AIDN. SME policy position for defence and national security

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1 AIDN SME policy position for defence and national security May 2017

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3 SME policy position for defence and national security The Australian Industry & Defence Network Incorporated (AIDN) is the peak industry association for small to medium enterprises (SMEs) wishing to do business in the defence and security sectors. Established in 1995, AIDN represents the interests of Australian SMEs in these industry sectors through advocacy, representation and member services. AIDN is made up of State and Territory Chapters with a combined membership of around 750 principally SME companies. Its chapter structures are optimised to reflect the nature of the defence and security industries in each State and Territory, which ensures that its national direction is informed by a full range of industry views. AIDN has a vital interest in industry policies that promote the interests of SMEs. In this regard, the Defence and Industry Policy Statement (DIPS) released by the Government in 2016 forms a sound basis for support of SMEs and AIDN commends the Government on this initiative. AIDN also stands ready to assist the implementation of the DIPS wherever it can and looks forward to a strong partnership with the Centre for Defence Industry Capability (CDIC) 1 in that regard. With this in mind, AIDN is formulating a comprehensive set of policies and will publish these in various releases of this SME Policy Position. For AIDN, two vital policy areas in the DIPS are: Sovereign Industrial Capability (SIC) and the related Sovereign Industrial Capability Assessment Framework (SICAF) 2, and Innovation 3 AIDN is ideally placed to assist Government in the formulation and development of the SICAF and is providing ongoing assistance to Defence in its development using a Framework that includes a 3-Horizon approach within Capability Streams and has provision for SME Setasides where it would be advantageous to do so. AIDN also has a role in Innovation policy and implementation. It sees that both policy objectives will require a longer-term strategic approach to reach full maturity. In the shorter term, AIDN considers that the recognition of industry as a Fundamental Input to Capability (FIC) 4 requires a reconsideration of the way industry capability is viewed in Defence projects. Consequently, this edition of our SME Policy Position will look at range of objectives to support industry s status as a FIC. Alan Rankins President, Australian Industry & Defence Network Defence and Industry Policy Statement (DIPS), Section 1 the Defence and Industry Partnership, p11 2 DIPS, Section 1 p12 3 DIPS, Section 3 p29 4 DIPS, Section 2 p19 1

4 Proposal This edition of AIDN s comprehensive Defence and National Security SME Policy Position proposes a strategically formulated set of key objectives to be used in Defence projects to recognise industry as a FIC and support other policies contained in the DIPS. These key objectives are: A reconsideration of the definition of value of money in the assessment of both defence capability, sustainment and other project source selection options and defence industry programs to take into account industry as a Fundamental Input to Capability, Sovereign Capability and a range of national interest considerations. Mandatory inclusion of relevant Sovereign Industrial Capability in the AIC plans for projects, with clear objectives and milestones, appropriate public reporting of implementation status and a strategic approach to implementation through comprehensive requirements. The Defence Industry Capability Plan (DICP) to further inform rigorous priorities for AIC Plans in projects, and to enhance self-reliance through broadly based support for Sovereign Industrial Capability and key technology areas where Defence should carefully nurture its organic SME industry. SMEs particularly contribute to core Defence capability in new technology areas such as ICT, Cyber Security and Simulation Technology. Innovation to be a key objective within the Defence Industrial Capability Plan, with a focus on developing capability to drive innovative solutions for projects in the Integrated Investment Program (IIP). Where AIC Plans fail to deliver Australian content of at least seventy-five percent of the value of projects including the first 5 years of Through Life Support, the contractor be required to implement an Australian Industry Participation Program (AIPP) to make up the shortfall. In addition to delivering project capability, the AIPP may include: Further elements of the DICP not already included in AIC Plans Innovative solutions that enhance project capability or reduce project, operational or support costs, such solutions being valued at 250% of their cost when delivered by an SME and 150% of their cost otherwise, Project capability delivered to Global Supply Chain customers, or Excess AIPP delivered in other Defence projects. Prime Contractors be held accountable for the achievement of AIC KPIs in their contracts, with a requirement for annual reporting of progress. In addition, failure to fulfil the requirements of endorsed AIC plans to have real consequences for non-compliant prime contractors including: For major failures, contract cancellation, For other failures by the public reporting of such non-compliance, and Impacts on the future tender assessment of non-complying companies. AIC Plans to include contractually binding deeds of agreement between the prime contractors and supporting SMEs, with such deeds including designated performance requirements for both the prime contractor and SMEs. Changes to the deed would be subject to usual contract change procedures. Consistent with the Defence First Principles Review and the establishment of the Centre for Defence Industry Capability (CDIC) 5, a strategically focussed and integrated system be put in place to manage all aspects of SME participation including: Efficient and effective scrutiny of AIC Plan, Defence Industrial Capability Plan and Australian Industry Participation Program implementation. Recognition that Defence SMEs are often fundamental to delivery of core capability and that consequentially, Major Service Providers in the Defence Support Services Standing Offer Panel and similar arrangements must be contractually bound to produce AIC plans with identical structure and value to Acquisition contracts, and to utilise SMEs in them. Use of contracting strategies that maximise the potential for SMEs to engage directly with Defence as individual organisations or in consortia Growing SME engagement in Industry policy by direct involvement in the Centre for Defence Industry Capability (CDIC). To encourage new participants into Defence in both manufacturing and services sectors, re-examining and simplifying the current cumbersome Defence Security framework. It is imperative that Australia maximises its ability to transfer talented workforce from other industries to Defence to meet the workforce requirements of the Integrated Investment Program Defence and Industry Policy Statement (DIPS), Section 1 the Defence and Industry Partnership, p11 2

