was only tendered for to utilize

remaining capacity. The type of work for which OFB was successful

in tendering was complex engineering projects requiring the type

of technologies which exist at OFB. OFB was not successful in

tendering for work of a less complex nature. Indeed once

processes have been pioneered by OFB they are not maintained in

confidence to the factory (e.g. electroslag welding of the

autogenous mills for Allis Chalmers; Mr Roberts, '... we electro

slag welded them in a manner that had never been used in America

... Because we had that process, we were more competitive. ' ^ Mr

Roberts went on to state that processes developed by OFB were

made freely available to private industry. Thus when a market was established as a result of OFB's engineering capabilities,

private industry would make its own capital investment leaving

OFB to look for fresh markets. This is why OFB undertakes so much

work of a one-off nature.

4.39 The effect of undertaking commercial work of this nature

is that it has not proved to be very profitable to OFB. One-off

or low volume work requires considerable costs in terms of development and tooling up which cannot be recovered. In evidence

Mr Roberts recognised this to be a problem but justified the

nature of the work by saying it '... gives us a chance to

] 7

practise skills ... and to improve our technology.' '

Legal considerations regarding commercial work

4.40 The submission by the Department of Industry and

Commerce contained the following comment:

'Competition for an increased volume of commercial work to sustain a factory no longer seen in total to be essential for defence

purposes could be subject to legal

challenge.'

45

4.41 In evidence (in camera) Mr Currie indicated to the

Committee that the ordnance factory was set up under the defence

power and accordingly could be open to legal challenge if

commercial work at the factory exceeded fifty percent.

4.42 This was based on the clothing factory judgment of

19 ,

1935. In that case the High Court ruled that the Government

Clothing Factory was able to undertake commercial work. Mr Currie

stated that at that time the Government Clothing Factory was

still doing 50% of its work for the defence forces. In Mr

Currie's opinion this figure of 50% is significant in that if

commercial work exceeds that percentage then the factories once

again would come under legal challenge.

4.43 A further legal problem is that of unfair advantage held

by the government factories in their pricing structure. However,

as OFB has only a 9% 1 success' rate for tenders it is arguable

whether they are pricing at a level which is causing their competitors any problems. In the period 1975/76 to 1980/81 OFB

quoted for '...5,500,000 manhours of commercial work and received orders involving 506,000 manhours ...'20

4.44 Whether or not this perceived legal problem has

inhibited OFB in its tendering process and the levels at which

they have set their tenders is uncertain from the evidence

obtained. It can only be noted that 9 0% of tenders are

unsuccessful and that commercial work at OFB over the past six

years (including offset work) has remained at a round the 50%

level.

46

ENDNOTES

1. Evidence, p. 142 .

2. Evidence, P- 141.

3. Committee document.

4. Evidence, p. 200.

5. Department of Industry and Commerce submiss ion

6. ibid, p. 15.

7 . Evidence, pp. 200-201.

8 . Evidence, p. 267.

9. Evidence, P- 200.

10. Department of Industry and Commerce submission

11. ibid, p . 1.

12. ibid, p. 2.

13. Committee document.

14 . Evidence, p. 134.

15. Evidence, p. 136 .

16 . Evidence, P· 134 .

17. Evidence, P· 136.

18. Department of Industry and Commerce submission, p. 10.

19. Attorney-General for Victoria v. Commonwealth (1935), 52, CLR 533; 41 ALR 246. 2 0

20. Department of Industry and Commerce submission, p. 6.

47

CHAPTER 5

SOCIAL IMPLICATIONS

5.1 Most submissions to the Committee detailed the perceived

social effects of a sale of OFB. Possible social effects of the

options other than sale as set out in paragraph 2.9 were not

always canvassed. In this chapter the Committee details the

options and effects.

5.2 The options are examined in line with the main areas of

concern, i.e ., employment, economic and social effects. The

Committee has not discussed the effect of the fourth option

mentioned at paragraph 2.9 of retaining in government control,

there being no social effect - assuming that orders to the

factory, staff ceilings, etc, remain as before the sale

announcement. Due to the uncertainty as to which option will

finally be pursued, most of the evidence presented to the

Committee was based on a perceived closure consequent upon a sale

to private enterprise.On the basis of the evidence, this was not

the preferred option and indeed many of the social issues

discussed in this chapter arise out of the option.

Sale as a 'going concern'

Employment

5.3 The Review of Commonwealth Functions stated that OFB was

to be sold as a 'going concern' . However, submissions and

evidence presented to the Committee have indicated little faith

in a private operator being able to maintain existing levels of

employment.

49

5.4 The fear was expressed to the Committee that, without

Commonwealth assurances to a private operator of defence work or

a subsidy for maintenance of defence related equipment, then existing staffing levels could not be justified.

5.5 Capacity exists at OFB for a range of heavy engineering

works should a private operator take over the factory. It is

argueable however, that the high capital cost, combined with a

shortage of work of this kind could lead to a rationalisation of

the factory under private ownership. It was due to such

possibilities and the lack of guarantees by the Government that

the Bendigo City Council opposed the sale to private enterprise.

The Council's submission stated that '... if Ordnance Factory Bendigo is transferred to private enterprise [we find it

difficult to believe] that the same level of economic activity will be maintained .. . '1

5.6 A survey conducted by the Economic Impact Study Group

contained provision for comment by employees. It is pointed out

that the Committee has some qualifications about the methodology

of this study, nevertheless according to Mr D. Kennedy, Convenor

of the study group, 1 There were very strong comments indeed. The

fact is that they do not have confidence that the place will

survive under private enterprise.12 Mr Kennedy estimated staff

levels would drop by 300 should the factory be sold to private

enterprise. When asked by Senator Crichton-Browne as to how the

figure was arrived at, Mr Kennedy replied, 1 I have a friend who

is an engineer and he looked at the report of the management for

1979/8 0 . He concluded that on the number of production manhours

the Ordnance Factory would probably require 175 direct workers.

In private enterprise, as he knows it, that would be matched by a

ratio of 1:1 - one direct worker for one indirect w o r k e r . So put

7

175 together with 175 and you have 350 employees. '

5.7 The Victorian Government Submission stated that a sale

to private enterprise could result in asset stripping, with a

50

consequent reduction in the capacity of the plant, which has

a direct effect on the number of skilled tradesmen and

apprentices required for employment.1^

5.8 Effect on apprentice numbers was also an area of

concern. The ACTU, in a submission to the Committee, stated 1 The

sale of the Bendigo Ordnance Factory to private enterprise will most likely also lead to a significant reduction in the number of

apprentices trained at the factory ...'" The factory currently

has a very high number of apprentices to tradesmen, approximately

1 apprentice to 2 tradesmen. According to the ACTU, a Metal Trades Industry survey showed that the average metal trades firm

has a ratio of 4 tradesmen to each apprentice. Thus, if the

factory were sold, the effect would be a decrease in apprentice

numbers of approximately 60%.

5.9 These conclusions in relation to a sale of OFB were

supported by a submission from the Rev. J . Stuart Murrary, St. Andrew's Uniting Church, Bendigo. The submission pointed to the potential loss of jobs at the factory following a sale and the

resultant social problems that this would cause.

Employment (partial defence capacity)

5.10 Evidence to the Committee did not cover in detail the

option of a sale with defence capacity maintained. The Minister

for Industry and Commerce has indicated that no guarantees

regarding defence work could be made to a potential buyer.

5.11 if a sale to private enterprise was made with such a

guarantee, then presumably the current staffing levels could be

retained. Indeed, combined with commercial work, it could be that

an increase in the workforce would be necessary.

5.12 It could not be assumed , however, that current

apprentice numbers would be maintained under this option for the

same reasons as detailed under the total sale option.

51

Economic impact (total sale)

5.13 The Bendigo City Council was not initially opposed to

the sale of OFB providing some guarantees regarding defence work

were given to a private operator. However, when the Minister for

Industry and Commerce informed the Council that such guarantees

would not be forthcoming, the Council totally opposed the sale.

The fear was held that the factory would not be commercially

viable without the defence work and that it would be subject to

asset stripping and retrenchment of staff in order to rationalise

the operation. The Mayor, Councillor Stoltz, said in evidence,

'Sir Phillip would not give us any assurances at all ...

Following my report to my Council after that deputation ...

Council was firmly of the view that it was highly unlikely

without those assurances that the sale of the Ordnance Factory,

Bendigo, would be beneficial to Bendigo.'^7

5.14 Senator Crichton-Browne sought the Council's views in

relation to the sale of OFB to a dynamic private enterprise:

'Senator Crichton-Browne - Do you believe ... that if it were to be sold to an efficient, competent, capable, imaginative private enterprise operator, the Factory could

flourish and expand ... Have you contemplated it as an alternative to it being stripped or would down?

Mr Stoltz - ... If you want to look at things

through rose coloured glasses and if you

believe private enterprise is the panacea for our economic ills, selling the Ordnance Factory to a dynamic private enterprise could be very beneficial ... However, there are no assurances that is going to happen; all of the indications are that quite the opposite is going to happen.'”

5.15 The Victorian Government submission expressed a similar

view, that is '... sales of going concerns like the Ordnance

Factory, plant and equipment asset stripping is one method by

52

which purchasers commonly offset the purchase price by disposing

of certain equipment, consistent with such motives as

rationalisation programmes, and profit. Asset stripping reduces

the capacity of the plant, which has a direct effect on the

number of skilled tradesmen and apprentices required for 9 employment.' Hence the impact of the sale on the economy would

be the lost spending power of employees retrenched, combined with a multiplier effect. The extent of the impact would be some part

of that outlined under the option of total closure of the plant.

According to the Victorian Government submission, this effect

would be felt through housing, education, transport, commerce and

retail trading sectors of the local community and the ability of

Bendigo to attract replacement industries.10 ( i i )

Economic impact (partial defence capacity)

5.16 Should the factory be sold and some defence capacity

maintained, then the economic impact of the sale could be:

(i) some proportion of the impact under the previous

option of sale without defence capacity;

(ii) zero impact; and

(iii) a positive impact if commercial work at the

factory combined with defence work/subsidy

resulted in additional manhours worked at the

factory.

5.17 Many witnesses and submissions made the point that a

sale with guarantees as to defence work was a satisfactory

approach. The Bendigo City Council supported the sale providing

such a guarantee could be made11.

5.18 The Department of Defence, in their submission, pointed

to the need for a private operator of the factory to provide for

Defence Department requirements:

53

' Protection of Defence Interests in the Sale of OFB

16. In the sale of OFB to private industry the purchaser would be required to enter into an agreement with the Commonwealth to meet a range of Defence requirements under mutually acceptable conditions. The matters covered by the agreement would include the following:

. the retention of specified capabilities for a period to be negotiated

. an undertaking by the purchaser to

satisfy at agreed prices current and future orders which involve the

"specified capabilities"

. arrangements for the completion of all current Defence orders under mutually acceptable price and delivery conditions

. Commonwealth assurances relating to the placement with the purchaser of orders involving the "specified capabilities"

. quality control arrangements

. maintenance of required security

a rrangements.'

5.19 The actual manhours that a private operator could derive

from undertaking the above defence functions would have a

significant bearing on the viability of a private enterprise

operation at OFB. If it were such that current workforce levels

could be retained, then the economic impact on the Bendigo

economy could be of little or no significance.

5.20 However, the Minister for Industry and Commerce has

stated that there could be no guarantees that work of the above

nature would be given to a private operator. This does not

necessarily mean that it will not be allocated to a private

operator, just that a guarantee will not be given.

5.21 The ACTU submission argues that '... if the Government

were to give such guarantees the factory would be operating under

54

much the same conditions as it is now, so really there would be

no gains in selling it to private enterprise.' Similarly, there

would be no change in the economic impact.

Rationalisation and/or Closure

Employment

5.22 Staffing statistics provided by the Department of

Industry and Commerce^ show that 642 people were employed at OFB

at 30 June 1981. Of this number, 175 were employed under the Public Service Act and 467 under the Supply and Development Act.

5.23 Closure of the factory would not result in this total

number being unemployed. Public Service Act staff could be

redeployed to other areas within the Munitions Supply Division or

the public service generally - if such redeployment is not

possible, the redundancy provisions as contained in the

Commonwealth Employees (Redeployment and Retirement) Act 1979

could be utilised.

5.24 The remainder of the personnel at the factory, that is

the tradesmen, apprentices and the non-trade workers, could not rely on redeployment. Some skilled tradesmen could move across to

other munitions establishments, however, the majority of this

group would be laid off.

5.25 The Victorian Government, in their submission, stated

'The closure, or reduced operation, of the plant would inevitably

create more unemployment in the area. Alternative employment is

not a viable option for the vast majority of employees ,

especially the unskilled.'1^

5.26 Councillor Stoltz stated in regard to the closure of

OFB, that 'Bendigo already suffers from high unemployment, much

higher than the nation's average ... Any additional unemployment

55

■'·

w i l l e x a c e r b a t e t h e s t r u g g l e s of the p r e s e n t l y u n e m p l o y e d and

w i l l a d d f u r t h e r to t h e s o c i a l c o n s e q u e n c e s o f h i g h e r

u n e m p l o y m e n t . 1

5.27 F i g u r e s p r o v i d e d b y t h e C i t y of B e n d i g o in its

s u b m i s s i o n ^ i n d i c a t e d t h a t , a t A p r i l 1 9 7 9 , t h e a g g r e g a t e

u n e m p l o y m e n t r ate in B e n d i g o was 10.5% at a t i m e w h e n the

V i c t o r i a n a g g r e g a t e w a s 5.7%.

5.28 T h e A C T U , in a s u b m i s s i o n to the C o m m i t t e e , s t a t e d that

1 On the b a s i s of t h e 1976 w o r k f o r c e e s t i m a t e for B e n d i g o , the

B e n d i g o O r d n a n c e F a c t o r y e m p l o y s s o m e 3% of t h e B e n d i g o

w o r k f o r c e . T h e f a c t o r y , t h e r e f o r e , is an i m p o r t a n t e m p l o y e r in

the B e n d i g o re g i o n . Its i m p o r t a n c e in thi s r e g a r d is e m p h a s i s e d

w h e n the h i g h u n e m p l o y m e n t a n d l o w j o b v a c a n c y r a t e in B e n d i g o

p e r se and r e l a t i v e to o t h e r a r e a s in V i c t o r i a is t a k e n into

a c c o u n t . 1

A p p r e n t i c e s

5.29 O F B c u r r e n t l y e m p l o y s 102 a p p r e n t i c e s a m o n g s t its total

s t a f f of 6 4 2. A c c o r d i n g to the A C T U , 1 . . . s h o u l d the f a c t o r y

c l o s e no a p p r e n t i c e s w ill be e m p l o y e d at the f a c t o r y . 1 The A C T U

s u b m i s s i o n c o n t i n u e d , ' S u c h a r e d u c t i o n in t h e n u m b e r of

a p p r e n t i c e s h i p s at t h e B e n d i g o O r d n a n c e F a c t o r y w i l l

s u b s t a n t i a l l y r e d u c e the n u m b e r of a p p r e n t i c e s h i p s for y o u t h s

f r o m the t o w n s t h r o u g h o u t n o r t h e r n and c e n t r a l V i c t o r i a , w h i c h

w i l l e x a c e r b a t e t h e a l r e a d y h i g h y o u t h and g e n e r a l u n e m p l o y m e n t

20

rates in the area.'

5.30 According to the ACTU, it is likely that only a few

apprenticeships will be taken up by other government bodies or

private enterprise.

5.31 Councillor Stoltz highlighted the problem of apprentice

training. 'The Ordnance Factory at Bendigo has played a

56

significant role ... in contributing to the training of such

skilled people. ' Indeed, the Trades Hall Council submission

pointed out that 'Education in Bendigo is ... designed to cater

specifically for trades carried out at Bendigo Ordnance Factory.

