Defence Informer

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YOUR MEMBER-ONLY DEFENCE INDUSTRY BRIEFING - MARCH 2016

WHAT’S INSIDE:• The Current Performance• The Outlook• Opportunities

DEFENCE INFORMER

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Use of this image does not imply association or endorsement by the Department of Defence Copyright Commonwealth of Australia 2015

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Australia’s defence sector is vital in ensuring national security and protecting of the Australian way of life. The capability of the sector acts both as a deterrent to conflict, and enables our Government to provide reasoned intervention and assistance in international conflicts or matters of national significance. Due to its resources, experience and capability, the defence sector is also regularly called upon to provide aid and assistance in cases of humanitarian crisis or environmental disasters, both locally and abroad.


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The overview

The defence sector is comprised of the public and private sector arms. The public sector includes the Australian Defence Force (ADF) and the civilian Australian Public Service (APS), both funded directly by the Government. The private sector is often referred to as the Australian defence industry, and is comprised of the industries and private businesses that provide products and services to the Australian Defence Force. The capability of the Australian defence industry is highly reliant on ongoing support through Government procurement, as these contracts typically account for the majority of business revenue.

The Federal Government has announced significant changes in the level of defence spending, with the budget forecast to deliver $195 billion to defence over the next decade. This funding will be used to finance major capital investments in ships, aircraft, submarines and technology. Technical professionals in the private-sector Australian defence industry are expected to benefit significantly, with a high-level of skill required to manufacture final and intermediate products and deliver enabling research.

Employment of technical professionals within the ADF and APS is also expected to benefit over the coming years from a boost in revenue. However, the degree of benefit is less certain, as the Federal Government has signalled that while some new positions will be established, others will be reallocated from their current duties to high-priority areas. This reallocation of staff will limit the number of new defence opportunities available in the public sector.

Current performance

Australia’s defence capability hinges the ability to maintain a technical edge over other regional powers. While defence is one of the largest areas spending in Australia, defence expenditure is also rising rapidly across the region. The challenge for governments will be to ensure that the defence force remains adequately funded to protect Australia’s regional position, and that funding is directed where it is most needed. However, job cuts and uncertainty surrounding funding and policy in recent years has placed some strain on the sector.

Jobs

The past five years have provided some challenges for technical professionals in Defence. While the number of Australian Defence Force (ADF) personnel is increasing, the number in the Australian Public Service (APS) remains well below the levels of 2012, and will remain lower through the forward estimates. While some technical professionals are employed in the ADF in roles such as naval engineering and cyber security, the majority are employed within the APS.

Professional personnel in the APS directly enable defence capability, with most engineers and technical professionals employed in this area. While the number of personnel in the APS is expected to benefit from the addition of 800 new positions in high-priority areas, many of these positions are to be offset by reductions in other areas, limiting growth in the workforce. Overall, the total personnel figure will only reach 18,200 FTE staff, which is 4,100 less than the total reached in June 2012, when 22,300 FTE staff were employed in the APS workforce. While the department points to the Federal Government’s First Principles Review in justifying the rebalancing of the workforce, there is little doubt that the capability of the defence force is unlikely to be strengthened by the cuts, with spending on APS personnel declining significantly in recent years.

The Defence White Paper places a greater emphasis on supporting employment through the Australian defence industry, which is comprised of private industries and companies involved in defence. In doing so, it will use defence procurement, funding programs and advice to support the growth of businesses and industries providing defence inputs including technology, products and research. While greater support for industry-based employment has the capacity to provide better outcomes for defence, it is not a substitute for science and technical skill within the defence force itself. The defence force requires a high level of in-house skill in order to direct its own investment, develop and determine priorities, enable in-house research in priority areas, and ensure that its programs work together to improve the capability of defence in Australia.

Figure 1: Number of employees in the Australian Public Service (APS)

Source: Defence Annual Reports

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Uncertainty

Defence has suffered in recent years from an environment of uncertainty. Policies surrounding spending, investment, personnel and cost-cutting have changed frequently, influenced by changes funding, Government, Prime Minister, and Minister for Defence.