5 Key objectives Defence recognises the defence industry as a critical partner in its success 6. It also recognises that more than 3,000 SMEs operate in the defence industry in Australia 7. These SMEs are estimated by AIDN to employ more than 50,000 people and, in conjunction with the primes in Australia, play a crucial role in providing Defence with new capability and the sustainment of that capability. Those employed in the defence industry SME sector are in general highly skilled, many with a high level of dedication to the support of the Australian Defence Force (ADF) and Australia s defence. However, previous outcomes of defence capability development and procurement processes have led to many companies and their key skilled staff in the sector seeing their commercial opportunities shrink. If these companies and skills are lost to the defence industry, there would be a considerable impact on the provision and sustainment of ADF capability. An effective and supportive Defence strategy recognising industry as a FIC would promote the continuing vitality of the defence industry SME sector with its essential role in supporting Australia s defence interests. This SME Policy Position for Defence and National Security has as its primary objective the establishment and maintenance of an Australian defence and national security industry base with the depth, capability and viability to cost-effectively contribute to the achievement of the necessary level of Australian defence self-reliance. Further, the key elements of the Policy Position articulated below are focussed on achieving not only benefits for Australian SMEs but also benefits for Defence through equal or better pricing, access to innovation, enhanced through-life support and consequently enhanced self-reliance. Sme Policy Position For Defence And National Security Key Objectives 1. Reconsideration of the Definition of Value for Money With industry now one of the nine Fundamental Inputs to Capability, reconsideration of the definition of value of money is required. This is recognised in the 2016 Defence Industry Policy Statement 8 with sovereign requirements and Australian industry involvement included. AIDN would take this further. Where previously value for money has been primarily about defence capability and sustainment, source selection decisions must now give much greater weight to the industry programs offered. In fact, the lack of suitable industry programs should now rule out a tender. Further, failure to achieve industry program objectives should now lead to contract cancellation. AIDN does not imply that a change in the weighting of industry programs should be at the expense of other criteria, including consideration of other FICs. It simply contends that the weighting for industry programs must become more significant and the consequences of unsatisfactory industry program performance must be more severe. Notwithstanding the proposed emphasis on industry programs, AIDN fully supports the Government s requirement to achieve best value for money for the Defence budget. The Defence Organisation does not operate in isolation from the rest of the Australian community and economy. Nor does each equipment project operate in isolation. It follows that the wider national and defence implications of project and sustainment source selection should be taken into account in assessing overall value for money. AIDN is confident that such a wider considerati on of value for money would yield net benefits to both Defence and to Australia as a whole. With industry now one of the nine Fundamental Inputs to Capability, reconsideration of the definition of value of money is required DIPS, Section 1 The Defence and Industry Partnership, pp DIPS, p DIPS, p21. 3