Apprenticeships in the metal trades are fully catered for at the

Bendigo Technical College ... Excellent apprentice training

facilities at the Ordnance Factory are fully complemented by

equally excellent schooling facilities at the Bendigo Technical 2 2 College. 1 The conclusion being that closure of OFB could also

mean a curtailing or even closure of certain trades courses at

the Technical College. The Area Committee, in their submission,

also point to the number of apprentices trained at OFB and the

effect a closure of the factory would have on youth employment in

Bendigo. The submission further points out that 'Bendigo Ordnance

apprentices make up 40% of Metal Trades apprentices trained at the Bendigo Technical College. Clearly any significant decrease

in apprenticeships at the Ordnance Factory would have serious

implications for the Technical College's apprentice training programme.'2 3

5.32 The Area Committee submission also mentions the Federal

Government's one year apprentice training scheme (GOYA). Under

this programme, OFB undertakes to train first year apprentices sponsored by outside companies. The benefits to the community

mentioned in the Area Committee submission would presumably be lost should the factory be sold. Such benefits include:

(i) The Government meeting the full first year cost

of training apprentices (currently 22 at OFB);

(ii) The broad skill base acquired by apprentices

working under the scheme which they take back to

smaller firms where they complete

apprenticeships; and

57

τ

(iii) Creation of job opportunities in Bendigo region

due to employers taking advantage of a scheme

which costs nothing in its first year.

Skill base for Bendigo sub-region

5.33 Evidence was presented to the Committee that OFB

provides a range of skills and services that are relied upon by

industry and other government bodies in the region.

5.34 An example of such reliance is contained in a letter

from the Shire of Kerang detailing work carried out by OFB

requiring '... specialist advice and manufacturing expertise i 24

5.35 Councillor Stoltz stated that 'In the discussions I have

had with the directors of companies we have approached, one of

the first questions they have asked is about the Bendigo Ordnance

Factory, because they see it as an important skill base, if you like, for the area . 125 Closure of OFB would result in loss of

that skill base.

Economic impact

5.36 A great deal of evidence was given to the Committee

concerning the economic impact of a closure of the Ordnance

Factory. Much of this evidence has been of a subjective nature.

In evidence, Councillor Stoltz, told the Committee that,

since the decision of the Government to sell the Ordnance

Factory, Bendigo was announced, the economy has slumped. Real

estate agents around town will tell you that virtually nothing is

moving and retailers will tell you ... that they are afraid to

order goods for pre-Christmas trading ... Put simply, Bendigo is

unsure of its economic future. The Ordnance Factory, Bendigo, is

seen as a crucial part of Bendigo's economy and any diminishing

of the Factory's workforce will have a consequent diminishing

effect on the economy of the whole sub-region. ' ^

58

5.37 Various submissions to the Committee have attempted to

provide a more objective view of the economic effects of closure

of the factory. The Victorian Government submission stated:

'Total wages paid per annum at the Ordnance Factory are in the order of $9m and this,

together with a multiplier effect, has a

dramatic impact on the economy of Bendigo and the surrounding area. It is estimated that the multiplier effect of these wages is S30m.

Already Bendigo has felt the effects of the Commonwealth Government's decision to consider the future of the Ordnance Factory.

Assessments by Victorian Government officers indicate that retail sales are down, business activity uncertain and Bendigo people

unwilling to commit themselves financially to purchasing major goods and services, when there is a likelihood of the breadwinner

losing his or her job as a direct result of

Common we,a,l th policy affecting the Bendigo region.'

5.38 Arriving at a basis upon which to determine the economic

impact of closure is a problem recognised by the Committee.

Senator Button highlighted the problem thus:

'Senator Button - On page 7 in the conclusion you say that in real terms nearly $3m is paid in wages and this in turn is channelled into the economy of Bendigo. What do you mean by

"real terms"? You have heard the evidence.

Mr Curnow - The wages are perhaps $8m or so

but that would be the money that would be

spent actually on a year to year basis. The balance would be in, I think, taxation

accounts for some things and ...

Senator Button - Why I ask you this question is that we do not want to have to write a

report in which we say that in the view of the Secretary of the Trades Hall Council at

Bendigo, the Ordnance Factory is worth $3m to the economy of Bendigo and in view of the

evidence of the workers of the factory it is worth $7m. Do you follow what I mean?

59

Mr Curnow - Yes. I worked out what each person would spend in wages in Bendigo.

Senator Button - You made some calculations about that?

Mr Curnow - Mainly on what I spend and how I

live.

Senator Button - I follow that but did you

make some calculations? I mean it is not a

figure plucked out of the air.

Mr Curnow - No.'2®

5.39 In fact, the Committee has been presented with differing

figures as to the extent of the economic impact. The City

Council's submission bases its estimate on a salary bill at the

factory of 68.9m per annum and a multiplier of 1.5. The result of

this process, after making a 20% allowance to the salary bill for

taxes, is that the factory creates an income flow within the

region of at least $13.4m per year.

5.40 The submission of the ACTU estimated that 'The factory

and its employees currently spend about $7m annually in the Bendigo region. The multipler effects of this expenditure on the

Bendigo economy, of course, make their annual contribution considerably greater. The importance of the Bendigo Ordnance

Factory and its employees impacts upon all of Bendigo's economic

and social concerns such as its shops, its churches, its schools,

its housing industry, and its local manufacturing industry, ect.'29

5.41 The ACTU submission also emphasised the point that, 'The

destruction of the economic infrastructure will be aided as time

goes on by the lack of trained apprentices and broadly

knowledgeable and skilled tradesmen to assist the continuance of

established enterprises and develop much needed new

businesses.'29

60

5.42 A submission to the Committee from the Economic Impact

Study Group contained the results of a survey of OFB employees.

Based on this survey, the submission points out that, on the

basis of the sale decision, 121 employees either put off or

scrapped plans to buy or build a home in the near future. Should

the factory close, the effect on real estate could be severe, as

there are potentially 296 homes that could come on to the

market. ^

5.43 The Economic Impact Study Group submission estimated

that $ 3m was spent by Ordnance Factory employees on just four

daily consumer items:

- $ 1.2m on groceries

- . 55m on meat

- .64m on entertainment

- .57m on petrol.

5.44 Based on a payroll of $9m at the factory, the Economic

Impact Study Group calculated that the take-home pay would be $6m

and that a multiplier of 5 would be applied to this fugure to

give a total turn-over in Bendigo's economy of $30m. This figure

agrees with that raised in the Victorian Government submission.

The Economic Impact Study Group estimated '... that, with

employees, spouses and working children, the total number of pay 3 2 packets in families associated with the factory is 1012. 1

Social impact

5.45 Given the option of closure and the points raised in the

first part of this chapter in relation to employment and the

economic impact of that decision, then it becomes evident that

social problems would also arise.

5.46 Councillor Stoltz saw an inherent social responsibility

on the Government to maintain the factory in its present form.

61

Councillor Stoltz felt it is presently the responsibility of

the Government and the Government has to weigh it very heavily in

its consideration in selling the Ordnance Factory.'33

5.47 The Council's submission contained much information as

to the likely effects of closure of OFB in relation to social

problems. The submission detailed the effects on physical health;

mental, emotional and social health and income.3^ The submission

concluded:

'The whole social structure of Bendigo and surrounding Municipalities would be affected by the proposed Government cuts. Family break­ downs, mental stress and closure of services now offered will follow.

The final result is likely to be any costs

saved as a result of the changes at the

Ordnance Factory ... will be far outweighed by the social costs to the community, both- in money terms and in community well-being.1'

5.48 The social implications of a closure decision are not

canvassed in the submission of the Department of Industry and

Commerce. Closure was an option raised in their submission to the

Committee.'3 However, the submission went on to state that it was

believed not to be practical in the short term. The Department

provided employees at the factory with a detailed account of

their entitlements should they have to be redeployed or stood

down. In addition Mr R.S. Thompson, former Controller, MSD,

issued a statement for employees which stated in part:

1 Concern for Employees

The Minister for Industry and Commerce and the Department are concerned to see that proper consideration is given to the future welfare of employees at the

factory.

Final arrangements can only be determined in negotiation with a prospective new owne r.

52

. Questions of accrued benefits for

recreation leav e, long service leave, superannuation and the like will all need to be addressed.

. The Department proposes to invite, as soon as possible, Union participation on a working group comprising Management and employees to wpyrk on matters of concern

to employees,'

5.49 The Victorian Government saw the following social costs

of closure:

' - severe economic down-turn in the Bendigo region

- burden of high unemployment

- ... local industries would be forced to

look elsewhere to have ^ ancillary

manufacturing undertaken ...'"

5.50 The submission further stated that 'It would be improper

for the Committee to formulate recommendations based solely on

financial cost considerations without giving due weight to the 19

cost to the surrounding community.'

5.51 All but two submissions to the Committee did not canvas

the option of closure. This is understandable , given the

Government's intention of selling the factory as a 'going

concern' and also in light of Ministerial statements to the same

effect. For example, the ACTU submission concentrated primarily

on the option of sale to private enterprise. However, in regard

to social issues, the submission stated 'The factory and its

employees also contribute much to the economic and social

infrastructure of Bendigo. The present Bendigo Ordnance Factory

provides very much to many diverse groups, yet it still does this

in a most cost effective manner.'^

5.52 Members of the ACOA employed at the factory under the

Public Service Act 1922 are not concerned for their jobs as such.

63

In their submission they pointed to the real social costs of

redeployment:

1 Many of the ACOA members have stabilised their employment at Ordnance Factory Bendigo [to the extent of not taking promotions

requiring transfer]. To force them to SEVER their established ties and to throw them headlong into the problems of redeployment, financial and family pressures and ^location seems unjust and socially uncaring.1

5.53 In evidence to the Committee, Mr D. Kennedy, detailed

some of the social consequences of a closure of the factory:

unemployment and transfer of population away from Bendigo ... break-up of families ... where the wife has a job in Bendigo and the husband looks for a job elsewhere ... the loss to Bendigo ... of a large number of people who are involved in community activities ... If you remove large numbers of young people from Bendigo, then what you are in fact doing is removing very important personal ^ n d social supports for the older community.'

5.54 The following information was provided in the Economic

Impact Study Group submission based on a survey of factory employees:

- 83.6% (543) will leave Bendigo if the factory is sold;

- 1,539 people would leave in total, i.e. 543 employees,

393 spouses and 603 dependent children;

- up to 296 houses could come onto the market.

5.55 The submission concludes '... that Government decisions

on the Ordnance Factory will bring about a large scale decline in

jobs and that this will have severe effects on Bendigo's

,43

economy.

64

ENDNOTES

1. City of Bendigo submission, p . 3.

2. Evidence, p. 327.

3. Evidence, p. 329.

4. Victorian Government submission, p. 8 •

5. ACTU submission, p . 13.

6. St. Andrew's Uniting Church, Bendigo, submission, pp. 1-2.

7. Evidence, p. 158.

8. Evidence, pp. 167-168.

9. Victorian Government submission, p. 8 •

10. ibid .

11. Evidence, p. 158.

12 . Department of Defence submission, pp. 9-10.

13. ACTU submission, p. 13.

14 . Department of Industry and Commerce, 1, p. 13. submission, Attachment

15 . Victorian Government submission, p. 4•

16. Evidence, p. 154.

17 . Bendigo City Council submission, p. 2 •

18. ACTU submission, p. 5.

19. ibid, p. 14 .

20. ibid .

21. Evidence, p. 154.

22. Bendigo Trades Hall Council submission, p . 5.

2 ?. Ordnance Factory Bendigo Area Committee submission p. 22.

24. The Ordnance Factory has carried out the following works for the Shire of Kerang : ( i )

(i) designed and manufactured heavy duty roller pulls;

65

(ii) repaired and rebuilt heavy steel drum rollers;

(iii) re-machined grader circles;

(iv) manufactured new, extremely large hydraulic cylinders for crane;

(v) specialist repairs to damaged housings on loader.

25. Evidence, p. 168.

26. Evidence, pp. 154-155.

27. Victorian Government submission, pp. 4-5.

28. Evidence, p. 314.

29. ACTU submission, p. 7.

30. ibid, p. 15.

31. Economic Impact Study Group submission, Appendix, p. 8.

32. ibid, p . 9.

33. Evidence, p. 167.

34. Committee document.

35. Bendigo City Council submission, Appendix.

36. Department of Industry and Commerce submission, p. 7.

37. Statement for Employees - R. Thompson (CMS) 30 April 1981.

38. Victorian Government submission, p . 7.

39. ibid, p. 6.

40. ACTU submission, p. 8.

41. ACOA submission, Part 7.

42. Evidence, pp. 323-324.

43. Economic Impact Study Group submission, pp. 9-10.

66

PART B RECOMMENDATIONS

CHAPTER 6

FINDINGS, CONCLUSIONS, RECOMMENDATIONS

6.1 As set out in paragraph 2.9 the Committee examined the

evidence in terms of various options. As the Government's stated

intention was to sell OFB as a 'going concern' it is this option

that has principally occupied the Committee's attention.

6.2 However the Committee recognised that other

possibilities existed for OFB and it was for this reason that the

Committee canvassed the effects of the various options in regard

to the defence, commercial and social issues.

6.3 The options other than outright sale discussed by the

Committee were: 1

1. Sale as a 'going concern', maintaining partial defence

capacity.

2. Rationalisation and/or closure.

3. Retention in government control.

6.4 A further option raised at this point is the sale of

some parts of OFB as going concerns. This was not an aspect on

which the Committee received a great deal of evidence however it

is raised because of the diverse range of functions carried out

at OFB and their consequent potential for seperate sale.

67

Findings

Defence

6.5 Evidence to the Committee revealed that OFB possessed

few unique industrial processes necessary to defence production.

Most tasks performed at OFB could equally be undertaken at other government factories or by industry generally.

6.6 Given the low level of defence orders to OFB in the last

decade, the Committee is not convinced that OFB is vital to

present defence requirements.

6.7 The Committee appreciates the dilemma of the Departments

of Defence and Industry and Commerce that they must attempt to

obtain the greatest possible value for the taxpayer's defence

dollar, whilst at the same time ensuring that defence skills and

capabilities already acquired in Australia at high costs are not

lost or dissipated. To resolve the dilemma the Committee believes

that rationalisation of the ordnance/munitions industry is

necessary and that the sale of OFB forms part of that process.

6.8 The Committee believes that even an immediate closure of

OFB would only marginally affect Australia's defence capacity and

capability, as all defence works at OFB could be re-located in a

comparatively short time to other munitions factories.

Commercial

6.9 In order to maintain production levels, OFB has had to

undertake commercial work at approximately 50% of production.

However, there has been only a break-even return on commercial

work. This has meant that OFB has required a subsidy each year

from the Defence appropriations and has been unable to resolve

the problem of excess capacity. The Committee accepts the notion

that it allows staff to maintain skills, however it is felt that

68

commercial work should have paid its way or alternatively more

defence orders should have been placed with the factory.

6.10 The nature of the commercial work undertaken did not

have the potential for an economic return to OFB. Invariably it

involved short run items, requiring significant research and

development. When the costs of running OFB are taken into

account, work of this type would appear to have made no financial

contribution to the resolution of OFB1s problems.

6.11 The Committee appreciates that OFB has the capability to

undertake a wide range of ordnance/munitions manufacture.

However, the cost of tooling up for the comparatively short runs required for Australian defence orders is prohibitive compared to

the cost of overseas purchase.

6.12 The level of commercial work undertaken at OFB casts

doubts on the need for the factory as a defence establishment. In

the last ten years, commercial work has accounted for

approximately 50% of production. Action in regard to this fact

should have been taken as a result of past reviews of OFB's

performance. That this situation has been allowed to continue

since World War II is the reason why action must be taken now to

rationalise the activities of the Government ordnance factories

or alternatively see that they are given a real defence workload.

