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Australian Defence Aerospace Industry and Air Power: Responding to New Challenges |
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(Source: Australian Defence Organisation; issued Feb. 13, 2003)
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Honoured guests, ladies and gentlemen.
I am delighted to present this inaugural address as the Minister for Defence at the Australian International Air Show, and I thank Ian Honnery of Air Shows Down Under for the opportunity to do so.
(…)
OVERVIEW
But what I wanted to do today is provide an update on progress that is being made in developing the Australian Defence Aerospace Industry Sector Plan.
I want to reflect on the improvements in Defence procurement in Australia. Outline some areas of ongoing reforms in procurement policy and the way in which Defence does business.
But because Defence’s capability needs and in turn our demands of industry Âultimately are driven by our strategic environment, I shall first survey some recent operational deployments of our air power in response to the contemporary strategic environment.
CHANGING STRATEGIC ENVIRONMENT
Clearly the World and our strategic environment have changed in the last couple of years as a result of the threats of global terrorism and weapons of mass destruction.
A high operational tempo has placed great demands on the ADF.
Of particular relevance in the present forum is that significant air power assets have had direct involvement in Coalition operations in the War on Terror in Afghanistan, in supporting efforts to eliminate weapons of mass destruction, in providing domestic security and in humanitarian missions in our region.
WAR ON TERROR AND WEAPONS OF MASS DESTRUCTION
Following the devastating attacks by al-Qaeda on the United States of America, Australia actively and fully supported the US-led War on Terror.
RAAF assets and personnel deployed to this end included F/A-18 fighters to operations in the Indian Ocean and air-to-air refuellers to Coalition air operations over Afghanistan.
To give you a small indication of the effort, the Australian Air Force transferred some six million pounds of fuel in the first three months of air-to-air refuelling operations.
The deployment of C-130 aircraft to support operations in Afghanistan was also essential for intra-theatre lift and resupply for our Special Air Service troops on the ground.
Indeed, one of the lessons we learned in Afghanistan was the benefit of deploying force packages with their own integral lift and mobility capabilities.
It is for this reason that the forces which have recently deployed to the Middle East include three C-130 aircraft and three Army CH-47 Chinook troop lift helicopters to support the Special Forces Task Group.
DOMESTIC SECURITY
In the domestic context, we have also seen air power deployed to secure the Commonwealth Heads of Government meeting in Brisbane last year.
Air power such as Blackhawk helicopters also play a supporting role in our readiness to combat terrorism within Australian territory, should the need arise.
HUMANITARIAN AID
Australia has also continued its commitment to deploying Australian air power in support of humanitarian aid operations.
This capability came to prominence when the aeromedical evacuation assets of the RAAF and our other Services were called upon to assist the casualties of the terrorist bombings in Bali.
It is a tribute to the maintenance skills of our engineers and ground crew that RAAF aircraft were available and in the air within an hour or so of being called upon for assistance.
And no words can adequately describe the commitment and professionalism of the medical teams and air crews which flew back and forth across the Timor Sea countless times ferrying the injured.
DEVELOPING THEMES IN A CHANGING STRATEGIC ENVIRONMENT
There are a number of observations that can be made from our involvement in the War on Terror and in combating weapons of mass destruction.
One is that we have confidently been able to call upon a wide range of our air power assets and skills to support emerging strategic imperatives, which demonstrates that the existing force structure has served us well.
In the 2000 White Paper the Government set out directions for Australia’s strategic policy, outlined key roles for the Australian Defence Force and, together with the Defence Capability Plan accompanying the White Paper, mapped its capability requirements over the next decade.
Two years on, both experience and events have confirmed that the scope and relevance of its key policy directions, strategic interests and tasks remain fundamentally on track.
It is true, however, that the threat of terrorism and proliferation of weapons of mass destruction has caused some fine-tuning.
For example, the Government in combating terrorism was advised to enhance its amphibious capabilities.
As a result, the Government has announced that the planned acquisition of Additional Troop Lift Helicopters for the Army will be accelerated.
Furthermore, we face the reality of ongoing high operational tempo of Australian forces operating beyond our region increasingly in high threat environments.
In this regard we are reviewing our capability requirements in areas such as strategic lift and battlefield mobility.
The trend towards coalition operations has also reinforced the need for interoperability and improved force protection.
But Iwanted to say a bit about Intra-operability within the ADF
Our air power assets must also be viewed as increasingly integrated with the other capabilities and assets of all Services.