Defence policies are typically long-term, with several white papers announcing long-term goals for investment, capability and spending overall. However, given the large portion of government spending attributed to defence, it is often an easy target for delays and cuts when governments need to reduce spending. Additionally, while there is unquestionable support for strong defence spending across both sides of government, politics continues to pervade the policy-setting process, with successive governments often required to approve spending for the promises of previous governments.

Doubt as to the future of spending creates a significant level of uncertainty for defence, with the department and enabling industries unable to make informed decisions surrounding investment, personnel and planning over the longer-term. If private businesses are to be encouraged to invest money and personnel in the research and development of products for defence, they require some assurance as to where defence procurement will be directed over the longer-term and what level of procurement will be occurring. The Australian Defence Force and the private sector require a greater level of certainty if this is to be rectified, however this will require Government to recognise that their role is to set consistent, long-term policy that aids the development of Defence capability.

The Defence White Paper has taken some steps ensure a longer-term view of defence. The release of the Defence Integrated Investment Program provides some greater surety as to the longer-term investment plan for the sector and the funding that will be required to deliver it. The challenge now will be for Governments to stick to the plan, without introducing delays or cuts. While some changes to such a forward looking plan are to be expected as circumstances change, wholesale alterations to the plan including politically motivated cuts or budgetary savings risk negatively affecting the confidence of the private sector. Unless the private sector is able to rely on a level of certainty in defence planning, private businesses are less likely to invest in the skills and capital required to deliver the products, services and research that the Defence sector needs.

Sector outlook

The publication of the Defence White Paper in February 2016 has provided some greater guidance as to the direction that the Australian Defence Force will be taking over the coming years. Spending on defence is slated to increase to 2 per cent of GDP by 2020-21, with the vast majority of new spending attributable to capital investment. While major capital projects are likely to provide a boost for private businesses involved in manufacturing defence products, modest increases in personnel spending will limit growth in wages and opportunities for technical professionals in the Australian Defence Force and the Australian Public Service.


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Source: Defence Annual Reports, Defence White Paper

The recent Defence White Paper outlined a commitment to a 10-year program of spending within the defence sector. One of the most persistent criticisms of the manner in which defence has been managed in recent years has been the lack of certainty and the lack of long-term funding. This has prevented the development of firm, longer-term planning in the sector. The new 10-year funding model is hoped to provide a greater level of certainty for the sector, allowing investment and workforce planning to occur over a longer timeframe.

According to the program outlined in the White Paper, defence spending is expected to reach its target of two per cent of GDP in 2020-21. This will see total spending over the next decade reach $195 billion, which is $29.9 billion more than previously planned. While the forecast boost in defence spending is undoubtedly a good sign for the defence sector overall, there is less certainty as to how technical professionals are likely to benefit.

The level of defence spending on people and workforce is expected to rise from $12.0 billion in the current year to $15.3 billion in 2025-26, a rise of 27.5% overall. However, on an annualised basis, this rise equates to only 2.5% per year, which means that spending is only likely to keep up with basic wage growth, rather than deliver additional technical capacity. Additionally, the increase in workforce investment falls well below the increase in defence spending overall, meaning that the proportion of spending allocated to personnel will reduce significantly over the coming decade.

Spending

Figure 2: Defence Funding


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Source: Defence White Paper

Figure 4: Defence personnel costs as a share of total spending 2025-26

Figure 3: Defence personnel costs as a share of total spending 2015-16.


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63%

37%

26%

74%

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Major investment The centrepiece of the White Paper is the $50 billion future submarine program, with a continuous build of 12 submarines to be rolled out over the coming decades. This major investment comes alongside similarly significant spending on ships, aircraft and technology. Overall, the Paper announced planned spending on 12 submarines, 9 frigates, 12 patrol vessels and over 100 aircraft of various types. While the planned investment has been well received by the industry, the most significant of the announcements was the confirmation that the patrol vessels and frigates will be built in Australia. The department announced that it expects the investment to provide the foundations for the development of the local shipbuilding industry, with a continuous build of ships expected to ensure ongoing work for the industry until 2040. The local production of ships will support the employment of technical professionals locally, particularly given the highly complex nature of the ships to be built. Additionally, the continuous build should provide a level of stability for the local industry, removing the boom-bust approach to defence that has characterised past spending and ensuring the industry is able to build up and develop the local skills required to carry out the build.