6.13 As a commercial operation, OFB has many advantages. A

steady, skilled workforce is available. Defence work would be

forthcoming to the factory at least to the extent of the unique

work skills and machinery that exist at the factory as well as

any additional defence contracts that could be obtained. Further

a private operator would bring his own capacity and expertise to

the factory.

6.14 As currently operating, OFB has a possible legal problem

in relation to the amount of commercial work undertaken at the

69

factory. This has resulted not only from the high proportion of

commercial work undertaken but also as a result of quoting at

rates lower than private industry could sustain.

Social

6.15 The Committee believes that a decision to sell OFB would

not result in significant social and economic impact on the

Bendigo region. The Government decision to sell the factory as a 'going concern' is the basis for this finding.

6.16 Failure to sell or rationalise OFB could have gradual

but serious consequences to the Bendigo region as the Department

of Industry and Commerce have stated in their submission that

closure within five years could follow a non-sale.

6.17 The Committee appreciates that a sale of OFB may result

in some changes to the size and operation of the factory.

However, if the Committee's recommendations as set out later in

the chapter are observed, then the effect of such changes could

be lessened.

6.18 The Committee does not accept the concept that the

Government has a social responsibility to maintain the factory in

its present form. The factory must be made viable in its own

right and the best method of achieving this, given that the size

of defence orders is unlikely to increase, is to sell the factory as a 'going concern'.

6.19 Even given the option of closure or rationalisation, the

Committee believes that with the present demand for skills of the

type found at OFB and the opportunities available in the other

government factories, there should be no real unemployment for

those presently employed.

70

Principal evidence summarised and focussed on particular options

Defence

6.20 Neither the capacity nor capability of Australia's

defence would be affected by the sale of OFB as a 'going concern'

and indeed would be only marginally affected by closure. There is

clearly excess capacity to defence requirements and has been for

the last twenty years.

6.21 Better value for the defence dollar could be obtained if

the 'maintenance of production capability' subsidy and other high

local production costs did not have to be paid.

Commercial

6.22 OFB is now mainly a commercial factory with a perceived

legal problem as a consequence. A mixture of defence and

commercial output would be a viable commercial enterprise, and

this was the best possible compromise for OFB's future.

Social

6.23 The concern of employees as to the social consequences

of a sale are not ignored. The consequences of a sale as a 'going

concern' need not be as pessimistic as that outlined in many

submissions to the Committee. This conclusion is based on private

enterprise bringing a mix of commercial and defence work to OFB.

71

Conclusions

The Committee concludes that:

Defence

1. The Federal Government decision of 30 April 1981 to

offer the Ordnance Factory, Bendigo, for sale as a

'going concern' was completely correct in all the

defence circumstances pertaining then and now.

Commercial

II. Commercial ideas and philosophies introduced into what

has been up to date a closed government shop have great

potential to enhance Bendigo's future and our Australian

defence capabilities, with better value for the defence

dollar.

Bendigo would, of course, be far better off if the

Factory could be sold as a commercial venture than if it

had to be closed immediately or wound down and closed

and this has been a major consideration in the

Committee's decision. The apparent unwillingness of the

professional and wages staff to work for private

enterprise, obvious at the hearing and shown in the

evidence, is difficult to understand.

Social

III. The considerable amount of social impact evidence was

mainly based on the option of failure to sell, leading

to closure and neglected entirely the benefits of sale as a 'going concern'. The Committee noted the social

impact evidence and, whilst sensitive to the views of

the local people, believes that sale as a 'going

concern' is the appropriate answer.

72

Recommendations

The Committee recommends that:-

I. The effort to sell the factory as a ' going concern' -

suspended for this inquiry - be now pursued with maximum vigor, and a particular effort be made to show the work

force the benefits of sale,

II. As an incentive to prospective purchasers, the factory

should retain certain defence contracts presently unique

to its operation. Favourable consideration should be

given to the inclusion of suitable parts of new projects

such as the 10 5mm U.K. light gun and ammunition and

other work.

III. There be no replacement of personnel or equipment from

the date of this Report, unless it facilitates the sale

of OFB as a 'going concern'.

IV. If these efforts fail, then the possibility of sale of

various sections of OFB as 'going concerns' be

investigated. V . V I .

V. If all the preceding moves fail, then OFB be wound down

with an official closure date to be fixed by the

government to allow time to conclude existing

commitments.

VI. In the event of a wind-down to closure:

(i) existing apprentices have priority of placement

in Federal Government services, locally or

elsewhere;

73

(ii) other employees be given maximum help to re­

locate at Maribyrnong or elsewhere, or to retire;

(iii) all necessary machinery for continuity of defence

projects be transferred to OFM or elsewhere; and

(iv) the balance of assets of OFB be sold, either with

the factory or separately.

Senator J.R. Martyr Chairman

PART C - DISSENTING REPORTS

DISSENTING REPORT BY SENATOR JOHN BUTTON

The Select Committee appointed by the Senate to consider

the future of the Bendigo Ordnance Factory could hardly be described as a model on which to base the development of the

Senate Committee system.

The Committee has reached agreement on a number of facts

relating to the Ordnance Factory's operations. These matters are

recorded in the main portion of the Committee's Report. There is

no agreement, however, on the fundamental question of whether the

factory should be sold to private enterprise, or remain as a

Government factory.

The two Government Senators on the Committee accept the

view, expressed by the Government in the so-called Review of

Commonwealth Functions (April, 1981), that the Factory should be

sold. It is for them to justify their decision. Senator Siddons

and I disagree with this view, but not for exactly the same

reasons, and I am accordingly setting out my view in this

minority report.

The Bendigo Ordnance Factory's operations have some of

the same characteristics as the Victorian Railways. In

particular, it has a vastly under-utilised capacity and

accordingly runs at a loss. For many years it has been the

unhappy victim of inept Government policies. At times, the

evidence before the Committee almost persuaded me that the

Department of Defence should be sold to private enterprise rather

than the Ordnance Factory.

75

In fact, the decision to sell the Factory could probably

have been made by a Government at any time in the last twenty

years, and the considerations which bear on the advisability of

that decision would have been much the same as they are today.

The notable exception to this is the fact that the social

consequences of such a sale are likely to be considerably greater

today than in the two previous decades.

The present Government's decision to sell the Factory is

based on the view that governments should not indulge in

activities which could equally well be carried out by private

enterprise. This is a legitimate view with which I happen to

disagree. I believe, however, that in the case of the Bendigo

Ordnance Factory, the decision to sell it will have the same

consequences as a government decision to close the Factory down.

The device of a sale has been adopted merely to lessen the

policial odium of a decision to close the Factory.

The current and projected workload, the particularly esoteric capacities of the Factory, the current state of the

heavy engineering industry in Australia, and the qualifications

and conditions which the Government has placed on the sale,

suggest that a potential purchaser would be more interested in an

asset stripping exercise than the retention of the Factory at its

present strength. I hope I am wrong, but I do not believe so. It

is noteworthy that the Victorian Government submission and a

number of witnesses before the Committee considered this to be a

likely consequence of a sale to private enterprise.

There are a number of particular matters arising from

the evidence before the Committee upon which I wish to comment:

1. The Factory and the workforce

The Factory is situated on a large site and is well laid

out in a series of workshops containing a mixture of new and

76

sophisticated equipment and some old, but still serviceable,

equipment. There is a highly skilled workforce and a talented

group of enthusiastic engineers who are responsible for design

work, quality control and general supervision. The Factory trains

approximately 100 apprentices a year, the majority for the

Factory itself, but some for outside industry in the Bendigo

District, and some under an apprenticeship training scheme. The

management impresses as being capable and diligent, although they

may lack entrepreneurial skills. They have scarcely been encouraged to develop them. There is a low labour turnover, and a

record of good industrial relations. My overwhelming impression

is of an establishment with considerable engineering expertise

... 650 characters in search of direction.

2. Background

Since the early 1960's, the Factory has not operated at

full capacity. In the last few years only about 50% of the

workload has been defence work. Throughout these years the Factory has been maintained on the basis of the notion of

'reserve defence capacity'. Simply stated, this means that the

rationale of the Factory has been the perceived need for

Australia to maintain local capacity to produce weapons so that in the event of war or a strategically dangerous situation, the

country can be at least partially self-reliant, and have the

skilled base upon which to expand the munitions industry rapidly.

Over the years, various Government Ministers have articulated

this justification, and a supposed expansion programme for the

Factory was announced by the Federal Member for Bendigo as

recently as October, 1980.

3. Attitudes to 'reserved defence capacity'

In more recent years, the defence workload has been

adversely affected by increasing defence procurement overseas on

the grounds of cost and sometimes speed of delivery.

77

Whilst overseas procurement policies have loomed large

in the minds of governments and Defence Department planners, it

should be pointed out that they do not accord with the view of

the Australian Parliament as expressed in various reports of the

Joint Committee on Foreign Affairs and Defence. In its 1979

Report on Defence Procurement, the Committee says -

Para 3, page 57:

'The Committee is concerned that the

Government should accept, apparently readily, that Australia is, and will remain, a nation not in the forefront of defence related

technology. There are smaller countries with fewer resources, such as Israel and Sweden, and less developed countries, such as Brazil, which have developed significant defence

related industries and defence support self­ reliance . 1

Para 4, page 57:

'The Committee is concerned further that if industry is to support and maintain defence equipments, wherever these are acquired, it will require a high level of technological competence including design and construction expertise. We accept the advice provided by competent and highly qualified witnesses who have maintained that it is not possible to acquire the necessary levels of technology or to retain the design and construction skills needed to achieve the central objective of Defence industrial policy and capabilities unless there is an ongoing program of design and construction of the equipments

themselves.'

Para 3, page 65:

'There is a considerable Australian technical education base which is not fully utilised. Because of the lack of job opportunity and job satisfaction in such specialised fields as naval architecture and aerospace design, morale is low; there is a brain-drain away

from defence-related industries, and there is little feed-back to, or encouragement for, technical education programs. An upsurge in

78

local production of major defence equipments would do much to remedy this position and, at the same time, to update the Australian technological base generally.'

I share the Joint Committee's view expressed in

paragraph 3.57 above. There is no evidence of any Government

response to paragraph 3.65 above. In a 19 7 7 Report , the

Committee expressed similar views, and suggested a number of ways

in which the machinery of defence procurement could be expedited.

There has been no response to the 19 7 9 Report from the

Government. It is clear from the evidence given to the Committee

that the question of the methods of defence procurement is of

considerable relevance to this Inquiry for reasons which are

explained later in this Report.

4. The economics of the Bendigo Ordnance Factory

As appears from the body of the Report, the Factory is

grossly under-utilised and operates at considerable expense to

the taxpayer. In the year 1980/81, the cost of the Factory to the 2 .

taxpayer (including notional costs) was $8.5 million . Slightly

less than 50% of the existing workload was defence work, the

remainder being 1 commercial1 work of a generally specialised

n ature, frequently involving high quality engineering.

There are accordingly two issues relating to workload:

defence work and commercial work. I refer to the issue of defence

work later in this report.

(a) Commercial work:

The Department of Industry and Commerce submission to

the Committee referred to the likely increase in volume

of work for resource d e v e l o p m e n t industries and

indicated that 1 there are signs of a substantial

increase in work being available in this area.'3

79

It is apparent, however, that for many years the

assumption has existed in government or, more

particularly, departmental minds, that it would be wrong

for the Factory to pursue commercial work too vigorously

as a supplement to its limited defence workload. This

view was mentioned in the Department's submission, and elaborated on in oral evidence. It is based on the

notion that the Clothing Trades Case^ effectively

prohibits a government factory established under the

Defence Power from engaging in a significant amount of

commercial work to complement the defence function. In

my view, this is incorrect, and governments have for

years been indulging themselves with lazy illusions on

this matter. The joint judgement of Gavan Duffy, Evatt

and McTiernan J. contains the following passage:

'It is obvious that the maintenance of a

factory to make naval and military equipment is within the field of legislative power. The method of internal organisation in time of peace is largely a matter for determination by

those to whom is entrusted the sole

responsibility for the conduct of naval and military defence. In particular, the retention of all members of a specially trained and

specially efficient staff might well be

considered necessary, and it might well be thought that the policy involved in such

retention could not be effectively carried out unless that staff was fully engaged.

Consequently, the sales of clothing to bodies outside the regular naval and military forces are not to be regarded as the main or

essential purpose of this part of the

business, but as incidents in the maintenance for war purposes of an essential part of the munitions branch of the defence arm. In such a matter, much must be left to the discretion of

the Gove rruj r-Gene r a 1 and the responsible Ministers.'

All this establishes is that it is a matter for the

Executive Government. If the Government determines that

80

the retention of a defence production capacity ('a

specially trained and specially efficient staff1) is

desirable as a matter of public policy, then incidental

work to fully engage that capacity is legitimate.

Work performed by the Factory as 'commercial work' is

listed in the main part of the report. It includes work

for the State Electricity Commission of Victoria, other

State instrumentalities and mining companies. Much of it

is 1 one off' work of high technical quality. Suffice to

say that because of perceived inhibitions, no serious

attempts appear to have been made to define an

appropriate area of non-defence work for the Ordnance Factory, Bendigo.

(b) Defence work:

The engineering staff at the Factory gave evidence to

the Committee about a number of defence projects which,

in their view, could have been directed to the Factory.

Reasons were advanced by the Defence Department as to

why these projects were ultimately directed elsewhere.

On the evidence available, I am not able to reach any

firm conclusion in relation to this argument. The

problem is compounded by the difficulty of determining

1 where the buck stops' in the decision-making process.

There have been prevarications and changes of mind by

governments on defence procurement policy, and the

processes within the Defence Department seem

extraordinarily complex and protracted.

I am not alone in this view. The Parliamentary Joint

Committee on Foreign Affairs and Defence has expressed

similar opinions. The Defence Manufacturers Association

of Australia, a private industry body, clearly regards

the delays and prevarications which have bedevilled the

81

Ordnance Factory as intolerable for private industry.

Their recent submission to the Defence Review Committee

expressed their views as follows:

1 The defence related industrial sector is a unique national asset which deserves special consideration - and economic support - in Australia's contingency planning for an acceptable level of self-reliance.'

'There is a need to envoi ve a credible and

valid production planning and programming system to overcome the unnecessary complexity, delays and lack of information. '

Senator Siddons in his report has set out in some detail

his views about the Defence Procurement Process with

which I basically agree, although I regard myself as too

inexpert to confidently arrive at his conclusions about

the use of the OTO-Me 1 a r a gun on the Follow On

Destroyers and the Patrol boats. I was not, however,

persuaded by the vagueness of the Defence Department

response to this suggestion.

Senator Siddons also deals with the matter of the

purchase of the 155 mm Howitzers from the United States

in Appendix 'A ' to his minority report. I agree with his

comments on this issue insofar as they suggest that

there is a cautionary tale which attaches to overseas procurement.

In the evidence before the Committee, there was little

in the Departmental evidence to suggest that any serious

efforts have been made to secure overseas sales for

Australian munitions factory production. In regard to

this matter, and the general under-utilisation of the

Bendigo Ordnance Factory, the following extracts from

the 1977 Report of the Parliamentary Joint Committee on

Foreign Affairs and Defence are of interest:

82

Defence Workload

4.65 What the industry most needs is a

workload and that workload should be in the production of munitions items. Preferably the work should come from orders placed to satisfy Australian defence requirements and the

Committee sees it as essential that purchases be made locally to the maximum feasible

extent. To this e n d , in the present

circumstance of a completely inadequate workload and the continually increasing cost of maintaining under-utilised capacity, the

Committee recommends that critical workload levels should be established for each of the factories and that the Defence purchasing system should be instructed that, wherever possible, munitions items must be purchased from the local factories unless there are clear and overwhelming national interest

reasons for overseas purchase. It recommends, too, that careful attention be given to

establishing ordering patterns designed to maintain as great a degree of workload

continuity as can be reasonably achieved.

