Transcript of Speech to the Defence and Industry ’06 Conference (Except)
(Source: Australian Department of Defence; issued June 21, 2006)
Speech by The Hon Dr Brendan Nelson, MP,
Minister for Defence
At the National Convention Centre, Canberra, June 20, 2006


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The Defence Capability Plan that we're releasing today is the third such document that we have released since the White Paper of 2000. It is intended to give you broad, strategic guidance for the next decade in terms of what we are planning to do in defence.

The Budget this year, as you know, announced a number of things. But our defence budget this year will go to $19.6 billion. It is a 7.7% increase on the last published estimates for our budget this year. It's a $1.4 billion increase in defence expenditure in this year alone.

Defence expenditure is now 9.1% of Commonwealth outlays. It is 1.9% of Australia's GDP. It would be higher, but for the fact our economy is growing very well. Thanks in no small way to the hard work and effort that's undertaken by business people in this country.

We have also announced a $15.9 billion increase in defence expenditure in this budget alone: $5.2 billion dollars for new initiatives including $1.9 billion for the four C17s we'll be acquiring; the $1.5 billion for Hardened and Networked Army; the $623 million for deployments; the $560 million for reserve initiatives; $131 million for the Mulwala redevelopment, amongst many other things.

In addition to that, there is $10.7 billion in the budget to support and grow upon existing programs. It includes a 2% real increase in civilian personnel costs. A 2.5% real increase for military personnel costs, a 1.8% real increase in logistics and sustainment which is based on the experience we've had in recent years with sustainment costs across our platforms. And of course it includes the 3% real increase in funding for the DCP which adds another $2.4 billion. And that's 3% real, compounding the DCP out to 2016.

Since the last DCP was released in February 2004, there've been 58 projects that have been approved worth $11.5 billion. In this financial year alone, we've had 24 projects at $7.2 billion. This represents a significant increase in expenditure, and it also, I might add, reflects the benefits of the Kinnaird Reforms and it reflects very favourably on our Chief Executive, Stephen Gumley. For example one of the things I've learned in almost five months I've been in the portfolio, is it's common for people to talk about cost blowouts. A lot of which relates to, as you're well aware, legacy projects and the way that business used to be done in the past.

In fact for 230 projects that we've had since 2003, we've had 18 projects that have come in below cost in real terms. We've had eight above cost. When people talk about or commentators talk about cost blowouts, it ignores the fact that 59% are basically normal price indexation, 30% are exchange rate movements, and 11% are real cost increases. But when we go into why we actually have real cost increases in 11% of those projects, that is where one of the themes of the conference is just so important. And that is cooperation between industry and the Defence Materiel Organisation.

Eighty per cent of the real cost increases that we have experienced have come from delays. Often beyond our control, often beyond your control, but there's more that we can do to address that. Again reflecting on the reforms and the leadership shown by Steve Gumley and David Hurley, what it's done is in 2003/2004, the first year of the Kinnaird Reforms, we had 25% in terms of delay. We then went in the following year to 15% to 20%, and we're now running at 10% to 13% in terms of delay. And industry best practice I'm informed is somewhere between 8% and 10%.

Over the period of the DCP, we will see annual expenditure on new acquisitions grow to around $5 billion a year. Of those, 46% will be in electronics, 26% will be in aerospace, 11% maritime. That's just basic platforms, of course a lot of the maritime expenditure includes electronics. And 10% will be in vehicles, and 7% will be in munitions and firearms.

This particular DCP will do a number of things. It will consolidate the projects that were announced in the 2004-14 DCP. It will also give you an update on what we expect to be the life of existing defence equipment, and it also brings to it, additions which come from the 2005 Defence Strategic Update.

It will also give you in terms of business planning an opportunity to have a look in the long term at what we believe our defence capability guidance is going to be. It will give you also the opportunity, and I invite this on behalf of the DMO and the Department of Defence, it will give you the opportunity to influence our defence planning guidance systems in terms of acquiring capability, and it will also give you the opportunity to propose – and nothing should be a closed book in this rapidly changing world – but to propose changes to that capability, and perhaps even additions to it as we go forward.

No one, and particularly a Defence Minister or Government, should have a closed mind when it comes to changing our capability in relation to a changing and uncertain future.

Of course the DCP reinforces the Air Warfare Destroyers, the LHDs, the new air combat capability. It includes the C17 acquisition and the decision that we took four months ago, and it also includes the replacement of land vehicles and Land 121 and some of the projects in which some of you are so deeply immersed.

Without tediously going through all of the things that are in it, in maritime in particular, I think it's worth pointing out that we're going to invest more than half a billion dollars of new money, in new projects, to improve the effectiveness of our naval surface capability. It will at the same time enhance our Anzac class air search radar systems and also give us a better capability in terms of undersea warfare and ship protection, and also mine sea surface activities.