Further, as technology advances, the way in which we operate and communicate is becoming necessarily more sophisticated and integrated.
The Government decision to establish a new co-located Joint Headquarters for the Australian Theatre is part of the organisational response to the operational need.
The Headquarters will allow enhanced planning, control and conduct of fully-integrated ADF operations.
In many of its support functions the Australian Defence Organisation is already integrated and operating as a joint entity in areas such as acquisition, personnel administration and estate management.
But more importantly, it is difficult to think of any forthcoming air acquisition that will not be bound by the need to operate in conjunction with ground and naval assets.
This is especially so given the focus of Australian operating requirements on the littoral environment.
The Airborne Early Warning and Control capability is a good example in this regard a capability that incidentally could also make a valuable potential niche contribution to Coalition forces.
But this matter goes not only to the need for seamless communications, command and control structures.
It also goes to the ability to share data on the battlefield and how this information can be exploited to achieve decisive effects and to the ability of a range of platforms.
These issues are currently the subject of examination by Government in the context of our strategic review which will fine-tune our capability planning where appropriate.
I wanted to now discuss the implications of the changing environment on industry and procurement policy.
AEROSPACE IN FORWARD ACQUISITION
It is obvious that aerospace will continue to be a significant feature of our acquisitions in the coming decade.
The Commonwealth will spend around 28 billion Australia dollars on Defence aerospace over that period.
Of this, around 11 billion dollars will be spent in Australia on training, through-life-support, upgrades and some production work.
The balance will be spent abroad on platforms and spares and those upgrades that can not be undertaken in Australia.
This spending is laid out on a project basis for the coming decade in the Defence Capability Plan.
The Plan is a hallmark achievement that recognises both Defence and industry’s need for greater certainty and visibility of the Government planning parameters.
It continues to provide Defence with a comprehensive and integrated plan for the development of Australia’s armed forces over the next decade.
With the certainty now provided by the Defence Capability Plan, we can provide an unprecedented opportunity to maximise value-for-money in aerospace acquisitions and to embed sustainable self-reliance in key industry capabilities.
But, procurement processes and defence industry ultimately must serve strategic needs, and not vice versa. Some flexibility on the part of both Defence and industry will be required in terms of the rapidly changing strategic environment.
As I’ve already mentioned, the Government will accelerate the Additional Troop Lift Helicopters acquisition.
We are updating the Defence Capability Plan to reflect this changing strategic environment.
The 2003 public version of the Plan will be made available later in the year.
NEW DEFENCE INDUSTRY POLICY
For industry to sustain key capabilities especially those that are of less relevance to the civil market it needs an environment conducive to securing positive returns on its long-term investment.
The Australian aerospace industry is currently fragmented with many small companies fighting for too few Defence contracts in a cyclical procurement environment.
Australian defence industry does not require subsidies or protection for its survival. What it does require is a more stable workload to maintain its viability and the capability to support the Australian Defence Forces.
A new strategic approach to defence industry is of enormous importance to Defence and Government because industry is obviously an essential part of national security in a time of increasing uncertainty.
The rules of engagement also need to change from the traditional confrontational approach to one of sharing the risks and benefits that is, one of partnership.
The recognition of the need for industry reform led the Government in October 2001 to direct the development of a more strategic approach to Defence procurement that would foster long-term strategic alliances between Defence and fewer primes.
The new policy will act as a driver for further acquisition reform that improves the value for money for Defence on a whole of life basis.
It will reduce non-productive costs and free up financial resources for capability development.
The new alliance approach will call for greater commonality in platforms and systems in aid of lower ownership costs for Defence and more viable business volumes for industry.
It will further call for the bundling of work into more sustainable contract volumes for strategic partners where appropriate.
The benefits to Defence through sustainable industry capabilities and increased value for money will outweigh any perceived risk of abandoning the traditional project-by-project open competition approach to procurement.
But moving towards strategic partnerships will also require that Defence apply new approaches to governance and contract management in order to mitigate the risks that attach to long-term contractual relations.
For its part, industry will be expected to invest in the skills, the research and technology, and the global linkages that will sustain the capabilities required to support the Australian Defence Force.
Industry will also be held to account for attaining world’s best practices in its management and growing this through continuous improvement.
We can readily see the need for this new approach if we consider our rotary wing sector.
The Australian Defence Force is still served by nine helicopter types across around 150 helicopters where arguably four or five types could suffice.
This would afford enormous economies of scale in through-life support and training as well as increased operational flexibility.