Overseas Sales

4.66 Recognising that any major increase in the level of Service ordering of high usage expandable type stores is unlikely in the short-term future, the Committee has concluded that the factories should become more active and competitive in the world market for such

stores. It has reached this conclusion because continuity in producing munitions items is of far more relevance to the maintenance of

defence production capability than is a

miscellany of unrelated commercial work. Despite the difficulties enumerated in para. 4.51, the Committee recommends that strenuous efforts be made to achieve overseas sales and that policies in relation to pricing and to foreign sales of this nature be made as non-

restrictive as possible.

Commercial Work

4.67 The Committee does not wish to denigrate the benefit that can accrue from commercial work, more particularly in the engineering factories. It sees such work to be of little

83

value, however, unless it has a reasonably high technology content that can utilise and exercise the facilities and skills needed to be maintained for munition production. On balance the Committee recommends that a

limited amount of high technology work should be sought but that it should be priced on a

basis that makes a contribution to the fixed overheads of the factory (except in the

special circumstance referred to in para. 4.57) and does not make for unfair competition with commercial industry. At the same time it recognises that low grade commercial work, provided it is similarly priced, could on occasion be useful in plugging a workload gap.'

The evidence to this Committee leads to the conclusion

that the needs of the Joint Committee on Foreign Affairs and

Defence have fallen on deaf ears.

5. Implications of the closure

If the sale of the Bendigo Ordnance Factory results, as

I and many witnesses before the Committee believe, in ultimate

closure of the Factory, than I believe the social consequences

for the Bendigo district will be severe. I accept with some

qualifications the substance of the evidence before the Committee

which is set out in the body of the report. Apart from the social

and economic impact on the City of Bendigo, there are a number of

important social policy considerations involved. These are as follows:

(a) Loss of a technological base:

Australia cannot, I believe, afford dismantling of an

engineering complex such as Bendigo Ordnance Factory

unless every possible way of avoiding that decision has

been fully explored. I do not believe that this is the case.

84

The experience of the sale of the Ball Bearing Factory

at Echuca is a salutory example of Australia losing

completely an important technical capacity which has

resulted in overseas dependence and increased cost.

It is apparent from the evidence that if there is a sale

to private enterprise and/or closure, there will be a

loss of expertise related to a particular function.

This, in my view, is to be deplored.

(b) Decentralisation policy:

For years, governments have given lip service to the

importance of decentralised industry and in many ways,

including stability of the labour force, contribution to apprenticeship training and work for local industry, the

Bendigo Ordnance Factory has illustrated the social

value of policies of this kind. I am not satisfied that

these facts have been sufficiently taken into account in

considering, for example, the option of removal of the

defence capacity to Maribyrnong Ordnance Factory as

advanced by the Department of Industry and Commerce.

(c) Employment:

If the Factory is closed or run down, unemployment of a

substantial section of the workforce will result. The

social cost to those involved will be considerable, and

the costs to taxpayers in unemployment benefits will

also be significant. It is assumed, but in no way

established by the evidence, that some of the employees

could be relocated at the Ma ribyrnong Ordnance Factory.

Again, the social costs to such employees in terms of

selling houses and buying new ones, family dislocation

and resettlement would be significant. Further, costs to the taxpayers would be involved. The Public Service

85

Board has provided detailed information of the

entitlement of employees who might lose their jobs. It

would, I suspect, provide cold comfort to those

concerned.

6. Cost to the taxpayer

As I understand the evidence given to the Committee, the

cost to the Australian taxpayer of maintaining the Bendigo

Ordnance Factory in 1981 was in the order of $8.5 million, of

which $6 million was a cash payment and the balance in 1 notional

costs' (see para 4.10 of the main report). The question of costs

to the taxpayer is a crucial one in assessing whether the Bendigo

Ordnance Factory should be sold or not.

The figure of $8.5 million is a significant one, and the

1981 figure is in fact higher than in previous years. The

Department of Industry and Commerce assessed the annual cash

subsidy in the order of $4.5 million on average. In return for

this sum, there are a number of benefits which accrue to

Australian society, viz:

(i) maintenance of a large industry in Bendigo, with

consequent benefits to the economy of that region;

(ii) employment of approximately 650 skilled personnel;

(iii) a capacity to manufacture a variety of weapons or

component parts of weapons; and

(iv) a capacity to perform other heavy engineering work of a

high quality.

The problems of the Ordnance Factory stem from a failure

to adequately use the capacity referred to in the last two

points.

86

If the Factory is sold to private enterprise and

maintained with its present establishment, I am not convinced

that the cost to the taxpayer will be any less. According to the

evidence, it would be a condition of sale that the Factory would

continue to perform certain classes of defence work. Calculations

provided by an independent consultant to the Committee suggest

that assuming the 1981/82 defence workload of 123,000 man hours,

the government subsidy for defence work would be just under $5

million; 'In addition, Defence may be charged for work such as

production development currently paid for by the subsidy.'

A private firm would also be entitled to additional

subsidy in respect of commercial work such as the investment

allowance and tariff protection.

Accordingly, there may not be 'much in it'. The taxpayer

will carry a significant burden whether a sale occurs or not. It

is not, in my view, unreasonable to make a comparative judgement of the extent of this burden in a society where subsidisation is

rife and there is little concensus on the extent to which it should be continued.

According to my calculations, the subsidy from

government funds to the Bendigo Ordnance Factory is in the order

of $13,128 per employee per year (based on 1981 figures).

In a comparable heavy engineering industry (gears,

shafts and couplings) totally privately owned and employing 710 people (compared with Bendigo Ordnance Factory 6 50) , the 35%

tariff rate provides effectively an annual subsidy of $14,000 per

worker.

It is significant that one of the arguments in favour of

high protection for the motor vehicle industry is its relevance

to Australia's defence capacity. I make no judgement about the

87

issue of subsidisation in a general context. It is in my view,

however, relevant to the issues to be considered in this Inquiry

relating to a government owned Defence establishment. I consider

cost to the taxpayer as a relevant and important issue, and

because of this, relative cost to the taxpayer is of some

significance.

The Committee received little satisfactory information

from the Defence Department or Industry and Commerce on the

question of costs to the taxpayer in the event of the Factory

being closed. Sufficient to say that these costs would include:

(i) unemployment benefits;

(ii) severance payments;

(iii) costs of removal of certain plant and equipment to an

alternative factory;

(iv) costs of removal of certain staff; and

(v) economic and social costs to Bendigo.

These items are of course unquantifiable, but would not,

in my view, be insignificant.

7. Conclusion

Ultimately one's assessment of the future of the Bendigo

Ordnance Factory is a matter of impression and judgement of what

is best, having regard to a number of relevant factors.

The Government's stated reason for the proposed sale is

exposed in the following terms:

'In the view of the Government, activities of a commercial kind are generally best performed

88

in the private sector, where they are open to greater influence from consumers and to the disciplines of competition.

The Government has therefore decided that a number of significant activities presently carried out by the Commonwealth Government can more efficiently be undertaken by private

enterprise.

We propose to offer for sale as a goigg

concern the Ordnance Factory at Bendigo

The rationale is that the Bendigo Ordnance Factory is

not 1 of a commercial kind1 , as defence procurement as currently

organised is not open to 'influence from consumers' in the normal

sense of that expression, and a subsidised industry is only

marginally subject to the 'disciplines of competition'.

The Government's 'stated reason' is not a cogent one,

though in fairness it should be said that the arguments for a

sale if it could be assured of success are of considerably more

weight than those advanced by the Government in the passage

quoted above.

The issues in this Inquiry are not, in my view,

ideological ones, they are essentially practical. If a sale were

made to a private company which was, in the words of my colleague

on the Committee, Senator Crichton-Browne, an '... efficient,

competent, capable, imaginative private enterprise operator

...'^, then I would welcome it because it would avoid the social

and economic consequences for the workforce and the City of

Bendigo which have been predicted in the event of a closure of

the Factory. It would also maintain an establishment of

importance in terms of technological capacity. I do not think,

however, that this is a likely possibility.

In my opinion, the future of the Bendigo Ordnance

Factory would be best assured by its retention in government

ownership, because of the weight which I give to the evidence on

the matters which I have canvassed in this minority report.

89

Needless to say, I am against the Factory being allowed

to continue indefinitely at its present level of operations.

Improvements in the process of defence procurement, a firmer

commitment to greater self-sufficiency in defence manufacture,

and a more rigorous and imaginative examination of the Factory's

possibilities in work other than defence manufacture, could

enable the Factory to make a more significant contribution than

it does at present.

Senator J.N. Button

90

ENDNOTES

1. Joint Committee on Foreign Affairs Support for Defence Needs and Allied and Defence 1 Industrial Matters', October 1977.

2. Of this amount, $6 million was in cash subsidy.

3. Department of Industry and Commerce submission, p. 8.

4. Attorney-General for Victoria and the Commonwealth 533. 52 CLR, p.

5. ibid, p. 558.

6. Review of Commonwealth Functions, p. 6.

7. Evidence, p. 167.

91

1,

■ I .

ι. /

> _

!>

i n · . ·

1 ■

1· ·

■ · ■

DISSENTING REPORT BY SENATOR JOHN SIDDONS

Contents

Summary Introduction Need for a strong defence industry Arms race Australia's situation

The perils of dependence Future of munitions factories Mounting Harpoon on Fremantles and Rivers Class DEs Cost of closure Munitions Supply Division in need of reorganising Procurement process Recommendations Appendixes

Summary

The Ordnance Factory, Bendigo, should be retained as a

government owned and operated enterprise and not sold to private

industry. Better planned procurement will enable OFB to make a

major contribution to Australia's defence preparedness in the

next 15 years, particularly to the 105mm gun and several possible

RAN programs.

The dangers of operating warships which cannot

adequately defend themselves against missile attack, and which

have no retaliatory capability, are too obvious to ignore.

Refitting the Fremantle class boats with a modern weapon

and mounting this also on the Follow On Destroyers would give

Australia a useful technology, give these boats a much more

respectable capability and provide OFB with more than 2 million

manhours work.

93

Introduction

Australia's survival depends on the control of the air

and sea around the continent. Since the early days of this

century we have maintained a modest navy to protect the sealanes,

and gradually developed a defence industry capable of maintaining that navy.

When Australia entered the Second World War, the RAN

possessed two heavy cruisers, four light cruisers and a flotilla

of elderly destroyers, with a total of 16 eight inch guns, 32 six

inch guns and many smaller weapons. All were imported, except

HMAS Adelaide.1

But during the course of the war circumstances threw us

on to our own resources to maintain and produce the armaments

with which to wage war. A number of government-owned munition

factories were therefore established, including the factory at

Bendigo, which was specifically to manufacture heavy naval 2 ordnance.

The skills concentrated at Bendigo are a unique and

valuable resource.3 As Australia engages in a modest but

significant period of rearmament, they should not be dispersed.

The skills and capabilities of a factory such as OFB are

as much a part of the skills of various individuals and works

teams as the technical capacity of the machinery. It has been

estimated by the factory management that it would take at least

five years to build up the skills level if another workforce had 4

to take the factory over, i.e. if the factory was sold. The cost

of replacing the factory would be around $200 million.

Need for strong defence industry

No less a person than the Prime Minister, the Right

Honorable Malcolm Fraser, C.H., has pointed to the need for

94

strong defences, and in April, 1981, noted former diplomat Sir

Keith Shann made a strong call for the development of our defence

industry. Sir Keith said:

our credibility as a nation makes it

imperative that we have and use the capacity to build our ovgi aeroplanes, ships, weapons and ammunition.'

In a speech on 24 August, 19 8 0, Mr Fraser said

democratic countries had a responsibility to upgrade their

defence preparedness because of Soviet power play around the

world. Pointing to a real seven per cent increase in defence

expenditure in the 1980-81 Budget, Mr Fraser said much of the

increase would be spent in Australia on purchases and equipment

made in Australia.®

In a speech made on 1 August, 198 0, he said Australia

must increase its general level of defence preparedness and

accept a higher real level of defence expenditure.

1 In short, we must be more prepared for the uncertainties of the future.1'

And in May last year he recalled that four decades

earlier the world had embarked on a terrible conflict which

Winston Churchill had rightly called 1 the unnecessary war'.

'It was unnecessary because comparatively modest steps would have been sufficient to deter it had they been taken early enough.

In the name of peace and business as usual, those steps were not taken. Those who

advocated them, including Churchill, were denounced as warmongers. It would be tragic - indeed it would be disastrous for the humag race - if that mistake were ever made again.'

Few could disagree. And yet this government now proposes

to sell off to private industry - which has shown acute lack of

95

Ί

fcv

interest - a factory which possesses several unique capabilities,

and could play a major role in the 1980's rearmament program.^

It seems ironic that Mr Fraser's government has made

several major overseas purchases both before and since the

1980-81 Budget statement. No consistent policy can be determined

by an analysis of the various decisions, not even cost. For

example the government recently announced that Australian

industry would build a new basic trainer for the RAAF at a unit cost more than three times that of some overseas competitors, yet

the aerospace industry may have problems delivering the local

aircraft because of timescale clashes with the FA-18 program.

This decision will cost $100 million more than if the trainer had

been bought overseas; money which, if it had been allocated to

the ordnance factories in the form of orders, would have kept

them in business for many years, increased their technological

skills and given Australia many capabilities this country does

not possess. The trainer order would not increase technological

skills, will use a familiar level of technology, and the aircraft

will almost certainly be unexportable except at give-away,

heavily subsidised prices.

OFB can produce most items at competitive prices.

Arms race

Let us not be mistaken. The super powers are engaged in

an arms race the like of which has not been seen since the late

1930' s . The end no one dares predict, but those people who argue

that the next war will be short, and that any defence industrial

capability Australia might have is superfluous, must surely

recognise that the next war will be short only if we lose it.

Before World War I the common consensus of many

professional soldiers and other observers, even well informed

people, was that the next war would be over in a matter of weeks,

or months at most.

96

In September 1914 The Economist of London, perhaps the

most respected jorunal of finance, discounted Lord Kitchener's

prediction of a long war by stressing 1 the economic and financial

impossibility of carrying on hostilities for many months on the

present scale.' In the event the combatants' economies proved

more resilient than thought possible. There were fewer illusions

before the Second World War, but even then few could have forseen

the scope of the changes the war would bring to the world order.

Australia's situation

Australia is a major trading nation, dependent upon

international trade for its survival. Our primary produce, our

minerals and ores and, to a smaller extent, our manufactured

goods, are shipped to the four corners of the globe. Many of our

partners, particularly Japan and the United States, are similarly

dependent on the sea for trade.

In our own area many countries are expanding their naval

resources. India has begun a massive program of naval expansion

which will make it the dominant regional power in the Indian

Ocean within a few years. Malaysia, Singapore and Indonesia,

particularly the latter, have added new and powerful ships to

their fleets in recent years. Japan, which already possesses the

world's fifth largest navy in terms of tonnage, continues a

modest program of new construction.

The Australian Government has ordered four FFG-7 class

ships from the U.S.A. and indicated that two ships, which will

form Phase I of the Follow On Destroyer program (FOD), are

probably to be built in Australia to the American FFG design. But

major components for these ships - long lead items such as

gearboxes, guided missile systems etc, which take several years

to make, have been ordered singly and have thus had to be ordered

from the U.S.

97

It was originally intended that Ordnance Factory Bendigo

make these components, but administrative and funding

restrictions have made this impossible. OFB has been closely

involved in the FOD program since its inception and the decision

to order the long lead items which would have been manufactured

at OFB, from the USA, was a great blow to the factory and

represented a waste of hundreds of thousands of manhours' work.

