Maximising the economic benefit of Australia’s defence projects

| August 24, 2019

Rob Bourke’s new study, Defence projects and the economy, lets us draw important lessons for maximising the economic benefits of building military equipment in Australia.

As the study states, ‘domestic builds tend to be economically advantageous if characterised by high Australian content, significant spillovers, a workforce drawn from the ranks of the long term unemployed, opportunities for unassisted exports and, where applicable, low price premiums’.

The problem is that local build projects have not always demonstrated these characteristics. With $200 billion in investment in defence capability in the pipeline, we can’t simply assume that the megaprojects currently ramping up will either without careful management.

Designing and delivering projects that do display those characteristics will be challenging, but it’s doable. Much of the groundwork for better outcomes has been laid by the government’s defence industry policy and its investment to date.

Let’s consider the elements Bourke’s study identifies. First, high Australian content. For projects where Defence is acquiring a foreign design, this will always be more complicated. But the industry policy’s requirement for prime contractors bidding for major projects to develop meaningful Australian industry content plans is already having an impact.

With the Attack-class submarine program still in the early stages of design, there’s time to ensure that Australian content is maximised. Close engagement with the French design and build partner, Naval Group, will be required to ensure it doesn’t automatically default to its overseas supply chains.

Defence’s plan to build the future submarines, frigates and offshore patrol vessels in ‘flights’ of three or four vessels also offers the opportunity for more Australian content to be designed into later flights. The key will be balancing the risk of tinkering with the design with the benefit of increased Australian content.

Related to this is Bourke’s next characteristic, major spillovers—that is, new knowledge generated by the project that flows over into the broader economy. Previously, evidence of substantial spillovers has been patchy.

The key, as Bourke notes, is to ensure that Australian industry is involved in designing, developing and producing the complex weapons, propulsion and operating systems and other technically advanced components and services this equipment embodies.

Can it be done? Yes, if two things happen. The first is that the partnerships between Defence, local industry and foreign prime contractors have to result in the transfer of key technologies to Australia.

The second, which is probably more important, reinforces the lesson on maximising Australian industry content, namely that the primes need to actively foster innovative Australian content rather than defaulting to their existing subsystems.

The Australian defence industry has demonstrated that it can design and produce world-leading subsystems, such as CEA’s phased array radar and the EOS remote weapon system.

The challenge is to ensure that the tens of billions of dollars going into the major platform megaprojects is used to foster Australian innovations that enter production.

In light of the major overlap between military and civilian technologies that characterises high-tech industries today (for example, in areas such as autonomous systems, AI and sensors), those innovations have great potential to flow into the broader economy.

Bourke’s point on workforce is salient. It’s no secret that developing the workforce for the megaprojects, especially shipbuilding, is a challenge. Simply poaching workers from other sectors of the economy isn’t the solution, and would undermine the overall economic benefit.

Drawing new workers or unemployed workers into the economy is crucial. The establishment of the Naval Shipbuilding Industry Reference Committee and Naval Shipbuilding College will help ensure that educational institutions are aligned with the industry’s demand for workers and provides a strong foundation for workforce development in that sector. Similar efforts may well be needed in the armoured vehicle projects.

As Bourke notes, exports could be key, and again the government’s defence export strategy lays a strong foundation. Certainly, reaping the benefits of exports for the ADF isn’t necessarily straightforward.

Ensuring that export demand balances the peaks and troughs in ADF demand rather than exacerbating them requires coordination. And ensuring that the benefits of the economies of scale identified by the export strategy flow through to the ADF through reduced prices will require careful scrutiny.

Perhaps the most important factor for increasing exports is a recognition that the real scope for exports lies not in major platforms but in advanced subsystems in which Australian academia and small to medium-sized enterprises have demonstrated expertise.

But again, those SMEs, regardless of their ability to develop innovative solutions, won’t have products to export unless the prime contractors managing the megaprojects build them into their Australian industry content plans.

All SMEs agree that the best way to win export deals is for their products to be in service with the ADF. Again, the lesson is clear: the primes can’t automatically default to their existing supply chains.

Bourke’s final characteristic is low price premiums. The evidence indicates that local builds have traditionally attracted high premiums. In large part that’s been due to Australia’s relatively high wage structures, particularly in areas where skilled workers are in short supply. This issue can be mitigated to some degree by making sure defence industry draws new or unemployed workers into productive jobs, as Bourke suggests.

It can also be mitigated by investment in new production facilities incorporating state-of-the-art manufacturing technologies. Again, this is happening already. The government is investing in new shipyards that feature high levels of automation in areas such a welding, which reduces rework and waste.

And, again, the premium can be mitigated by ensuring Australian content draws heavily on advanced technologies—a sector in which Australian wage structures aren’t appreciably different from those of other developed countries that compete for the supply of subsystems.

Bourke’s study clearly identifies the potential pitfalls of local defence projects. His account of missed opportunities in the past, and the scale of the potential risk for further lost opportunities if the megaprojects are not designed and managed to maximise their economic benefits to Australia, makes for sobering reading.

Economics is a dismal science after all. Perhaps his most important message is that history shows that beneficial outcomes won’t simply happen by themselves. Good intentions are not enough and constant attention from government and Defence is essential.

The government’s defence industry policy lays a strong foundation, but Defence and industry have to work together to deliver the economic outcomes.

Overall, there appears to be a golden thread running through the lessons learned. Australia underinvests in R&D, so even part of that $200 billion can make a difference. Defence needs to ensure that the megaprojects actively foster Australian innovation and maximise local industry involvement in areas of high economic value.

This article was published by The Strategist.

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