More generally, across both the rotary and the fixed wing fleets, only three aircraft platforms are currently supported by single prime contracts.
We have little commonality of support services across kindred platform types.
We need to respond to the changing engine overhaul and maintenance environment which sees a decreasing flow of work primarily because of increased engine reliability across a diverse range of engines. We do not optimise maintenance synergies with the civil sector.
We should explore further opportunities to create a regional centre for some support and maintenance. We continue to undertake some deeper maintenance and all operational maintenance by uniformed service personnel.
The need for uniformed personnel to undertake some aspects of this work is arguable.
And we are only now beginning to realise the potential for growing Australian firms into global supply chains. The available evidence suggests that we are foregoing significant efficiency gains. Moreover, if we fail to foster a viable industry we will be unable to sustain critical capabilities in support of the Australian Defence Force.
Indeed, we now risk a skills crisis and a collapse in industry research and development which belie the faith now placed in industry for underpinning the self-reliance of the Australian Defence Force aerospace operations.
Rationalisation might, however, require Government to consider trade-offs in capability in some areas in order to deliver larger benefits that commonality can bring.
But there is urgent need to redress this situation with outcomes that establish viability for the Defence aerospace industries. To this end, defence has been developing the Aerospace Industry Sector Plan in consultation with an industry Working Group.
The Working Group comprises key aerospace industry executives, industry associations and the Department of Industry, Tourism and Resources. It has met regularly over the past year and drawn on the services of the Allen Consulting Group for specialist economic advice.
I am pleased to extend my appreciation to the individual companies that have been most supportive in providing data to the consultants.
The working group will shortly be finalising the Sector Plan, and I look forward to considering it.
PARTICIPATION IN GLOBAL MARKETS
But the Government’s October 2001 industry policy also added momentum to another fundamental shift for industry.
This is because it also aims to foster the development of unique local capabilities and supporting SMEs that can exploit niche capabilities in global supply chains.
Our industry may be small relative to the great industrial complexes of North America and Europe, but it has developed extraordinary depth and flexibility in order to adapt, support and upgrade the air assets of the Australian Defence Force.
Together with the Aerospace Action Agenda to be released by the Minister of Industry, Tourism and Resources, the Defence Aerospace Industry Sector Plan will seek to position Australian aerospace industry for aggressive engagement in the international aerospace sector.
To succeed, Australian defence industry needs to perform at world competitive standards, and where possible, to generate its own commercially viable economies of scale.
In this light I welcome the announcement I understand just yesterday by BAE Systems Australia, Boeing Australian Limited and Bombardier Aerospace Defence Services that they have signed a heads of agreement marking the formation of the Hornet Industry Coalition.
The Coalition will provide through-life support requirements for our F/A-18 aircraft including maintenance and modifications, training and training support, supply support and engineering. This marks a worthwhile advance towards a more rational and robust provision of support services to our fighters.
In some cases achieving world competitive standard may be as an Original Equipment Manufacturer.
Our maritime sector perhaps best illustrates this potential, given its success in the Anzac Frigates, ocean going catamarans, and light vessels all vessels specified for littoral operations.
But in the aerospace sector our objectives are primarily fixed on commercially sound engagement in the supply chains of the global OEMs.
Our capabilities in advanced composite structures are regarded as amongst the best in the world, as are our capabilities in fatigue monitoring and life extension, specialist tooling, specialty alloys, through-life-support, trials and evaluation, and photonic applications to name a few.
Australian firms are also establishing global niches as technology houses our outstanding work in phased array radar illustrates this, with applications now spanning ultra-long range ionosphere reflected radar, medium range surface wave reflected radar, and tactical volume search and target illumination radars.
In the case of competitive OEMs our successes with light utility aircraft and surveillance UAVs come to mind.
Indeed I congratulate Gippsland Aeronautics who announced again I think only yesterday their appointment to supply GA8 Airvans to the United States Air Force Auxiliary for use in their Civil Air Patrol over the next three years.
I want to mention particularly the Joint Strike Fighter program.
The decision last year by Government to join the System Development and Demonstration phase of the Joint Strike Fighter program provides a unique and unprecedented opportunity for Australian industry to become integrated into global supply chains.
In terms of the procurement aspect, a decision on Air 6000 the new aerospace combat capability was not planned to be made until 2006.
But when Defence advice indicated that it could not see JSF not being dominant in the AIR6000 solution, it became obvious that the Government and Australian industry would not benefit from a protracted competition.