Indeed the recent history of the factory shows it has

suffered from a succession of government decisions, often made at the last moment, to order particular items from overseas, rather

than the factory. Apart from the FOD I program already mentioned,

staff at Bendigo expended considerable effort on the Leopard tank

gun program before it was decided not to manufacture more than a

few spare barrels at OFB. Although the Leopard is undoubtedly a

magnificent vehicle, it manufacturer, Krauss Maffei of Munich,

emerges with considerable discredit from the program in relation

to its obligations to Australian industry.^

The perils of dependence part I - the Leopard program

The conclusion that Australia has been 1 taken to the

cleaners' by Krauss Maffei and German sub-contractors is hard to

avoid. For example Rheinmentall, the German licensee for the

British L7A3 105 mm gun, placed an enquiry with the Munitions

Supply Division for 200 of the 105 mm barrels. But when OFB was

able to prove its machining price was competitive with that of

Rheinmetall, the German company withdrew the enquiry, saying that it required the work for their own workshops, although the

company was at that time engaged in large scale production of the

gun for a number of countries. Even though the government did not

support ordnance manufacture at OFB, a foreign country had

sufficient confidence to place orders on the government owned

ordnance factories for the supply of 200 Leopard gun barrels to

the 'passed Y-tes t' condition and 50 Leopard gun barrels to the

'passed auto-frettage' condition.

98

The perils of dependence part II - the M198 Howitzer program

The M198 Howitzer program was also a disaster for OFB,

which worked on the program for nearly seven years before being

told - again at a late stage - that the guns were to be ordered

from the USA. In the event no advantage has accrued from this decision. The guns have not been supplied as early as had been

planned and there is reason to believe OFB could have provided

them earlier than they will now reach the army, (see Appendix A)

It is not clear whether the Australian responsible

authority was aware that soon after the Australian order was

placed with the American contractor, that contractor would engage

in an expansion program of such magnitude that deliveries of the

M198 have been seriously delayed.

But once we signed the contract, we were in a cleft

stick, at the mercy of the foreign contractor. If we turned to another supplier, we would still probably get the guns later than

planned and, depending on the terms of the contract, probably

have to pay cancellation fees, which would not small. The

American contractor can plead force majeur.

If the guns were made in Australia, at least we would

have some control over production priorities. Australian industry

could have manufactured a substantial proportion of the weapon,

assembled and delivered it earlier, at a competitive cost.

President Reagan's rearmament program is already running

into serious difficulties. Shortaged of skilled tradesmen, raw

materials and capacity are all combining to make nonsense of his

original plans for rearming America. For example, when the United

States sent M-60 tanks to Israel in 1973, it took years to

increase the tank production rate to cover the gift. There is now

only one manufacturer of castings for turrets and hulls of the

99

tanks (see Appendix B). These difficulties are very disturbing.

Their implications for America's allies, such as Australia,

Canada and Japan, are equally disturbing. Can we honestly expect

the U.S. to supply us with weapons when it cannot even

manufacture sufficient for its own burgeoning needs?

The M198 experience illustrates some of the difficulties

involved in purchasing arms abroad. Firstly, there are only a

limited number of suppliers, often only one in each arms

producing country. Secondly, products from a number of countries

are not acceptable to the defence forces for technical, strategic and political reasons.

For example, in the case of the 155 mm Howitzer, there

were at least seven competing weapons - one each from Argentina,

Finland, France, Israel, Sweden, a European consortium consisting

of Britain, Italy and Germany, and the United States.

But the ' serious1 contenders were only two - the

European FH70 and the US M198 - and the latter was chosen,

presumably for technical and strategic reasons, although these 14 have not been divulged.

Thirdly, we have little control over production

priorities and must accept that production for local requirements

will have priority over weapons for export to countries like Australia.

Nobody suggests Australia should become totally self-

reliant in defence because the cost would be astronomic. But it

does not seem a bad long term aim to increase our level of self

sufficiency to the greatest practicable extent. It seems foolish

to have munitions factories being paid millions of dollars a year

to maintain certain capabilities which are not exercised and to

simultaneously pay a foreign country hard earned foreign exchange

for exercising identical capabilities. We are, in effect, paying

twice for the same thing.

100

Future of munitions factories

Evidence and information available suggests the firms

interested in purchasing OFB are unlikely to want to take the

factory over as a 'going concern' , but are more likely to be

interested in removing certain equipment. The reasons are

obvious: armaments manufacture is such a difficult business that

it can only be profitable when either the domestic market is

large or when there is a sizeable export market. At present

Australia is not in either situation and it would take

considerable effort to build up an export industry, particularly

in the field of heavy weapons manufacture. Licences would have to

be negotiated and agreements sought on rights to certain

countries and so on.

In addition the defence sales organisation is pitifully

small and apparently consists of only a handful of people working

within the Department of Industry and Commerce. This is surely inadequate for an industry with an export potential of hundreds

of millions of dollars. The lack of marketing expertise has cost

Australia dearly. For example British Aerospace has the rights to

market the Ikara system to other countries, which meant that when

the Ikara system was sold to Brazil, BAe took a percentage.

Brazil and Israel have both developed their arms

industries very considerably in the last 15 years and by

aggressive selling have made their industries into major export

earners. Brazil probably has the unique distinction of selling

arms and ammunition to both the West and the East.

Of course arms sales may raise foreign policy problems,

but Australia would probably be most interested in South-East

Asian and Pacific markets - countries with which Australia

generally has cordial and close diplomatic relations. In most

cases Australia is already a supplier of arms and military aid to

these countries.

101

There are a number of projects which will come tc

fruition in the next 15 years which may have export potential in

the South-East Asian and Pacific regions: the British 105 mm

Light Gun (Project Hamel); possibly the OTO Melara 76 mm gun; the

76 mm gun and turret adaptor ring presently being manufactured at

Maribyrnong for the Fire Support Vehicles; the M-113 replacement,

project Waler; and possibly canister launchers for Harpoon

missiles. If the government decides to refurbish the Centurion

tanks, now stored, the gun (at least) could be manufactured at OFB.

Most of these projects could provide work for Bendigo

and other factories a n d , if the appropriate licences were

negotiated and agreements made, could provide a lucrative source of foreign exchange.

OFB was primarily intended to manufacture heavy ordnance

and heavy engineering items for naval ships. As such it was

involved in the original River class DE (destroyer escort)

program (successfully), the DDG (guided missile destroyer)

modernisation (but work eventually done in the USA) , the DDL

(light destroyer) project (cancelled), the FFG (guided missile

frigate) program (some work, not as much as hoped) and the FOD

(Follow on Destroyer) Phase I (work also given to the USA).

A golden opportunity exists now for significant

Australian participation in the FOD Phase II program for four

ships and the Follow On Patrol Boat program of five units. OFB

stands to gain a major slice of the action if timely decisions

are made. If OFB was directed to make major long lead items, it

would be kept busy well into the 1990's, produce them at

competitive prices and deliver them on time, (see Appendix C for

further details).

102

Mounting Harpoon on Fremantles and River Class DEs

The Harpoon missile is available in canister launched

form suitable for fitting to even quite small ships, down to 60

ton hydrofoils. The total weight of two four round canisters is

less than eight tons and the cost of such an installation would

be about A$10 mill ion"*"^. Adding two such canisters to the Fremantles and the Rivers would give them some punch and

something to fight with in today's naval environment. At present they are almost completely helpless.

The vulnerability of these ships cannot be stressed too

highly. Although both classes have sophisticated navigation aids,

their Bofors guns have only one tenth the accuracy required to

engage modern sea-skimming missiles. The 4.5 inch guns on the

Rivers are 35 years old in design and are also obsolete.

Basically the ships would be sitting ducks, utterly incapable of

1 mixing it' even with boats like the Indonesian Komar class, or

any other similar missile boats. The Seacat missile systems on the Rivers have only limited effectiveness against sea-skimming

missiles.

The Fremantles, and indeed all the larger ships of the

Royal Australian Navy, do not possess adequate anti-missile

weapons. Deployment of River class escorts or the Fremantle class

patrol boats in areas in which hostile missile-equipped forces

were likely to be encountered would be akin to pitting Wirraways

against Zeroes in the Second World War.

The pilots of those aircraft said, in the manner of

Roman gladiators, 'we who are about to die salute you'. It seems

a pity we have not learned from their sacrifice.

Cost of closure

Apparently most of OFB's ordnance manufacturing could be

done at OFM if the latter's capability was broadened. However ,

103

staff would have to be transferred to Melbourne and so would

equipment, at considerable cost, and with a fatal effect on OFB.

Maribyrnong sometimes has difficulty obtaining and retaining the

highly qualified staff it needs for its present activities,

whereas Bendigo's workforce is more stable. Nor could the heavy

engineering facilities be transferred; DIAC has already excluded

this option on cost grounds.

OFB presently employs about 600 people. If it was

closed, it is likely most would have to join the dole queues,

because there is little likelihood of them getting jobs in

Bendigo, which already has quite high unemployment. Although the

factory employs only 3 per cent of the city's workforce, the

multiplier effect is likely to mean perhaps a thousand jobs would

go, which in a city the size of Bendigo is not a prospect to be

viewed with enthusiasm. The direct cost of supporting the

unemployed workers could not be much less than $7 million . It

is perhaps noteworthy that in nearby Castlemaine the unemployment

rate is 30 per cent; higher than it was during the Great

Depression.

Munitions Supply Division in need of reorganisation

The present structure of the Munitions Supply Division

is unsatisfactory and the government should seriously consider

reorganising the division. In reply to a question the Department

of Industry and Commerce revealed that work had been done on the

possibility of instituting something like the British system,

where the Royal Ordnance Factories (ROF) remain owned and

operated by the Crown but are run as commercial enterprises,

independent of and at no cost to the Ministry for Defence.

Such a significant change could not be instituted in

Australia quickly. The Department has had to ask a distinguished

engineer from outside the Munitions Supply Division to accept the

position of Controller of Munitions, because no satisfactory

104

applicant replied to advertisements for the position in 1981.

This can, at best, be regarded as an interim solution only, for

the current appointment is only till October 1982.

Staff ceilings have severely affected the efficiency of

the factory and it is important to correct the impression given

in evidence that it is only operating at half capacity. At

present it is operating at full capacity, but its capacity has

been reduced by staff ceilings and is presently about 330,000 manhours per year, rather than the 640,000 manhours which has

been widely mentioned.

An alternative to the ROF system would be the American,

where there are three types of arms factories: government owned,

government operated. (Go-Go); government owned, company operated

(Go-Go); and company owned, company operated concerns (Co-Co). If

the government remains committed to selling or changing the

status of Bendigo, perhaps an agreement similar to the Go-Co

arrangement in the U.S. could be worked out under which the government would retain ownership of all the equipment there and

lease it to a private operator. Such an arrangement has a number

of advantages:

(a) the interests of most of the employees could be

safeguarded by appropriate agreement with the lessee;

(b) the factory would remain a 'going concern' and not be dispersed, thus the expertise built up would not be

lost; and

(c) a private company could increase staff levels so that the factory could operate efficiently and it would also

be able to tender for private, non-defence work without

restriction, thus getting around the possible legal

difficulties.

105

The disadvantage is that the government would probably

have to still subsidise operation of the factory, or discount the

lease to reflect the fact that parts of the factory, while vital

to Australia's defence industrial capability, are not economic for private interests.

Procurement process

There is considerable evidence the procurement process

is a major problem for the Australian defence industry. Factories

like OFB which produce heavy engineering items with long lead

times are severely affected. Delay in the procurement process has

meant work has had to be given to the established production

lines of overseas firms, because there was not enough time for

OFB to meet delivery schedules.

It is completely unreasonable for the administrative

procurement process to take 75 per cent of the time allocated to

a program, as is clearly shown by flow charts made available to 19 the committee. Although the committee should be aware this excessive evaluation period is by no means unique to Australia, a

major effort should be devoted to shortening and simplifying it

drastically. Excessive procurement time can mean weapons are

outdated by the time we decide to buy them.

Recommendations

1. The Ordnance Factory, Bendigo, should remain a

government owned and operated factory. The factory possesses a

unique combination of technical skills and facilities important

to Australia's defence preparedness. It is the only factory in

Australia which has the trained staff and specialised facilities

to produce heavy naval ordnance such as will be required for the

Follow On Destroyers, and modern naval guns capable of engaging

missiles. Many ships in the RAN lack this capability.

106

2. OFB has repeatedly demonstrated an ability to compete

with overseas suppliers in terms of quality and cost. If orders

placed with it were properly planned, it could also provide timely delivery for major long lead items.

3. OFB could play a significant role in several major

programs planned for the Australian Defence Force, including the

105 mm Light Gun for the Army and the Phase II Follow On

Destroyer program for the Navy.

4. Closure of the factory would have serious social

consequences for Bendigo and increase unemployment in an area

already badly hit by unemployment. Unemployment in Bendigo would

probably increase by a round 50 per cent if the factory was

closed.

5. Sale of the factory to private interests would raise

many difficulties which the Department of Industry and Commerce

has not resolved. In particular, despite the expressed wish of

the Departments of Industry and Commerce and Defence to not

reduce the overall capacity of Australian industry, the sale of

the factory would:

- risk loss of the capability developed by the present

staff and the facilities at OFB

- risk the stripping of the factory and dispersal of both

its equipment and staff.

6. The evidence shows Australia cannot depend on even the

most benevolent foreign countries for such basic weapons as

artillery.

7 . Foreign suppliers have shown an unwillingness to provide

satisfactory industrial offsets for Australian industry.

107

8. The Munitions Supply Division ought to be re-organised,

preferably on lines similar to those of the Royal Ordnance

Factories in Britain, removed from the control of the Department

of Industry and Commerce and given the status of a publicly-owned

corporation operating as far as possible on commercial lines.

9. A Defence Sales organisation ought to be set up to

promote the sale of Australian made defence products overseas.

10. Leasing the factory on a similar basis to that used in

America ought to be considered as a second alternative.

11. The defence equipment procurement process ought to be

streamlined and simplified. Its complexity and length gives

contractors typically only one quarter of the time taken for the

acquisition process to actually manufacture equipment. This is

particularly critical for suppliers of long lead time equipment

such as OFB.

12. The Government-owned Ordnance Factories should be able

to do as much commercial work as is necessary to exercise the

skills and functions they possess.

Senator J.R. Siddons

108

ENDNOTES

1. The two heavy cruisers, HMAS Canberra and Australia, the three modern light cruisers, HMAS Perth, Sydney and Hobart and the destroyers of the First World War V class, were all built in Great Britain.

HMAS Adelaide, a light cruiser completed shortly after World War I, was built at Cockatoo Island Dockyard, Sydney, albeit to a British design.

2. The factory was begun in 1941 and production started early in 1942. It was originally intended to produce heavy artillery pieces and to recondition large calibre naval guns (from General Information relating to the sale of Ordnance Factory, Bendigo, published by the Department of Industry and

Commerce).

3. The prime purpose of OFB is, according to the document

mentioned in 2., the manufacture of ordnance stores such as gun barrels, gun mountings, marine propulsion gearing, general gearing and general engineering items; and the manufacture of spare parts, and the modification and

reconditioning of such stores as above.

In certain technical areas, for example reduction gearbox manufacturing, it has a unique capability in Australia. A spokesman for the Western Gear Corporation, a major

manufacturer of gearboxes for the United States Navy, described OFB as having a greater capability to manufacture such gearing than the rest of Australian industry put

together, (see Professional Engineers' submission.)

4. See evidence, Professional Engineers' submission.

5. See ' Build our defences and hang the cost', by Sir Keith

Shann, in Pacific Defence Reporter, April, 1981, published by Peter Isaacson publications, Prahran, Vic., 1981.

