Op-Ed: The IP paradox and defence industry growth

Discussion has arisen over the merits or otherwise of the AIC program, and on Defence’s statements to the effect that they have little control over the primes’ subcontracting. This stands in stark contrast to the experience many Australian companies have had in contracting with Defence.

To date, CASG’s views on how formal interaction with industry should occur are enshrined in the suite of ASDEFCON contracting templates. In a recent joint ministerial statement, it appears that the “best endeavours” approach of the existing AIC policy may be replaced by harder contractual commitments to expenditure levels on local Australian industry (ideally Australian-owned). Whether these changes can achieve this outcome, or there remains the ‘but not at additional cost nor impact to schedule’ for the ‘acquisition phase’ escape clause remains to be seen.

It is fair to say that these templates reflect a view that Defence must treat industry with a great degree of caution. Under these templates, Defence retains controls over many steps of the process of the supply (by industry) of defence equipment.

Additionally, in the event that Defence wishes to exert authority over its supplier, Defence retains a range of powerful contractual remedies able to be drawn upon at different acquisition or sustainment stages. 

Defence even retains the power to simply walk away from a contract for no better reason than it be ‘convenient’ to do so.

So local industry is understandably perplexed when Defence representatives claim that they are powerless to enforce prime contractors to abide by the local AIC levels that the prime’s themselves tendered – and contracted for.

There has to be a sovereign commitment to AIC. Defence needs to use its wide-ranging powers to support Australian owned SMEs. This includes external auditing to ensure compliance. No longer can Defence allow enforcement of AIC to be put in the ‘too hard basket’. Stove-piped project-by-project acquisition methodologies has allowed this to happen. Consider the paradox of intellectual property (IP).

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Among the many measures enshrined within Defence’s ASDEFCON suite is its position on IP.

Defence demands licences to the IP underlying a supplier’s products. Such licences are nuanced by the supposed constraint that the supplied products/technologies be used only for “defence purposes” – as compared to  “commercial purposes”; but for much of military technology, defence purposes are the only purposes for the goods, so this constraint is immaterial if, for example, Defence subsequently gives away or exchanges this technology with our allies – which often are the only commercial export market for those goods.

For suppliers of high technology items, such licenses demand further access to the technology’s source code and other technical data. Now while this same approach ostensibly also applies to goods that are imported; in practice, Defence contracting personnel appear to implicitly accept that this level of control of IP of systems developed overseas, and often supplied by the local branch of the foreign primes, are beyond their reach.

After all, who would realistically expect to be supplied, for example, the full source code of the US-developed Aegis combat system and the SPY radars that equip the RAN’s Hobart Class DDGs?

But Australian developed technology gets harsher treatment. Local SMEs report cases where they are told by Defence’s contracting personnel that: “you are an Australian company, so we must have paid for the IP on previous contracts, so we should own it”.

Such statements may simply reflect a low-level of-understanding by public servants that have not benefited from Defence private sector experience, of the level of commercial risk borne by SMEs in their continuing investment in the development of Australian technology between often intermittent Defence contracts.

But the consequences are well understood – the ability to supplant the SME from the longer-term support of its own product by handing the SME’s IP necessary to support the product to a larger aggregated services supplier.

If Defence is genuinely concerned about long-term access to IP, as distinct from just the perpetual licence that it secures through the contractual Defence Licence, then there are already provisions for placing IP and source code in escrow. Being an Australian SME should not be used as an excuse by Defence procurement to take ‘the easy path’.

It is unfortunate that, faced with the prospect of having the local supplier of technology engaged over the longer term to support its product, Defence’s instinctive response is one of innate discomfort, rather than enthusiasm at an opportunity to partner with its local industry.

AIDN appreciates that Defence has reached these positions following unfortunate prior experience on some large programs where foreign-owned primes have utilised their control over IP to block Defence’s access to sufficient technical information to enable other parties (including SMEs) to interface equipment to the prime’s equipment and/or address obsolescence issues.

Pragmatically there may be some cases where for strategic reasons, a procurement may be undertaken through an FMS procurement – however there is a whole section on AIC for foreign military sales acquisitions that rarely has had more than lip service ever paid to it.

What irony that IP positions developed to protect Defence against the occasional proprietary practices of foreign owned primes are used to stymie the health and growth of local defence industry.

More to the point, is the inconsistency of this contracting approach with the oft-stated desire to develop sovereign industrial capabilities.

How can local industry be expected to develop defence systems if, whenever it makes a sale, it is required to include rights to higher-tier contractors, that enable them, as potential competitors, to use that technology.

And if due to this risk, there is only a poor business case to develop the desired types of technology locally, how can a sovereign industry capability ever emerge, let alone flourish?

Yet government has made it crystal clear that it not only wants, but demands, that Defence act in a manner that allows such a sovereign industrial capability to develop.

It is AIDN’s view that, in implementing its announced ‘enhanced AIC’ initiative, the time has come for Defence to reconsider the approach it takes to IP in tendering and contracting local industry.

Instead of continuing with an approach that tilts the field against local industry, it must take a stand that aids local industry. Existing requirements for local industry to provide licences to its underlying source code and technical data should be revisited to ensure local developers that signal non-compliance with such requirements are not disadvantaged.

Defence’s masters have declared that Defence must act to develop sovereign industry capability and remove the obstacles to the progress of local defence industry.

Whether Defence recalibrates its approach to local industry IP will be a sure indicator of whether its response to the challenge laid down by its masters is substantive – or merely rhetoric.

Brent Clark is the chief executive of the Australian Industry and Defence Network (AIDN).