A timely decision was made to remove the uncertainty in industry and allow it to concentrate its efforts on the most practical solution for Australia. This is a good example of procurement processes adapting to strategic realities and corresponding capability needs.
But in the past, decisions on major acquisitions have tended to be too late for Australian industry to have a chance to compete in the early development and production phases of major overseas programmes. This left industry to look for opportunities in mature programmes with little chance of sustained work or access to such global chains.
Partnership in the SDD phase provides opportunities for Australian industry to contribute to the development of the aircraft and evolve its capabilities. This will help us develop and then sustain industry capabilities important to the ADF.
Australian industry is now bidding for work in the JSF global supply chain of between 3000 and 6000 aircraft and not just those aircraft to be acquired by Australia. In the short time since joining, Australia has already been provided with over 20 requests for proposals or information from the JSF industry partners.
The long term planning availed by the Government’s commitment to funding the Defence Capability Plan is therefore paying dividends for industry by signalling well in advance our future capability needs. This certainty together with better industry planning is opening the door to opportunities to leverage future global supply chain opportunities in a complementary fashion.
But as a relatively small player by global standards, Australian industry recognised that a team approach was required to enable it to compete against much larger suppliers. Industry moved quickly to organise itself into Industry Capability Teams that broadly align with Lockheed Martin’s Integrated Product Teams - Mission Systems, Vehicle Systems, Autonomic Logistics, Air Frames and Propulsion Systems.
These arrangements mean that large and small Australian companies have equal opportunity to promote their capabilities into Lockheed Martin and its partners.
The JSF procurement approach will serve as a model for future acquisitions where it makes sense to do so.
And I am pleased to be able to refer you to the Team Australia stand at the Air Show where some of our fine capabilities are on display.
ONGOING IMPROVEMENT TO PROCUREMENT
But a fundamental complement to industry reform is procurement reform. And I just wanted to briefly mention the fact that significant reforms have occurred in Defence procurement processes in recent years. These include the implementation of strategies to address shortcomings recognised in the McIntosh/Prescott Report into the Collins Class submarine project.
The creation of the Defence Material Organisation in itself was a major reform. DMO’s whole-of-life organisational structure is reinforced by the fact that it brought together three organisations to establish a single area of accountability and is now responsible for maintaining capability assets throughout their life.
And there are developing themes in Defence procurement reform which are also integral to industry reform. For example, commercialisation of defence support and whole of life, outcomes-based contracting.
--Commercialisation of defence support
Consistent with trends in other countries, we have sought to maximise the effectiveness of our Defence budget by contracting to industry the non-combat functions which support the fighting forces.
We have sought also to commercialise those industries which had supplied Defence materiel and which had evolved since the Second World War as Government owned enterprises, such as ADI.
These two initiatives have changed fundamentally the landscape of the Australian defence sector. They have greatly expanded the role of private industry in supporting the ADF and, conversely, have increased the dependence of the Defence Force on the sustainment of key capabilities in private industry.
This trend will be further developed by the new industry sector plans.
--Outcomes-based and contemporary contracting
However, gains from commercialising Defence industry and support can only flow if the private sector is free to draw upon best commercial practices, to employ innovation and to draw upon global networks and experience.
There would be little point in outsourcing functions while constraining private industry by requiring the replication of government work practices.Governments must provide appropriate flexibility and incentives to the private sector to deliver best value for money.
Key to providing this incentive is to share the gains from doing business more intelligently and to move away from prescribing inputs and towards carefully designed whole-of-life and outcome-based specifications. This is best done in a partnership environment of mutual understanding and trust with long term commitments. And it demands contractual relations that foster constructive partnering frameworks directed at problem solving rather than blame shifting.
Again, these features will also form part of the fabric of industry reform.
Some key recent procurement projects which reflect some of the features I have just outlined and other new ways of doing business are the Hawk Lead-In Fighter, the Eurocopter Tiger Armed Reconnaissance Helicopter, the Airborne Early Warning and Control project and the Joint Strike Fighter.
In relation to Hawk, it is a landmark contract for the defence aerospace sector in Australia. This marked the first Defence aerospace acquisition in Australia which integrated acquisition and through-life-support into a single ‘cradle-to-grave’ long-term contract which was outcomes driven. It is a performance based contract which casts BAE Systems not only as the OEM prime in supplying the aircraft but also as the support prime, or ‘platform steward’ for the aircraft.
The contract sheds a long-standing and dysfunctional tradition of the Commonwealth acting itself as the prime in managing multiple support contracts for the support of an aircraft.