In the air space, we announced yesterday – the Prime Minister and I – the acquisition of another 34 MRH-90s, phase 4 and 6 of Air 9000 that brings to 46 the number of MRH-90s that we are acquiring. In our term prices, that's $2.7 billion plus the $1.5 billion we announced for phase 2, and that's the first step in bringing us back to a smaller number of helicopter platforms across the ADF. We will move initially from ten down to seven different helicopter types. You should notice that when you read the document that we are going to have commonality in terms of training and management systems. We're also proposing to acquire rather than lease our training systems, and you'll also see from 2017 that we're going to invest in new anti-surface, anti-ship and anti-submarine warfare technology.

I should also inform you that we propose to appoint a new position – a Two-Star to head management of our helicopter assets and supported by a system program office. And further to that in the air space area, we'll also be investing between $200 and $500 million in mid-life upgrade for the Hawk Lead-In Fighter. There will be an upgrade to the airborne early warning command and control system planes, the Wedgetails. They'll also be a billion dollars, retained in the DCP for either replacing or upgrading the C130H and the Caribou and another $250 million will be invested in the multipurpose UAVs.

That and many other things, as I said earlier, building on the new air combat capability program, I think present an exciting range of measures in capability in the air space area.

Across land, you'll see in the DCP a 40% increase in funding to improve networking across the army consistent with Hardened and Networked Army. There's a $200 million investment in improving digital communications and the links between land and air across the army. The air, the ground based air defence capability platform for the army will be improved with a $750 million investment commencing in 2017 and there will also be an extension of the battle management system right across more of the army.

When you look at the DCP, you'll see year of delivery dates, just to make it absolutely clear to you – that refers to second pass. Some of the dates, in fact quite a few of the dates in the last DCP refer to first pass decision making in government. If you live a normal life for some reason you don't appreciate how government works. In this new procurement environment, when we make a decision about a procurement, we go through a two pass system. Hence some of the legacy projects that I'm dealing with, we wouldn't be going into today. And at first pass, we allocate about 10% of the proposed budget to look at the off-the-shelf versus a more developed platform for whatever we're thinking of acquiring. So the year of delivery dates that you look at in the DCP will refer to actual second pass decision when the government makes the decision that it's actually going to proceed with a particular asset.

There is flexibility in it. Obviously in terms of projecting over the next decade, what we intend to buy and how much money we think we're going to need to invest in it, you need to take account of unforeseeable risks, changes in technology, changes in the strategic outlook. As I said, September 11 has changed everything for countries like ours, and we also need to take into account things we may not envisage in terms of the global supply chain. And the fact is you're well aware that globally the number of major defence companies supplying defence material throughout the world has declined.

One of the other things that's important to appreciate is there is deliberate over programming in the DCP. It's important that we basically have projects which are in excess of program expenditure. If for some reason we have a problem in terms of slippage or delay or for some reason need to seriously change an acquisition that we're looking at, then we need to make sure we have other projects that are online to do it. The over programming across the decade is around 7% and we're quite confident that that's more than enough to deal with slippages and as I say the unforeseen things that may arise through the course of the DCP.

In summary, the DCP will present $51 billion in projects that are fully costed, $31 billion over the decade alone, and by any standard I think it's fair to say that at the moment, under this government, the level of investment and long term commitment in defence is as strong and as confident as you could possibly be in reasonably planning a future.

The other thing that I am focused on is defence industry policy and I know for some of you sort of your eyes will start to glaze over as I mention that. I think in the last 35 years, we've had something like 23 reviews or policy statements or a variety of things – endeavours with the best of intentions by industry and perhaps government of the day to develop some kind of industry policy. And the number of reviews that have been undertaken really reflects the complexity in this area. We're basically dealing with national security policy.

In my view, defence industry capability is about defence security. I see and I've got to say on behalf of the Government, I see defence industry as a very important part of our capability. It is different but no less important in many ways than intelligence, personnel and all of the other things that inform our broad ability to defend and secure our interests. But the number of reviews and enquiries and so on really reflects the complexity of trying to develop policy in terms of security. It also reflects enormous sums of money that are invested in this area and I'm very conscious of the fact that when we in government make decisions we have an impact on your companies, your shareholders, your employees and I'm also very mindful that when we make decisions in defence procurement and sustainment, we're having an impact on significant regions of Australia.

We also appreciate that military equipment is extremely complex and technologically complex and so too is the industry from which it comes. And as an aside, Lindsay Fox, for whom I have a very high regard, said to me recently, he said, ‘Mate, if you want to buy trucks’ – he said – ‘I'll buy them for less than the DMO can buy them’. And I won't say exactly what I said to him, but we had a very interesting conversation about that. I've learned a lot about how to save money buying tyres and I'll have that chat with David Hurley, but in the end, what our defence personnel do with trucks is a little bit different from what Lindsay's people do going up and down the highways of this country and others in the region.

There will be a serious attempt to develop defence industry policy and I don't intend to muck about in this area. Bruce Billson is going to head following a roundtable we held a month ago, head a three month consultation phase. Kerry Clarke, Lucio Di Bartolomeo and Mark Thompson will be joining him and Henry Ergas in putting together the consultation.

