Creating a fairer defence industry for Australian SMEs

It is the responsibility of AIDN to set out matters of policy that impact AIDN’s members – the Australian owned defence sector businesses that support the ADF – AIDN has in previous articles highlighted a series of behaviours from certain prime system integrators that need to be challenged.

It is also important to note that AIDN is not “anti-prime”, AIDN is opposed to certain behaviours that some primes have exhibited. AIDN seeks a change in the current defence industrial structure where poor behaviour is accepted and becomes the standard modus operandi.

AIDN wants primes to engage with the Australian supply chain, in contract, in the same manner as the prime claimed it would engage during the tendering process.

For instance, where a prime contractor tendering for a program makes commitments to Australian companies that they will be awarded subcontracts for nominated work scopes within the program if those prime win the contract. It is AIDN’s expectation that if that prime does win that tender and is awarded a contract for the program, then they will do as they said they will do – they will award those subcontracts to the Australian companies.

What AIDN seeks is honesty and integrity - Honesty and integrity should be standard practice.

The feedback we have from our members indicates that this is not always the case. Certain companies offer one thing to Australian businesses during the tendering process, but once in contract, backtrack, and behave in a different way.

This is the behaviour that AIDN wishes to remove from our industrial landscape.

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To achieve this, it is first necessary to understand who benefits, and who loses from this practice.

This practice benefits companies who promise one thing at tender and do something else in contract. These companies can provide offers to Defence that look attractive in terms of Australian industry content; possibly more attractive than tenders offered by competitor companies that are genuinely offering Australian industry content. 

They are not concerned with the commercial implications of managing the local supply chain that they are promising as they know that they will be able to back out of those commitments in contract. This approach rewards them with contracts for programs that they may not have won if they had tendered what they planned to do.

The losing side of the ledger is more crowded.

Clearly Australian businesses – lose out because they do not receive the subcontracts that they were promised during the tendering phase. 

Defence loses out, as the industrial capability that it needs to sustain the ADF during operations is not developed in-country. In our changed strategic circumstances, the ability to sustain operations without needing access to offshore facilities or industrial resources is now essential, as access to offshore resources may be compromised during high level conflict.

The Australian taxpayer loses out, as subcontract revenue for supply flows not into Australian businesses, but offshore into the alternative supply chains outside Australia, reducing employment and taxation benefits for the Australian economy.

AIDN wishes to highlight that there is an additional party that loses out due to these poor practices. 

The companies that behave honestly towards their Australian suppliers. They make commitments to Australian businesses during tender phase that they intend to keep yet miss out on winning tenders. 

How can the commitments made to Australian industry gain a comparative advantage during tender evaluation if any company can tender commitments, without being troubled by needing to meet those commitments? 

This behaviour deprives the honest companies of a competitive market advantage they are rightfully entitled to.

At the root of this is the need for Defence to stop facilitating this behaviour. Defence must stop accepting changes to tendering responses saying one thing at tender about engaging with Australian suppliers, and then doing something quite different in contract.

Defence’s message to companies must be clear – if you want Defence business, you must deliver what you say you are going to deliver.

Words are important, but for the message to be received in a manner that will lead to the desired changes, there needs to be enforcement.

Defence knows specific cases of primes whose behaviour reflects what we have been discussing. AIDN calls for Defence to stop issuing contracts to the contractors that have reneged on their workshare commitments to Australian controlled suppliers. Defence simply cannot further reward these companies and must instead start creating real commercial advantage for the companies following through on their commitments.

The current Defence AIC policy, in which in contract primes only need to show “best endeavours” when engaging Australian suppliers must be dispensed with. This policy emboldens poor performance, whilst removing commercial advantage for those companies doing the right thing. 

If a company can make promises of local industry engagement at tender, yet back-track in contract then a company knows that all that must be said in contract is “we put in our best endeavour to work with the Australian supplier, but it didn’t work out”. 

Any faith in the “best endeavours” mechanism can only be regarded as rank commercial naiveté. This policy does not constitute an effective tool to induce good behaviour.

Anything other than firm contractual obligations for local workshare will continue to lead to work share atrophying offshore. 

AIDN is calling for Defence policy that ensures a measurable and agreed contract value to be placed into local Australian controlled businesses, and for all the work within a prime contract that is identified as a sovereign industry capability priority (SICP) to be undertaken within local Australian controlled businesses. 

AIDN appreciates that there will always be unusual cases that do not fit neatly into this construct – but these must only be exceptions rather than the rule. AIDN’s position is that such exceptions should only be allowed with the prior approval of the National Security Committee of cabinet.

AIDN notes that this firmer approach is consistent with what some companies are in any case doing; these companies will not have any problems with this policy. This policy acts as an effective incentive, in offering commercial rewards only to those primes acting appropriately.

However, this policy will undoubtedly be challenging for some companies.

These policy changes get to the heart of the flawed framework of the Australian defence industry sector, and it is necessary that our elected leaders lead on this.

Encouragingly, in one of his first interviews following his as appointment as Defence Minister, referring to Defence’s major programs Peter Dutton stated he was “determined to ensure Australia, and particularly Australian industry, received value for money from the investments”, and further stated “I want to make sure there is a very clear message to the primes here. We are not going to tolerate slippage in relation to Australian content” (The Australian, 4 April 2021). AIDN applauds the clarity of the Defence Minister’s message. 

AIDN will work constructively with any company seeking to improve their practices in this regard, and with both sides of the political divide to improve their defence industry policies.

The poor behaviours described have been allowed to prevail for too long. Too many part measures facilitating the continuation of the unacceptable behaviour have been offered on too many occasions. 

The time has now come for this to be addressed.

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