Eurocopter Tiger Armed Reconnaissance Helicopter
The Eurocopter Tiger Armed Reconnaissance Helicopter, or Air 87, contract with Australian Aerospace built on the Hawk example. In that project, Defence contracted to acquire a comprehensive system including:
-- the helicopter fleet;
-- a state-of-the-art training system including flight and ground-crew simulators;
-- a software support capability; and
-- a ground-based mission planning and management system.
The project was also novel for the way in which the final tender evaluation process was fast tracked to reduce costs to industry and Defence. All in all it took only three months from receipt of proposals from the first four short listed suppliers to select the tenderer to advance to the tender development stage. This sped up the process and saved tenderers money.
The AIR87 contract was signed in December 2001 less than 12 months after the release of the RFT. In the past, it would typically have taken two or more years to get to that stage.
The AEW&C program was recognised early on that a complex acquisition of this sort poses some of the biggest acquisition challenges given that software probably accounts for more project failures than any other single cause.
Defence is implementing evolutionary acquisition for acquiring software intensive systems. This means that instead of trying to acquire a total software capability all at once, Defence will incrementally acquire small, well-defined capability elements that contribute to the total system so that the project has access to the latest technology through development. To the extent possible, we are seeking to “future proof†software development.
The AEW&C contract specifications are function and performance based, and responsibility for the design risk rests with the prime contractor who is in the best position to manage that risk.
KINNAIRD REVIEW
It can be observed that procurement reform is a fluid, ongoing process. There is no start and no end point.
On 12 December 2002, I announced the establishment of a Review Team chaired by Mr Malcolm Kinnaird to assist with a range of issues associated with major Defence procurement.
The review team will identify the key challenges associated with the management of Defence projects, how these are currently being addressed and any potential improvements that can be made. The outcomes of the Kinnaird Review will inform the Government’s thinking regarding future directions for defence acquisition processes.
There are of course new opportunities and ideas.
I’ve noticed the British for example are ahead of us in the utilization of private financing. In this regard I am reminded of a recent speech by the Secretary of State for Defence for the United Kingdom. He said that private finance had started to deliver real benefits in the provision of quality services, that 8 deals had been signed in the last 12 months and that the MOD will continue to pursue vigorously the benefits that private finance can bring.
In our circumstances, although our replacement Patrol Boats Project did not proceed as a private finance project, it was an important learning experience for Defence and the Commonwealth as a whole.
My Department is currently working with the Department of Finance and Administration to bring forward an improved policy framework and improved internal processes.
The Government is committed to ensuring that private financing becomes an established procurement option that can be used when it delivers better value for money.
Projects currently under active consideration for private financing in Defence include new in air refuellers, the Joint Headquarters building for the Australia Theatre and future accommodation for Defence Force people without dependents. Future projects might include land transport assets and flight simulators.
We do recognize the flow-on benefits that the application of private financing principles can bring generally to procurement processes within Defence.
And as you may be aware, the Commonwealth’s leasing arrangements for its new Special Purpose Aircraft approximate many of the most desirable aspects of private financing.
Also before I conclude, I would like to foreshadow a new measure which aims to make Defence more open to innovative solutions from industry.
I expect to consider very shortly from my Department a proposal for guiding the consideration of Unsolicited Proposals. This policy will set out a process for managing proposals which are innovative, and in particular where they don’t fit neatly within existing funding boxes or when they suggest an improved way of doing ongoing business. Such proposals are a common way for industry to bring forward solutions to capability needs outside of formal solicitations by the Commonwealth.
These proposals currently lack a formal framework for consideration, yet they can potentially bring significant gains to the Commonwealth in cost savings and enhanced capability.
But they can also pose challenges in equity where a formal solicitation process is in parallel train, where a solicitation might be the appropriate outcome of considering the proposal, or where the proposal is of high merit but can not be funded from existing appropriations.
Resolving the policy framework will help further open our procurement and capability processes to the innovative potential of industry.
So in conclusion, the Government is committed to ensuring that our Defence capabilities respond to strategic needs.
We will also ensure that procurement processes continue to evolve to ensure best value for money.
We will continue to strengthen our industry capability because it is an essential part of national security.
Industry will also need to be dynamic and shape itself to ensure it continues to align with our objectives.
Both industry and Defence need to sign onto the new rules of engagement whereby we both share the risks and benefits of doing business that is, an environment of partnership.
Thank you for giving me the opportunity to present your inaugural address.
-ends-
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