6 Key objectives AIDN considers that the strongest tool available to ensure the maintenance and enhancement of Sovereign Industrial Capability is its mandatory inclusion in AIC Plans 2. Sovereign Industrial Capability AIDN strongly supports the development of the Sovereign Industrial Capability Assessment Framework identified in the 2016 Defence Industry Policy Statement 9. AIDN is ready to assist Defence and the CDIC in developing this Framework and its related Defence Industrial Capability Plan. 10 AIDN considers that the strongest tool available to ensure the maintenance and enhancement of Sovereign Industrial Capability is its mandatory inclusion in AIC Plans. Effective integration into AIC Plans must include consideration of: Its maintenance and enhancement in sustainment as well as procurement; and Where a new SIC is proposed, the effect on existing sovereign capability and the viability of the overall SIC must be considered. Further, a prime contractor proposing a SIC not within their existing Australian capability must seek a local industry partner to engineer the SIC system. Justification must be provided where a local partner cannot be found or is not proposed, and may lead to contract cancellation where a SIC is compromised as a result. 3. The Defence Industrial Capability Plan Informing AIC Plans Even with SICs made mandatory in AIC Plans for projects, they cannot be the only areas included in these Plans. There will be many more areas of industrial capability required in AIC Plans than are defined as Sovereign. However, Defence need look no further than its own DICP for further industrial priorities. While this Plan may inform industry of current and future areas were investment is needed, AIDN is strongly of the view that the best way to ensure this investment will be to include DICP areas of relevance in AIC Plans. Project AIC Plans would be formulated using the DICP to not only achieve projectspecific industry capability outcomes but also to enhance innovation and longer-term capability objectives which contribute to self-reliance. The capability so produced could then be expected to continue beyond individual project timeframes and boundaries as it would be required for future projects. In addition to the above, and to enhance the Australian SME base in areas of strength, the DICP must prioritise new technology areas including ICT, Cyber Security and Simulation technology. Also see further coverage of Innovation in Section 4 below DIPS, p DIPS, p23. 4

7 Key objectives 4. Innovation AIDN strongly supports the Government s current emphasis on innovation. Innovation is essential to the longer-term success of Australian industry, particularly to a defence industry which must evolve to continue to meet self-reliance objectives. Consequently, AIDN considers that, when considering the worth of industry programs in contributing to value for money, innovative programs should be given priority over programs containing only well-established technology. Further, innovation should be focused on: Developing capability to drive innovative solutions for projects in the Integrated Investment Program (IIP); and To assist SMEs, new technology areas such as ICT, Cyber Security and Simulation technology to be prioritised as part of innovative proposals. Further support for innovation is also included in the next section. 5. Australian Industry Participation Program (AIPP) The previous 2010 DIPS made the very valid point that Defence is well placed to leverage its weight as a customer as it was the world s 8th largest arms importer and its rate of procurement is increasing substantially. However, when looking at barriers to global competition, it states in contrast that other nations take protectionist approaches to their national defence industries while Australia does not, and this reality must be accepted. 12 The AIDN paper, Industry Involvement for Defence in Australia, August 2014, looks at the global proliferation of defence offset programs. It includes information from some 54 countries, finding 40 of them to have formal offsets policies and, of the 14 without, a number of these had de facto policies (USA: Buy America Act, Small Business Set Aside, etc) and others imposed offsets on a case-by-case basis. Detailed analysis in a number of countries shows that a range of policy objectives were addressed in these programs including: Requirements for achievement of direct (part of the specific project) and indirect (not part of the project) defence and civilian offsets, Technology transfer, Establishment of licensed production, co-production, joint ventures and partnerships Involvement in global supply chains, Economic development and job creation, Skills development, and Technological self-sufficiency. Innovative solutions that enhance project capability or reduce project, operational or support costs, such solutions being valued at 250% of their cost when delivered by an SME and 150% of their cost otherwise 11 Defence and Industry Policy Statement 2010 Building Defence Capability: A Policy for a Smarter and More Agile Defence Industry Base, para 2.54, p32 12 Ibid, para 2.19, p22 5

8 Key objectives AIDN considers that prime contractors must now be held fully accountable for the achievement of AIC and AIPP KPIs in their contracts 6 It is also clear that when Australia enters into joint projects such as the F-35 Joint Strike Fighter where many partners have such offsets policies, Australia s defence industry will be unlikely to win its fair share of project work until the offsets requirements of other partners have been met. Consequently, AIDN does not accept that preferential policies should be ignored by Australia. It is of the view that in order to level the playing field and maximise Australian industry involvement in Defence projects, strategically-focused acquisition policies must be revisited. AIDN proposes that, where AIC Plans including project-specific requirements, Sovereign Industrial Capability proposals and elements of the Defence Industrial Capability Plan fail to reach 75% of the value of projects including the first five years of in-service support, Australian Industry Participation Plans (AIPPs) be implemented to make up the shortfall. AIPPs would consistent of direct and indirect elements and in addition to delivering project capability, may include: Development or enhancement of related SICs (SICs in the same Capability Stream ), including for longer-term SIC viability Further elements of the DICP not already included in AIC Plans Innovative solutions that enhance project capability or reduce project, operational or support costs, such solutions being valued at 250% of their cost when delivered by an SME and 150% of their cost otherwise, Project capability delivered to Global Supply Chain customers, or Excess AIPP delivered in other Defence projects. 6. Implementation and Key Performance Indicators The above policy initiatives will only succeed if they result in formulation of specific outcomes with KPIs by which achievement of those outcomes are measured. AIDN is committed to working with Defence and the CDIC to ensure this happens. Some specific measures for achieving such outcomes are included below. Contractor accountability for AIC Plan and AIPP Objectives and Consequences for Non-Compliance with Endorsed AIC Plans Consistent with the elevation of industry as a FIC, AIDN considers that prime contractors must now be held fully accountable for the achievement of AIC and AIPP KPIs in their contracts, with a requirement for annual reporting of progress. In addition, AIDN considers the remedies for failure to fulfil the requirements of endorsed AIC plans should have real consequences for non-compliant contractors including: For major failures, including particularly where a contractor fails to establish a viable capability directly related to a SIC or fails to establish a local industry partner for a SIC: liquidated damages; and cancellation of contract, or part contract or sub-contract; or where cancellation is not feasible performance guarantees in the prime contract or sub-contract to require the overseas parent of the contractor ensures the AIC Plan requirements are met; For major and other failures, by the public reporting of such non-compliance; and Impacts on future tender assessment of non-complying companies.