6. Reported in The West Australian of 25.8.80.

7. Reported in The Canberra Times of 2.8.80. Mr Fraser was

speaking to the NSW Liberal Party's annual conference.

8. See the Prime Minister's electorate talk for Sunday, 4 May, 1980.

9. See Note 3.

10. See letter ' The case for the Pilatus PC-7' p. 3 of Pac i f ic Defence Reporter for December 1981/January 1982. 1 1

11. See ' The Causes of War' by Geoffrey Blainey, p. 215,

published by Macmillan, Melbourne, 1973.

109

12. During the Commonwealth Heads of Government Meeting, Mrs Indira Gandhi, Prime Minister of India, was quoted in the Melbourne 'Age' as having said there had been an 1 ominous intrusion' by the major powers into the Indian Ocean, which had led to an 1 alarming build up of naval power'.

Perhaps the superpower build up in the Indian Ocean is the reason for India's own major expansion of her navy, already larger than Australia's and already capable of dealing with Pakistan and simultaneously conducting amphibious operations

in the Bangladesh/Burma area.

India's naval program includes

- purchase of eight Sea Harrier aircraft for the aircraft carrier Vikrant

- modernisation of Alize anti-submarine carrier-borne aircraft

- modernisation and refit of Vikrant

- studies for a 10,000 tonne replacement carrier

- construction of four German designed submarines

- construction of five large general

purpose escorts to an enlarged Leander class (British) design, with much Russian equipment and armament. These capable ships will have surface-to-surface missiles, short range surface-to-air missiles and two large Sea King anti­ submarine helicopters

- acquisition of seven or eight Soviet

Nanuchka class missile corvettes armed with surface-to-surface missiles and surface-to-air missiles. Four are already in service.

- six Polish Polnochny III class LCTs

(Landing Ship Tank)

- six Natya class ocean minesweepers

already delivered from USSR

- modernisation of 16 Os a class missile boats

One commentator has noted, in the PDR 1980-81 Yearbook, 'The strong Indian army and air force have been justified since

110

independence by war with Pakistan and China. There is a need for defensive maritime forces. However the need for very substantial long-ranged and modern surface and submarine forces is less clear. Whatever her real motives, India has a major force capable of invading Sri Lanka and the other

island states of the Indian Ocean, dominating the approaches to the Malacca Straits and the Straits of Hormuz and

marauding the trade routes of the Indian Ocean.

Hindu India's strength cannot pass unnoticed by other Indian Ocean littoral powers, including Indonesia and Malaysia.1

It should be noted that with the exception of the Kashins and the Nanuchkas, most of this program will be fulfilled in India. Even the submarines will be built in India, after the lead unit.

Japan

The Japanese Maritime Self Defence Force possesses 14 submarines and 50 destroyers and frigates, making it the world's fifth largest after the US, USSR, UK and France.

13. Under the terms of the contract for the Leopards signed in early 1975, Krauss Maffei was obliged to provide Australian industry with work to the value of 30 per cent of the value of the contract within seven years of the signing date. This period will expire early in 1982. The value of the Leopard program so far has been $129.7 million, which should have given $38.91 million offset to Australian industry.

The most recent published information suggests that only $3 million of this target has been achieved, or only 7.7 per cent. In answer to Question on Notice number 286, the

Minister for Defence, Mr D.J. Killen, said on April 5, 1978 that the contractor was 'satisfactorily pursuing the object' , but admitted that many offset proposals were considered unsuitable because they did not advance Australia's

technological level. The Minister also said he saw no reason why the requirements would not be met.

A clause in the contract stated that the offset work must be competitive in price, quality and delivery, but the German company and its subcontractors have consistently spelled out delivery schedules which only they could possibly meet. This

is quite unsatisfactory.

14. Interestingly the Netherlands and India have also ordered the American weapon. The Netherlands ordered 144 in October 1980 and India 230 in the same month.

15. The programmed unit cost for Harpoon missiles in the Fiscal Year 1981 US Defence Budget is US$732,083 or A$649,355. This is for the missiles only. Japan recently bought 32 Harpoons

ill

for US$1,218,750 each, or 66 per cent more than the American cost. It can be assumed the extra is for support and spares. On this basis eight would cost Australia about $8.65 million, including support equipment.

16. An article entitled 1 The Battle Against the Sea-Skimmer' in the May 1981 edition of International Defence Review

highlights the problem. At a range of 1,000 metres a sea skimming anti-ship missile travelling at Mach 0.9 (90 per cent of the speed of sound at sea level, or 1100 kph/684 mph) is less than four seconds from impact with the vessel under attack, and has an apparent diameter of 0.35 mils. A gun with a one sigma deviation dispersion of 1.0 mils, which is highly accurate by current standards, still puts only 38 per cent of the total number of rounds fired into a circle of 1 mil

diameter. The Bofors 40 mm BOFI gun has a dispersion of 3.0 mils.

When we stop to consider that the level of performance quoted is that of the gun only and does not take into account the aiming errors in the target tracking system, or pointing errors and noise in the gunmount servos, the magnititude of the anti-missile gunnery problem becomes apparent.

17. Based on the cost of unemployment benefits for 1,000 people, their dependants and the cost of free hospital care and other benefits.

18. ' From July 1, 1974 the operations of the Royal Ordnance Factories have been financed by means of a Trading Fund instead of by annual votes and appropriations. So no vote (or budget) provision has been made for their operations in Defence Estimates. The disciplines and responsibilities of the new funding arrangements coupled with the greater autonomy which the Trading Fund has brought should provide the opportunity and means to improve the high standards maintained in the past.' - The UK Defence Estimates 1975.

The 1980 Defence Estimates contain the following - 'The Royal Ordnance Factories constitute a large manufacturing enterprise operating under a trading fund. They supply a large proportion of the equipment needed by our Armed Forces, producing ammunition, armoured vehicles, guns, small arms and

engineering equipment. Over half of the ROF output by value is for export and this excellent performance is expected to continue. The ROFs are becoming more involved in

collaborative projects and more effort is being put into design and development to complement the productive

capacity.'

19. See paragraph 3.55 of the main report which includes a copy of the flow chart.

112

APPENDIX A

In March, 1976 OFB initiated pricing studies on two different 155 mm Howitzers each of which were candidates for a future Army purchase. One was the US designed M 198 and the other was the FH70 designed under a tr i-partite agreement by the UK, West Germany and Italy. In the period March 1976 to March 1980,

OFB conducted a number of option and AIP studies on each weapon. This included lengthy negotiations with Vickers Ship Building Group Limited of UK (VSGL), the agents for the FH70. VSGL went to the extent of sending a representative to OFB for several days to help further develop AIP proposals.

Both weapons had to be studied because Defence did not make type selection until 31 March 198 0. The result of the

studies was that OFB was in a position to manufacture the saddle of the FH70 and was also interested in manufacture of the FH70 barrel. The study of the M198 had concluded that carriage

manufacture was uneconomic, but OFB could supply the complete cannon assembly and also could assemble and proof the weapon from US supplied sub-assemblies less the cannon. OFB's prices for the cannon and for final assembly and proof were competitive with the US prices.

In March 1980 Defence decided to select the M198 and accept a US offer for the supply of 36-No 155 mm M198 Howitzers from the US. If Defence accepted the US Letter of Offer and

Acceptance (LOA) by 1 December 1980, then a delivery beginning December 1981 to be completed 6 months later was promised. Defence (Army) argued that local participation (OFB supply of cannons) would cause cost and delivery penalties and therefore the Howitzer should be purchased complete from the US. This was accepted and after Government approval, an order for 36-No M198

Howitzers valued at approximately 36 million dollars was placed with the US Defence Department. This order contained no provision for part manufacture or designated AIP.

The following points should be made about this purchase:

(i) The option of part manufacture by OFB (supply of

cannons) was rejected on the grounds of delivery. The promised US delivery was to commence December 1981 and finish by June 1982. The current reported delivery date (unconfirmed) has now been extended by the US to

commence early 1984 and is expected to slide even further.

(ii) Delivery of cannons ex OFB could have commenced in 2 /„ years from order at 1 per month, increasing to higher rates as production became established. This would have meant delivery could have co mmenced early in 1983, at

least 1 year ahead of the currently proposed US

delivery.

113

(iii) OFB first began studying 155 mm Howitzers early in 1976. If Defence has placed orders by, say, late 19 78,

deliveries in 1981 could have been achieved.

(iv) The US has extended the delivery on the grounds that all weapons for the US take precedence over sales to foreign countries (unofficial report). While part manufacture at OFB would not solve this particular problem, it again highlights the problem of total dependence on foreign suppliers.

(v) Loss of workload to OFB for supply of proofed cannons in approximately 100,000 hours plus workload content of establishment cost. Combined with this is the loss to Australia of the expertise and experience which would have resulted from manufacture at OFB.

114

APPENDIX B

Article appearing in the U.S. News and World Report 17 August 1981

Special Report: Big Arms Buildup - It's Already In Trouble

A decade of neglect has left the nation's defense

industry in poor shape to meet the President's ambitious goals. In the works: A crash program to revitalize the plants that produce guns, planes , tanks, missiles.

President Reagan's plan for a massive military buildup has touched off concern that America's struggling defence industry may not be able to meet its most critical challenge since World War II.

The industry today is only a shadow of the powerful "Arsenal of Democracy" that churned out vast quantities of weapons during earlier crises. It has been steadily declining since the end of the Vietnam War.

Now, say many experts, producers may be hard put to provide the hardware that Reagan wants as part of his plan to pump an additional 184 billion dollars into the defense budget over the next five years. This would bring total military

spending for that period to 1.5 trillion dollars. An extensive study of the problem by US News & World Report shows that the military-industrial complex is hampered by -. A scarcity of many raw materials, including titanium,

which is vital to the manufacture of modern warplanes.

. The loss of hundreds of suppliers with expertise in

filling defense contracts. The Army, for instance, has just one manufacturer of turret castings for tanks.

. A severe shortage of skilled workers in many key phases of production.

. Many plants that have grown obsolete. In the aftermath of the Vietnam War, demand for their products has been sharply cut.

The Pentagon is striving to overcome these obstacles with a 500-million-dollar drive to revitalize America's arsenal. But the magnitude of the problem - and the potential impact on Reagan's ambitious plans for a military buildup - show up in this

intensive examination of the nation's defense industry.

115

The Crunch in Raw Materials

The effects of a shortage of metals and raw materials already are apparent, both in higher prices and long delays in weapons production.

A case in point is the Pratt & Whitney F-100 engine, the power plant for the supersonic F-15 and F-16 warplanes. Largely because of a shortage of lightweight titanium, used in producing this and other high-performance jet engines, delivery times have more than doubled recently - from 19 to 41 months.

Delivery spans for titanium sheet, used by McDonnell Douglas for bulkheads and wing spars on its F-15 fighter, have increased by as much as 65 weeks since 1975. Deliveries of one type of airframe once slipped from 28 months to 42 months, primarily because of lack of aluminum. Chromium, an essential engine element in the Army's new Ml tank, also has been scarce.

Costs have skyrocketed. For example, the price of cobalt, used in production of F-15 and F-16 engines, shot up 246 percent after the 1978 Shaba rebellion in Zaire interrupted that nation's exports of the metal. This boosted the price per engine by $18,000.

The raw-materials crunch could become crippling in event of war. The U.S. is 50 to 100 percent dependent on foreign

sources for 23 of 40 commodities considered vital to American security. Titanium, manganese, tantalum, cobalt, chromium and platinum are all vulnerable to being cut off in a full-scale conflict. Many of these materials are imported from politically

unstable areas such as southern Africa.

Compounding the danger is a sharp deterioration in the country's stockpile of strategic minerals, which is supposed to provide a three-year cushion against interruption of imports. Reserve levels fall well below that goal. One example: The U.S. stockpile of high-quality quartz crystal, critical to navigation systems, was virtually depleted after 1976.

The situation is summed up in this fashion by Harry Gray, chairman and chief executive officer of United Technologies Corp. : "When it comes to certain critical materials, the United States is a have-not nation. We are frighteningly vulnerable to overseas producers."

Vanishing Subcontractors

Almost as scarce as raw materials these days are

military subcontractors - companies that provide vital components, equipment and assembly help to prime defense contractors. Since the Vietnam War, thousands have been driven out of business by uncertain budgets, abrupt cancellation of weapons systems and other problems.

116

Some 25 percent of Navy suppliers have dropped out of military work, and the problem is even more severe for the Air Force. By one estimate, the number of aerospace suppliers has fallen to 3,500 from a high of 6,000 in 1967.

Today there is only one producer of precision ball bearings for military airframes and a single manufacturer of castings for turrets and hulls of the Army's M60 tanks. Five companies are available to produce certain digital microcircuits used in sophisticated military guidance systems. Only three suppliers make the large forgings for such things as aircraft

ribs, landing gear and engine parts.

One result: Longer lead times for aircraft parts. The Defence Science Board says that between 1976-80, delivery times increased from 20 to 120 weeks for aluminium forgings, from 25 to 62 weeks for integrated circuits and from 20 to about 120 weeks for landing-gear parts.

Delays can be equally bad for advanced aviation

components. One contractor once was able to manufacture radar systems for advanced U.S. jets within 12 months; now, it takes 27 months, mostly because of supply bottlenecks.

Other services are also affected. The Army's Ml tank, for example, incorporates infrared sensors in its gunsight - devices that require mercury-cadmium-telluride detectors. But Hughes Aircraft, one of the few suppliers, has a hard time making

enough of the components on time to meet Army needs.

Apart from expansion plans, some analysts feel the Pentagon could be hard pressed just to maintain current rates of production, especially in aircraft. Between 1977 and 1980, delivery times of key Air Force planes grew steadily longer, as much as 10 months for the A-10 and 8 months for the F-l5.

Some experts fear that delays and costs could go out of sight should the US couple production of a new manned bomber, a CX transport and new AWACS radar aircraft with increased

production rates for existing fighters. Warns defense consultant Jacques Gansler, a former top Pentagon procurement officer: "If we simultaneously surge all of these weapons, the contractors could find they are all counting on Joe's Forging House for

landing gear."

The peacetime crunch could turn into a full-blown crisis in a national emergency. Alton D. Slay, who retired recently as chief of the Air Force Systems Command, asserts that the U.S. has lost its capacity to drastically - and quickly - increase weapons production. He points out that if the Air Force were ordered to go all-out in production of F-l5s and F-16s, rates could not be

increased by even a single plane for 18 months.

117

Suppliers would be unable to expand output quickly enough. An executive at one concern says it would take 15 months to achieve even a modest 30 percent increase in its production of one essential electronic gadget for the F-16s.

The problem was thrown into sharp focus after the 1973 Arab-Israeli war, when the U.S. took scores of tanks from its own units to replace those Israel lost. Gansler recalls that, when the Pentagon tried to increase production by tooling up an idle tank plant, suppliers were nowhere to be found. "Our replacement tanks didn't roll off the lines for years," he says.

More worrisome: About 90 percent of military

semiconductors - guts of advanced radar, underwater surveillance and missile-guidance systems - are assembled in the Far East. Experts fear any wartime interruption could take two years to overcome.

The Manpower Drain

Another barrier to rapid expansion of America's arsenal is a shortage of the skilled workers who design and build U.S. planes, ships and tanks.

Even now, defense contractors face fierce competition for engineers, computer experts and trained blue-collar laborers, all of whom command high salaries in private industry.

The manpower squeeze shapes up as a key Pentagon

challenge in years ahead. "We can build the plants, set up the machines and get the factories ready to go," explained Dale W. Church, former deputy under secretary of defense. "But if we don't have the people to operate them, we still can't do

anything."

Machinists, vital to the aerospace and munitions industries, are in tight supply. By one estimate, America's defense industry recruits only one quarter of the 10,000 machinists needed each year merely to offset normal attrition.