I'm releasing today the discussion paper which will inform that this is a serious business. The issues that we will be looking at are defence capability and how can we sustain that. We'll be looking at getting value for money. You are all taxpayers; I'm a taxpayer. I'm strongly supportive and committed to increases in defence expenditure, but the average Australian that's looking for footy results in the Daily Telegraph today, the Herald Sun, they need to know that every last dollar that they invest in defence is a dollar well spent, not just in terms of the capability but in the efficiency with which it's actually delivered.

I also think it's extremely important with 19,000 people employed directly in defence industry and another 11,000 indirectly, that there is a place in the sun for SMEs. I know you have heard that before, but one of the CEOs of one of the primes said to me recently – having told me that we didn't need a defence industry policy – he said, ‘what we actually need is some definition around the role of getting SMEs to work with us as primes’. And I said that it sounds like you're talking about defence industry policy.

It is also important, whilst we are a relatively small country, that we look at our export potential and we will be looking at that and the issues surrounding competition. Steven Gumley – I have described Steve as rolled gold in terms of the job that he does for us – Steve is an ardent adherent to the importance of competition. Philosophically, I am privileged to represent a political party whose values are essentially those of idealism, hard work and self-sacrifice. We believe in giving people incentives to get out of bed and take a risk for their families, their shareholders and the community in which they work. And we are very strongly adherent, also, to the importance of competition. But this is an industry, in my opinion, which is like no other.

The government, through the Defence Materiel Organisation, borders on being a monopsony purchaser. Some says that it is. On the other hand, we have people in industry. We have got 60% of our business is going to 12 primes who have a return on sales of some 7% and return on equity of 38% over the four years we analysed to 2004, which compares favourably with world's best practice of the Top Six. Once the contracts are signed, notwithstanding the first and second pass, the balance of power, if you like, between DMO there in government and industry changes.

The conference is about improving that cooperation and the relationships and the partnerships. But the business industry, defence industry policy that we propose to develop has got to be about setting some flags. If I was to place myself in your shoes, one of the uncertainties is the political environment which can suddenly change; the direction in which you believed that you are going and into which you will have invested quite a bit of money.

So the challenge in Defence Industry, from my point of view, is how do we balance appropriately the enormous amount of power that is possessed by the Government and the DMO with a different but still significant power that is invested in the large primes with whom we deal, the important role played SMEs particularly in driving economic and social development in key parts of Australia.

The policy is not about job creation, it is not about nor should not be about government simply saying we will create jobs by suddenly deciding we are going to build a new ship or develop a new aircraft platform.

It is also not about saying to industry, large or not so large, that what the Government is consciously going to do is to guarantee you a flow of contracts and therein money.

It has got to be about making sure that as far as possible we can have competition, that you have certainty in terms of the political environment, that we have a defence industry policy that sees itself as very much integral to Australia's domestic indigenous defence capability, building skills and also supporting regions of this country that see defence as not just delivering capability that is important but putting bread on the tables of everyday households.

And we are determined to see that through, and the timeline, as I say, is Bruce Billson will run that consultation for about three months. We will then have a look at it. I will then consult with you before anything goes into concrete. It will naturally be a product of dialogue with my colleague Ian Macfarlane, the Minister for Industry, Tourism and Resources, and then, of course, I will take it to cabinet.

One of the legacies that I am determined to leave here for however long that I am privileged to be in this portfolio is to give you certainty, not just in terms of the DCP, but also the political environment which informs the quantum of money that is delivered in defence capability and the platforms that we choose to support with it.

In concluding, Kerry has not sort of tackled me from the left, I would have thought he would come from the right actually, but now I know. Unobserved he says.

One of the other things I would leave you with, you will notice any casual observation of the political environment at the moment suggests to you that industrial relations and workplace relations is going to be one of the key areas of contention for the federal election which will be held late next year. What the government is trying to do and what we recognise is that the world has changed very quickly. We are 20 million people. We are 0.3% of world population. There is nowhere to hide from the winds of change. And at the moment, we have a very tight labour market which is affecting many of you. We have an unemployment rate of 3.4% in the State of Western Australia and 4.9% across the country.

It is extremely important to us to appreciate that last year this country earned more from exporting education than wheat and wool combined. That information and communication technology at more than 4% of Australia's GDP, as a proportion of GDP is higher now than agriculture. Our future is going to be determined by our ability to compete with the rest of the world. What we are determined to do – and I say this to those of you who are employers – is to create an environment where it is easier for you to take those risks as I see it; in small and larger, in private and public companies to take risks and in the process of employing other people. As you know, it is described as flexibility to the labour market which is giving you and your employees choice underwritten by a solid safety net. We see that as a very important part of building this country's future and it is no less important in defence industry than it is in any other area of economic activity.

I wish the conference well and I will see the rest of you this evening.

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