9 Key objectives Further, Defence and the CDIC should establish a mechanism for confidential access to AIDN and other industry organisations as part of assessment, verification and determination of contestability of claims in this area. On the other hand, there should be positive consideration in tender evaluation given to companies with a record of compliance in establishing local industry partners for SICs. AIC Plan Deeds of Agreement AIDN strongly endorses the recent policy change to reinforce the effectiveness of AIC Plans. AIDN also proposes that each plan include a contractually binding deed of agreement between the prime contractors and supporting SMEs with such deeds including designated performance requirements for both the prime contractor and SMEs covering issues such as agreed capability, capacity, facilities to be provided, security requirements, insurance, staffing, an intellectual property register, quality assurance and work systems, and teaming arrangements. Such deeds would: Be in addition to the existing contractual arrangements, Require contract change procedures to be used to amend them, and Inform the AIC plan audits to be conducted by CASG or the CDIC. Other Defence Industry Policy and Program Implementation Initiatives The introduction of the CDIC is welcomed by AIDN. It is imperative that SMEs are directly involved in the staffing of the CDIC and its industry policy implementation. AIDN will work with Defence to ensure the CDIC is targeting the best of Australian industry capability. Priorities for industry capability and related matters that AIDN considers would benefit SMEs are: Defence & Security Industry AIDN SMEs are strongly capable at the innovative edge of technology. This can only benefit Defence and Australia s security if harnessed correctly. AIDN wants to work closely with the Commonwealth to strengthen the ties and inter industry cooperation between security and defence industries. Indeed, funding should be made available to structure joint cross-sector working groups and collaborations. AIDN recommends a joint congress be held by the Defence and Industry Associations, sponsored by the Defence, Immigration and Border Protection and Attorney General s Departments to address inter-industry ties and coordination. This should not be a marketing exercise but an internally driven congress to maximise ties and effectiveness. The introduction of the CDIC is welcomed by AIDN 7

10 Key objectives With a particular focus on the technology, services and innovation areas, Defence should develop contracting strategies that maximise the potential for SMEs to engage directly with Defence SME skilling - AIDN supported the Skilling Australian Defence Industry (SADI) program but believes it did not cover effectively the gap between an SME just joining the market and the Global Supply Chain Program. AIDN will work with Defence to further develop a skills and training framework that addresses the timeline from joining the defence and security industry to being eligible to become a Global Supply Chain-ready SME. To achieve the Integrated Investment Program, Defence must maximise the potential to transfer workforce from other industries and even overseas from accepted sources. The current security framework is cumbersome and restrictive. AIDN is working with, and will continue to support the Australian Government Security Vetting Agency (AGSVA) to formulate more effective and streamlined security processes to benefit SMEs joining the Defence Industry. Recognition that Defence SMEs are often fundamental to delivery of core capability and that consequentially, Major Service Providers in the Defence Support Services Standing Offer Panel and similar arrangements must be contractually bound to produce AIC plans with identical structure and value to Acquisition contracts and to use SMEs in them. With a particular focus on the technology, services and innovation areas, Defence should develop contracting strategies that maximise the potential for SMEs to engage directly with Defence, as individual organisations or in consortia, rather than having to subcontract to and/or compete with large and often overseas-owned professional service providers and consultants. Such direct engagement would avoid artificial inflation of SME prices and the potential for misappropriation of SME IP and recruitment of key SME staff by others. The contracting strategies should include direct SME set-asides and other preferential strategies. They would deliver returns to Defence by maintaining the inherent advantages enjoyed by SMEs in agility and innovation in the market place which allow them to evolve rapidly to meet changing Defence needs. 8

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12 Australian Industry & Defence Network Incorporated ARBN ABN Registration: Y PO Box 64 Belmont NSW 2280 Australia T +61 (2) E administration@aidn.org.au May 2017