Over all, the nation may lack 250,000 machinists by 1985. Just as critical is the shortage of workers who make tools and dies for defense manufacturing. Half the laborers in this field will retire in the next eight years; at present, only a fraction are being replaced by new workers.

The defense industry also faces a serious shortage of engineers and other white-collar professionals. U.S. colleges are graduating about 50,000 engineers a year, which is only two thirds of the expected demand throughout the 1980s. Even the Air Force, the most technologically oriented of all the services, is short more than 1,300 engineers.

Defense analysts predict potential shortfalls of 49 percent in computer specialists and 84 percent among

118

statisticans . Warns one aerospace official: "There's a

substantial shortage of professionals, and you can't train those kinds of people on the shop floor."

As experts see it, the most immediate impact would be felt in aircraft production, especially in the Los Angles area, where the big defence boom is expected to put still more strain on an already tight manpower market. Rockwell, for example, will hire 15,000 additional workers for the giant B-l program alone if the Pentagon gives a green light for development of the new strategic bomber.

Shipbuilders could be hard pressed to come up with the skilled workers for Reagan's ambitious naval program - one that could nearly double construction of ships from 80 to 143 during the next five years.

The Shipbuilders Council of America estimates that, because the impact of the big buildup will not be felt for years, some 30,000 pipe fitters, welders and other workers will be laid off by 1984. Then, when orders for new vessels pick up, the

workers will have to be rehired, if they can be found. Asserts council President Edwin Hood: "There's no way to avoid decimation of our labor force. Workers drift away, and then we'll have to find and train a whole new group to do the job."

There is no quick or easy solution to the industry's labor problems. In sharp contrast with earlier U.S. military buildups, contractors cannot rapidly expand the work force by recruiting from the general public. Retraining an automobile worker to handle complex aerospace components, for example,

requires at least a year. "You just can't take someone off a farm and expect him to build aircraft engines," says one executive. "The technology is too advanced, tolerances too tight, equipment too sophisticated."

Aging Defense Plants

Pentagon officials fret, too, about the deteriorating physical condition of the military-industrial complex. In many important sectors, the defense industry in the United States is plagued by aging plants, worn-out equipment and inefficient operations that drive up costs and limit output.

The munitions industry is a prime example. Of its 26,000 government-owned machine tools, 20,000 are more than 20 years old. The resulting inefficiencies cause higher costs for guns and ammunition. And analysts say that at least 18 months would be

required to wring substantial production increases from the industry.

The unpredictability of defense budgets has discouraged many companies from modernizing facilities and machines. From William J . Perry, a former under secretary of defense for

119

research and engineering, comes this warning: "Most of the good things about our industry have resulted from investments that were made in the 1950s and 1960s. We are now living off the fat."

The problem can be seen clearly by tracing developments in the aerospace industry, which during the 1970s invested in new equipment at only one fourth the rate of U.S. business

nationwide. Now, almost 60 percent of the metal-working equipment used to build aircraft is more than 20 years old.

The inefficiencies may be reflected in the declining U.S. share of the world's aerospace market, which has dropped from 66 to 58 percent since 1970. This decline has major security implications because the loss of markets means a loss of

capacity, capability and skills that could be used during a national emergency.

Lack of investment has had an even more serious impact upon the shipbuilding industry. One recent survey by the U.S. Maritime Administration, for example, states that America's yards are seriously deficient in 39 of 70 new technologies important to civilian shipbuilding - suggesting similar problems ahead for defence work. The Japanese can build a merchant ship in half the time required in the U.S., using half the number of man-days.

Shipbuilding capacity is concentrated in a few major yards. For example, only one yard - Newport News Shipbuilding & Dry Dock in Virginia - can build large-hulled nuclear-powered surface ships such as aircraft carriers. Only two shipyards are building Los Angeles-class nuclear attack submarines.

Congress, too, emerges as a contributor to production problems. Its habit of canceling or "stretching out": the completion of complex weapons programs creates low rates of construction that cancel out the economies of mass production. According to Slay, government stretchouts in only three aircraft programs - the F-15, F-16 and A-10 - have increased the costs by

4.7 billion dollars for the same number of aircraft.

Many defense contractors are also drowning in paper work that delays deliveries and drives up costs. The Phalanx ship- defense system, for example, took nine years to get on board U.S. vessels. While cited as a model of efficiency these days, the F-16 program took six years to produce its first warplane.

Oliver Bioleau, president of General Dynamics, the builder of the F-16, recalls that during World War II it took one year to develop the B-24 bomber from scratch. Now, Bioleau says, "It takes us that long simply to assemble the paper work on a new system."

120

Technology Overload

The greatest stumbling block to a swift and efficient buildup of U.S. arms may turn out to be the sheer scope and

technological complexity of modern weaponry.

Pentagon officials have a deep affection for

supersophisticated ships, planes and tanks, claiming that they are necessary to offset numerically superior Soviet forces.

But if the past is a guide, cost overruns and delays seem inevitable. Critics say that the defense industry and its patrons in the Pentagon lack competence to manage such enormous projects effectively. Cited as one example: The development program for the Trident submarine, a huge, missile-firing vessel that originally was supposed to cost 900 million dollars.

Today, the first Trident will cost 1.2 billion dollars, and it is more than two years behind schedule. The Trident's problems are chalked up to faulty management, which led to extensive repairs, but there is no agreement about where the blame should be pinned - whether on the Navy itself, or on

General Dynamics, the prime contractor.

Critics also point to difficulties in developing the Ml tank, the Army's new main battle tank. As far back as 1963, the Army declared that there was an urgent need for the Abrams tank, which is just now entering the force in large numbers. Over the

intervening 18 years, the tank has suffered from three separate design changes and numerous operational breakdowns. The price has risen to 2.5 million dollars a tank.

In addition to management deficiencies, vital weapons programs are often thwarted by the military's fascination with high technology. Time after time, the Pentagon and its partners in industry are forced back to the drawing boards when their miracle weapons prove to be impractical in real life.

One illustration of the problem was the Army's effort to develop a new helicopter.

The Army spent seven years and nearly 300 million

dollars trying to perfect its technologically advanced Cheyenne attack helicopter. Designed to replace aging Army gunships, the Cheyenne was finally scrapped, partly because of technical difficulties.

Prescription for Recovery

The sum of all these problems is a formidable obstacle to the Reagan administration in its bid to "rearm America" , although Defense Secretary Caspar Weinberger is moving swiftly to tackle the problem.

121

For openers, Weinberger is trying to restore stability in the industrial complex through measured but sustained increases in Pentagon budgets that, he hopes, will lure companies into the defense business. He wants to end the cycle of boom and bust that has driven so many contractors out of the field.

In addition, the Pentagon is pushing for reforms such as guaranteed funding of large weapons programs over several years in order to encourage contractors to modernize plants and invest in labor-saving technologies. Another goal: A reduction in the paper work associated with arms development.

Elsewhere, more fundamental changes are in the wind. Army, Navy and Air Force officials, for example, are being asked to design simpler, easier-to-build arms in addition to those that strain the frontiers of technology.

In his basic policy approach, moreover, Weinberger has sounded the death knell of the "short war" philosophy, which many experts blame for the lack of attention given the defense

industry in recent years.

The concept assumes that any conflict would end before the U.S. would be forced into full-scale mobilization. Plans now call for a revitalized industrial base that could supply the weaponry and other items needed to fight several extended wars simultaneously.

However, it will take more than well-intentioned plans to achieve a quick turnaround of America's defense industry after a 10-year decline. Shortages, labor difficulties, inefficient plants all seem likely to hamper the administration's defense program for years to come.

Says Gansler, the former Pentagon official: "No one can say flatly that it can't be done. But I see it as a very, very

serious challenge for a long time to come."

By Robert S. Dudney

122

APPENDIX C

FUTURE WORKLOAD POSSIBILITIES AT OFB

ITEM NUMBER MANHOURS MANHOURS

TOTAL

(A) (B) (A x B)

Follow On Destroyer, Phase I

Two ships, to FFG-7 design

- Guided Missile Launcher System Mk 131 2 80 000 160 000

- OTO-Melara Mk 75 76 mm gun2 4 115 000

(2 + spare + 460 000 training)

Follow On Destroyer, Phase II

Four ships, design not selected

- propeller shafting3 4 sets

+ spares

18 000 est or 22 500

72 000 est or 90 000

(if pit furnace refurbished)

4

- main reduction gearboxes 4 sets 50 000 200 000

est est or

400 000

- OTO-Mel^ra Mk 75 76 mm guns 4 + 115 000 460 000

similar

- FMC„5"/54 calibre Mk 45 Mod O 6 150 000 900 000

gun est est

(4 + spare + tra ining)

- Vertical Launch Missile System3 6 140 000 840 000

est est

Guided Missile Destroyer modernisation, Stage I

Three ships, Perth class DDG

- conversion of Mk 13 launchers to 4 30 000 120 000

Mod 4 for Harpoon missile est est

compatibility

(3 + 1 spare)

123

ITEM NUMBER MANHOURS MANHOURS

TOTAL

Follow On Patrol Boats

Five boats, Fremantle class®

(A) (B) (A x B)

- OTO-Melara.Mk 75 76 mm guns or similar1 5 + 115 000 575 000

- surface to surface missile 10 + 2 000 20 000

canisters for Harpoon or similar

Patrol Boat modernisation 9

Fifteen boats, Fremantle class

es t + est

- OTO - Melara Mk 75 76 mm guns

or similar1

15 115 000 1 725 000

- Harpoon missile canisters or 30 + 2 000 60 000

similar

Destroyer Escort modernisation 9

Six ships, River class

est + est

- Harpoon missile canisters

Fleet replenishment ship

One uijijt, AOR 2, French Durance class

12 2 000

est

24 000

- replacement at sea gear 1 46 000 46 000

(as for AOR 1)

Fleet replenishment ship APR 2

- propulsion shafting (as for AOR 1) 1 (46 000) (46 000)

(included above)

- propulsion gearboxes 1 set 17 000 17 000

124

ITEM

Project Hamel, close support weapons system

105 mm Light Gun

Project Waler, M-113 replacement

Major involvement in component manufacture

TOTAL

Averaged over 15 years

NUMBER MANHOURS MANHOURS TOTAL

(A) (B) (A x B)

184 as program 1 000 000

800 ? ?

est

6 897 000

460 000 p.a.

This table does not include the modernisation of the 4.5" gun mountings to which the factory is committed until 1986, Defence AIP/AOP orders from overseas customers, Nomad tooling and components for the Government Aircraft Factory, shafting for RAN patrol vessels and other routine work which nonetheless amounted

to 273,000 manhours in 1980-81. Nor does it include government non-defence and private work. Nor does it include manhours devoted to tooling up and set-up work, which can be substantial. If this work was added to the above the factory workload would

increase to about 730,000 manhours per annum. It is acknowledged there will be a trough in workload through to about 198 3,

although this situation could be alleviated in various ways, mainly by increased commercial work.

125

ENDNOTES

1. The two Phase I Follow On Destroyers will be identical to the FFG-7 class ships already ordered from the United States. The GMLS Mk 13 Mod 4 is a single arm missile launcher which

weighs 134,704 lbs. and can fire Standard surface-to-air and Harpoon surface-to-surface missiles. It is the main armament of the FFG-7 class frigates. OFB has already made components of this weapon under contract to its maker, the American FMC

corporation. Given adequate lead times and resources OFB has the capability to part manufacture, assemble and test the GMLS Mk 13 launching system.

2. These guns are identical to the guns on the FFG-7. The order would be for four - for two ships, a spare, plus a training mounting. This gun may be suitable for mounting on the

Fremantle class fast patrol boats and as secondary armament on the Phase II Follow On Destroyers. It is also suitable for mounting on the River class escorts to replace the 4.5" mounting later in the ship's lives. The Royal Netherlands Navy's ships of this type are presently being so modified.

3. OFB has supplied propulsion shafting for FFG 03 and 04 and is supplying spare shafts to the US Navy. The number of shafts produced would depend on the design of ship chosen; the design chosen would have either one or two shaft lines.

4. OFB could supply gearboxes for the FOD Phase II ships and believes the establishment cost of $2.6 to $8 million would be justified because this would ensure the continued

availability of support to the RAN fleet through to the year 2,000, as well as having the capacity available in time of emergency. Additionally this capacity could manufacture gearboxes for the new aircraft carrier and other ships. OFB believes the gearboxes could be supplied at a competitive cost. The number of gearboxes required will, of course, depend on the number of shafts the ship selected requires.

5. Although it is believed the Navy wants a five inch gun as the major gun on the FOD Phase II ships, the OTO-Melara gun could be used as a secondary armament. Alternatively a lighter gun might be chosen for the close-in-weapons system role. OFB

could still be involved in the project. Either way the gun chosen could be fitted to the last five Fremantle class boats, otherwise known as the Follow On Patrol Boats.

6. This is the gun the Navy is believed to want on the Follow On Destroyer Phase II ships. It is the most recent American gun and is of modern design. It is fitted to many classes of

American ships and the repair and maintenance capability in Australia would be useful to the Americans, as well as to us. A 1971 study showed it was feasible to manufacture the 5 inch 54 cal Mk 45 Mod 0 gun mounting complete under the terms of a co-production agreement with FMC/Northern Ordnance Division.

The cost penalty at the time of the study was insignificant.

126

7. Vertical launch missile systems are the latest fad in warship design and will be fitted to most new classes of American (and Soviet) warships. They offer many operational advantages and the Navy is known to be keen to have one on the Follow On Destroyers. Basically the VLMS is a box with a number of vertical tubes in which can be placed a variety of missiles,

including the Standard surface-to-air missile and the Harpoon surface-to-surface missile.

8. The Perth class guided missile destroyers are to undergo a $205 million modernisation program in the next few years which according to an answer to a recent question on notice (No. 1475) will be carried out in Australia. The OFB could be

involved in at least some of this work, particularly turret modernisation and modification of Mk 13 launchers to Mod 5 or Mod 6 standard i.e. to make them compatible with Harpoon missiles.

9. The fitment of Harpoon surface-to-surface missiles in canisters would give these craft a major offensive

capability, but the cost would be considerable. One

alternative would be to fit cheaper missiles like the Israeli Gag riel or the Norwegian Penguin.

10. The answers to a series of questions put by the committee show the RAN has looked at the possibility of fitting the OTO-Melara gun and other possible weapons fits to the patrol craft. 'The preliminary indications are that it would not be practicable to fit this gun to the patrol craft. Furthermore

is is more costly and heavier than needed. '

'In the early stages of the patrol craft project fitting of a new modern weapon was explored. The RAN favoured the Emerlec 30 mm weapon. However the project cost including spares and fitting to the 25 craft was estimated at about $34 million

(in January 1979 prices - now about $45 million) or about half the acquisition cost of the craft themselves.' (letter to the Committee)

However, these craft will eventually need something more modern and OFB and OFM could share the work.

Although the Emerlec Twin 30 mm mounting is a simpler and cheaper mounting it should be noted that OFB was the only Australian concern to discuss Australian manufacture of the weapon with Emerson Electric at the time it was being

considered for the patrol boats. 1 1

11. OFB supplied replenishment at sea equipment and propulsion shafting for AOR I on a strictly commercial basis and

negotiated with the AOR gearbox supplier, Engrenages et Reducteur of France, for the part manufacture of the two propulsion gearboxes. Again delivery schedule was the

127

stumbling block of the OFB proposal. E&R required an ex-works delivery of six months which was not possible due to lengthy procurement activity and so OFB offered the alternative of fully assembling the gearboxes at OFB using the gearcases manufactured at OFB and French gearing. This offer was declined.

128

APPENDIX I

What is ordnance?

Al.l The Manufacturing Manager, OFB, Mr Builows, explained ordnance in the following terms, traditionally ordnance was defined as the firing part of the weapon or cannon ... it covered such things as the gun barrel, the breach ring, the breach block which closes the breach against the projectile, plus the

mechanism that operates it ... However, in recent years, the term 'ordnance' world wide has changed in that it now seems to cover pretty well total weapons systems ...'

A1.2 Australia presently has two ordnance factories located at Maribyrnong (OFM) and Bendigo (OFB). As Mr Builows explained, the present arrangement is that OFM '... covers ... guns from

relatively small bore, say 30 millimetres up to 76 millimetres' , whereas C^FB '... covers (guns) from 76 millimetres Navy and upwards.'' 1 ... Ordnance Factory Bendigo ... has the machinery installed to complete, for instance, all the gun barrels of that size - the finish machining of them, that is. The Mar ibyrnong

Factory has a responsibility to produce gun barrel forging, to rough machine them and heat treat them to what is known as the passed Y test condition, which is a condition of acceptability for quality standards. At that point the gun barrels are then

transported to Ordnance Factory Bendigo where all the finishing operations are performed . '

A1.3 He points out that there are like skills at each of the

factories; but that '... it is a question of suitability of

machinery and the skills that have developed to .cover the particular bore sizes or calibres that are concerned. '

129

ENDNOTES

1. Evidence, p. 216

2. Evidence, p. 193

3. ibid.

4. ibid.

5 ibid

APPENDIX II

List of witnesses who appeared before the Committee

Anderson, Mr Stewart Adrian, Bendigo Branch Secretary,

Amalgamated Metal Workers' and Shipwrights' Union, Victoria.

Barclay, Dr John Robert, Assistant Manager (Quality), Ordnance Factory, Bendigo, Victoria.

Biles, Mr Geoffrey Frederick, Member, Association of Professional Engineers Australia, Victoria.

Bullows, Mr Richard Harrington, Manufacturing Manager, Ordnance Factory, Bendigo, Victoria.

Butler, Mr Desmond Joseph, Life Member, Association of

Draughting, Supervisory and Technical Employees, Victoria.

Coleman, Mr Peter William, Representative, Administrative and Clerical Officers' Association, Melbourne, Victoria.

Costello, Dr Kenneth Claude, Personnel Manager, Ordnance Factory, Bendigo, Victoria.

Curnow, Mr Esmond Julian, Secretary, Bendigo Trades Hall Council, Bendigo, Victoria.

Currie, Mr Neil Smith, Secretary, Department of Industry and Commerce, Barton, Australian Capital Territory.

Dobbin, Mr Leonard Maxwell, Vice-President, Association of Draughting, Supervisory and Technical Employees, Melbourne, Victoria .

Gifford, Mr Peter George, First Assistant Secretary, Management Division, Department of Industry and Commerce, Barton, Australian Capital Territory.

Kennedy, Mr Andrew David, Convenor, Economic Impact Study Group, Quarry Hill, Victoria.

King, Mr Damian Patrick, Secretary, Ordnance Area Committee, Bendigo, Victoria.

McKnown, Mr Keith, Assistant Secretary, Finance and Property Branch, Department of Industry and Commerce, Barton, Australian Capital Territory.

McMahon, Mr Barry Edwin, Member, Association of Professional Engineers Australia, Melbourne, Victoria.

131

Musk, Mr Francis Alfred, Member, Association of Professional Engineers Australia, Melbourne, Victoria.

Roberts, Mr Thomas Albert, Manager, Ordnance Factory Bendigo, Department of Industry and Commerce, Barton, Australian Capital Territory.

Ryan, Mr Hugh Joseph, Deputy Secretary, Department of Industry and Commerce, Barton, Australian Capital Territory.

Shannan, Mr Leo James, Assistant Manager, Administration, Ordnance Factory, Bendigo, Victoria.

Stoltz, Mr Christopher, Mayor, City of Bendigo, Bendigo, Victoria.

Vickery, Mr John Frederick, Acting Assistant Secretary, Industry, Policy and Planning Branch, Department of Defence, Canberra, Australian Capital Territory.

Watt, Mr Thomas Henry, Representative, Administrative and Clerical Officers' Association, Melbourne, Victoria.

Wild, Mr Geoffrey William, Chairman, Factory Area Committee, Bendigo, Victoria.

Williams, Mr Reginald Harold, Acting Deputy Controller, Munitions Supply Division, Department of Industry and Commerce, Barton, Australian Capital Territory.

Wood, Mr Donald David, Acting First Assistant Secretary, Defence Industry and Material Policy Division, Department of Defence, Canberra, Australian Capital Territory.

Wrigley, Mr Lloyd James, Assistant Controller, Munitions Supply Division, Department of Industry and Commerce, Barton, Australian Capital Territory.

132

APPENDIX III

Submissions presented to the Committee

1. Ordnance Factory Bendigo Area Committee, October 1981.

2. Amalgamated Metal Workers' and Shipwrights' Union, Bendigo Branch, 7 October 1981.

3. Student Union, Bendigo College of Advanced Education, 7 October 1981.

4. Department of Industry and Commerce, October 1981.

5. Bendigo City Council, 14 October 1981.

5. Department of Defence, October 1981.

7. The Convenor of the Economic Impact Study Group and State Labor Candidate for Bendigo, 18 October 1981.

8. Members of the Association of Drafting, Supervisory and Technical Employees at Ordnance Factory Factory Bendigo, October 1981.

9. Administrative and Clerical Officers' Association, Ordnance Factory Bendigo.

10. The Combined Groups of Professional Engineers and Officers employed at Ordnance Factory Bendigo, 19 October 1981.

11. Bendigo Trades Hall Council, October 1981.

12. The Australian Council of Trade Unions, 28 October 1981.

13. The Victorian Government, 4 November 1981.

14. Mr W.R. Barnes, President, Bendigo and District Serviceman's Club, 29 October 1981.

15. Mr N.J. Clark, Senior Lecturer in Management, Bendigo College of Advanced Education, 5 October 1981.

16. Mr Daryl McClure MLA, Member for Bendigo, 27 October 1981.

17. The Revd L.E. Styles, State Director, Inter-Church Trade and Industry Mission, 19 October 1981.

18. The Australia Defence Association (Victoria), 25 October 1981 .

133

19. Mr John Dyer, Shire Secretary, Shire of Kerang, 20 October 1981.

20. Mr Graeme Elvey, Shire Secretary, Shire of Marong, 23 October 1981.

21. Mr J.W. Tippett, Shire Secretary, Shire of Huntly, 22 October 1981.

22. Mr Bruce Reid MLC, Member for Bendigo Province, 21 October 1981.

23. The Revd Dr J. Stuart Murray, Chairman, Presbytery of Loddon- Campaspe, St. Andrew's Uniting Church, Bendigo, 11 December 1981.

24. Mr John Radford MLC, Member for Bendigo Province, 27 November 1981 .

134

APPENDIX IV

Report to

Senate Select Committee on the Government

Clothing and Ordnance Factories

Ordnance Factory, Bendigo

135

S U M M A R Y

Request No 1

"to establish a true man hour rate at the factory based on the real costs involved as shown in the financial statements and other information provided."

Including notional costs suggested by the factory but not including profit, tax, etc, direct labour would have had to be charged at $33.3 per hour to recover all factory costs in

1980/81. (Appendix C)

The hourly rate (1981/82) used by heavy engineering firms for tendering purposes is between $45 and $60 per hour. (Appendix D)

Request No 2

" the potential cost to the taxpayer by way of reserve capacity maintenance subsidy should the factory be sold to a private operator."

This depends on the capitalisation incurred by the private operator in the sale. $4,000,000 per 100,000 direct man hours is an estimate, or $4,920,000 if the DIAC budget of 123,000 defence man hours is achieved in 1981/82. (Appendix E)

The subsidy also depends on the pricing policy and the volume achieved in the factory.

A question asked by Senator John Siddons suggests a factory capacity of 640,000 man hours. In 1980/81, the total work load was 273,000 man hours. Total direct costs were $5,653,638 and operating income was $6,248,846. This gives a ratio of direct

costs to operating income of 90.4%.

If the maintenance of production subsidy is all counted as income, operating income rises to $12,214,583 and the ratio becomes 46.2%.

This leads to the following diagram based on a number of

assumptions.

The diagram is intended merely to illustrate the possible effect of volume through the factory on the costs and hence the profit or loss. Further detailed work would be needed to convert the diagram to be closer to a private operator's projections of costs and revenue.

136

Simulated break-even chart

Total cost

^Direct cost

Profit

Indirect cost

Production hours (000s)

Assumptions used in Breakeven Diagram

Current direct costs

Current income estimate (Actual plus part of subsidy)

Ratio direct costs to income

Current indirect costs

Current direct man hours per

Indirect cost increases at (very much estimated)

(Sm) 5.653

($m) 11.000

% 51

(Sm) 6.5

(Hrs) 273,000

300,000 Hrs (Sm) 0.5 400,000 Hrs (Sm) 1.0 500,000 Hrs (Sm) 1 . 5 600,000 Hrs (Sm) 1.0

137

NOTES TO THE REPORT

The answers given in the report are based information set out in Appendix F.

A full commercial cost evaluation was neither possible in the time.

Separately, a number of approaches were made to firms and accounting firms to find industry details were confidential and are embodied in of $45-$60 per man hour in the reply to Request

on the published

asked for nor was

heavy engineering yardsticks. These the broad figures No 2 above.

138

APPENDIX A

Summary of Data Suppli-ed

DESCRIPTION 1978/79 1979/80 1980/81

1. Defence work load (hrs 000s) 145 105 99

2. Total work load (hrs 000s) 307 272 273

3. DMMR average 8 factories (S/hr) 6.30 8.00 9.34

4. Direct labour ($m) 1.751 2.317 2.686

5. Other direct expenses (Sm) 0.577 0.705 0.671

6. Reserve Capacity maintenance (Sm) 4.838 4.877 5.961

7. Operating costs ($m)

(i) wages (ii) salaries (iii) materia Is (iv) expenses

(v) other

5.014 2.762 2.835 0.846

0.479

TOTAL 11.936

8. Total factory costs ($m) 9.168 9.731 12.215

9. Total notional operating costs ($m) 2.420 2.666 2.467

10. Percentage defence work load (%) 47 39 36

11. Maintenance of production capacity ($m) 5.961

12. Operating income ($m) 6.249

13. Direct material ($m) 2.296

Sources of Data Supplied

Items

1, 2, 3, 6 f 10

4,

7,

5, 11

6, 8, 9,

Source

Defence submission

DIAC submission

General information relating to OFB.

139

APPENDIX B

Calculations from Data Supplied

(see Appendix A)

DESCRIPTION Source 1978/79 1979/80

198 0/81'

1. Direct labour plus direct expense ($m)

(4) + (5) 2.328 3.023 3.358

2. OFB 'true' DMMR 'A' ($/hr)

(4) - ! ■ (2) 5.7 8.5 9.8

3. OFB 'true' DMMR 'B' ($/hr) (1) above - t (2) 7.6 11.1 12.3

4. OFB 'true' direct labour ($m) (2) x (3) 1.934 2.176 2.550

5. Total wages and salaries ($m) (7) i + ϋ

7.776

6. Indirect wages & salaries (Sm) (5) above - (4) 5.089

7 . Expenses & other costs ($m) (7)iv + v 1.325

8 .

9.

10.

Total wages, salaries , expenses & other costs ($m)

Cost per direct hour excluding materials ($/hr)

Indirect wages & salaries, expenses & other costs ($m)

(5) above + (7) above

(8) above - r 2

(6) above + (7) above

9.101

3 3.30

6.414

11. Direct costs/ operating income %

(4) + (5) + (13)

90.4

12

____ 1 —

140

APPENDIX C

1980/81

1981/82

1981/82

Calculation of True Manhour Rate

Actual cost/direct hour excluding materials (App B) ($/hr)

Percentage increase in DMMR (%)

= 1 1 - 5 0 - 9 . 3 4 χ 1 0 0

9 . 3 4

E s t i m a t e d a c t u a l c o s t / d i r e c t h o u r (using D M M R % incre a s e )

1 2 6 . 3 4

33.30

26. 3 4

(1) x

100

($/hr) 42.07

141

APPENDIX D

Hourly Rate for Private Heavy Engineering

The hourly rate used by heavy engineering firms for tendering purposes appears to lie in the range of $ 4 5-$ 5 0. Direct

comparison with the Defence Munitions Manhour Rate of $11.80 is difficult, as the $ 4 5-$ 6 0 contains other components . The variation between $45 and $60 is partly due to different

efficiencies and so different productivities but is mainly due to volume of work. A company with plenty of work would tender for further work at the higher rate, and vice versa.

142

APPENDIX E

Potential Cost of Reserve Capacity Maintenance Subsidy

The estimation of this cost depends on the deal done with the private operator buying the factory. In particular, the buying price of the specialised equipment (and buildings) used for defence work and the nature of the guarantees given to keep this

equipment operational for so many years will affect the costs.

Case 1

Full charges of $60 per hour for 100,000 hours of defence work and Defence paying $11.80 per hour.

Subsidy = (60 - 11.8) x 100,000 is $4,820,000.

Case 2

Lower charges of $45 per hour for 100,000 hours of defence work and Defence paying $11.80 per hour.

Subsidy = (45 - 11.8) x 100,000 is $3,320,000

So estimate $4,000,000 at 1981/82 values.

If the Department estimate of 12 3,000 manhours for ] 981/8 2 is correct, the subsidy would be $4,920,000.

In addition, Defence may be charged for work such as production development currently paid for by the subsidy.

143

APPENDIX F

Sources Used in this Report

1. DIAC Submission to the Committee.

2. DIAC Analysis of major Government non-defence work.

3. Department of Defence submission to the Committee.

4. Hansard Report on Committee meetings.

5. Part of "General Information Relating to Ordnance Factory, Bendigo" .

6. Questions to be asked of DIAC by Senator John Siddons.

7. Private communications with accounting firms and heavy engineering firms.

144

APPENDIX V

Joint Committee on Foreign Affairs and Defence

Conclusions and recommendations in relation to the ordnance/munitions industry '

1. October 19 7 7 , the Parliamentary Joint Committee on

Foreign Affairs and Defence presented a report entitled

1 Industrial Support for Defence Needs and Allied Matters'. This Report made the following recommendations in relation to the munitions industry:

(i) that munitions items must be purchased from the local factories unless there are clear and

overwhelming national interest reasons for overseas purchase;

(ii) that careful attention be given to establishing ordering patterns designed to maintain as great a degree of workload continuity as can reasonably be achieved;

(iii) that strenuous efforts be made to achieve

overseas sales and that policies in relation to pricing and foreign sales of this nature be made as non-restrictive as possible;

(iv) that the Department of Defence should, if at all possible, provide small development-type projects of a nature that would satisfy defence

requirements for a range of engineering and explosive type stores;

(v) that the studies to determine the needed

capabilities be brought to completion and

decisions be made as soon as possible so that long-term planning in respect of the future activities of each factory can proceed; and

(vi) that the studies should subsequently be extended to embrace the development of a planning basis for commercial industry involvement in situations of serious emergency.

2. December 1979, the Joint Committee presented a report

entitled 1 Australian Defence Procurement' . Amongst the conclusions and recommendations of that Report were the

following:

145

(i) Australia's indigenous defence-related industries should be developed to make us as free as

possible from reliance on overseas sources of supply;

(ii) changes in the size and shape of the Defence

Force and improved self-reliance in local defence production should be implemented during the present period of assessed favourable strategic outlook;

(iii) the system for procurement from Australian sources is excessively cumbersome and complex and that it poses serious problems for both the

Defence Department and local industry; and

(iv) the Government should direct relevant departments and agencies to produce an improved system for local defence procurement, and that this should be a matter of high priority.

146