While the future frigate program is expected to deliver a windfall for the local industry, the degree to which the future submarine program will benefit local industry is less certain. The White Paper notes that the government is committed to ensuring industry involvement in the submarine program. However, the nature of this involvement is unclear, and the Paper specifically avoids any firm commitment to a local build. German, French and Japanese manufacturers have been invited to submit proposals to a competitive evaluation process, with bids likely to include options for local, foreign and hybrid builds. While the cost of building the submarines locally may not be the lowest available, the sheer size of the investment means that the impact on the local economy should be a major consideration. The $50 billion investment in the future submarine program is the largest in the history of Australia’s defence program, and has the capacity to secure the development of a local submarine building industry, supported by a continuous build in a similar manner to the shipbuilding industry. The contracts for any build have yet to be awarded, and as a result, any benefit for the domestic industry remains to be seen.


Figure 5: Major areas of investment 2016-17 to 2025-26

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6%18%

25%

17%

9%

25%

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Innovation

A key piece of future defence planning is ensuring the ongoing technical skills and capability of the defence force. The capability of the defence force and the research that enables it is one of most reliable indicators of the nation’s scientific and technical skills. Collaboration between defence and Australia’s wide range of research organisations will be important if new technologies are to reach the defence force and if national skill levels are to be strengthened.

The defence budget has the capacity to provide unparalleled support for the development and commercialisation of research. In order to facilitate this transition, the department has announced a raft of measures to encourage investment and support innovation in private companies. These measures include a new Defence Innovation Hub which will provide $640 million in funding over the next decade, the establishment of the $730 million Next Generation Technology Fund, and the creation of a new Centre for Defence Industry Capability, which aims to align the needs of the defence force with the skills and expertise of Australian industry. The Centre for Defence Industry Capability will provide advice and development support for small to medium enterprises.

Defence spending also encourages innovation and improved skill across Australia by driving the creation and growth of high-skilled industries. Specifically, government procurement of major assets including ships, aircraft and especially submarines will directly determine the skill level that will ultimately be developed across Australia, as these are some of the most complex products in the world to manufacture. The knowledge and skill required to build such products is not easily developed, and is unlikely to occur without government procurement driving the need and providing ongoing support. However, if the Federal Government makes a firm commitment to the creation of local industries, such as shipbuilding or submarine building, then businesses, universities, and individual professionals are likely to respond by building their skill levels, investing in education, learning from current experts and developing the enabling knowledge base to drive complex manufacturing. While the government has committed to developing shipbuilding locally, support for local submarine manufacturing would have an even greater effect on Australia’s skill level, and has the potential to deliver much greater economic returns for the nation as high-level science and manufacturing skills disperse across the economy.

Opportunities

• Spending: An overall increase in defence spending will provide opportunities for technical professionals over the coming years. While many of these opportunities will come within private businesses that work with the defence sector, the number of new roles to be created within the ADF and APS is less certain.

• Investment: Major investments in ships, aircraft, submarines and related technologies will provide opportunities for technical professionals involved in production. However, the level of production carried out in Australia will have a major effect on the opportunities that will arise.

• Innovation: Improving defence capability will be a major driver of innovation over the coming years. A raft of funding and assistance programs have been announced which will support greater integration between defence and industry, where many new products and technologies are developed.

Use of this image does not imply association or endorsement by the Department of Defence Copyright: Commonwealth of Australia 2016

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Professionals Australia Defence Informer Level 1, 163 Eastern Road SOUTH MELBOURNE VIC 3205 [email protected] 1300 273 762

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Sources Defence White Paper, Australian Department of Defence, February 2016Integrated Investment Program, Australian Department of Defence, February 2016Defence Industry Policy Statement, Australian Department of Defence, February 2016Defence Annual Report 2014-15, Australian Department of Defence, October 2015Defence Annual Report 2013-14, Australian Department of Defence, October 2014Defence Annual Report 2012-13, Australian Department of Defence, October 2013Defence Annual Report 2011-12, Australian Department of Defence, September 2012Defence Annual Report 2010-11, Australian Department of Defence, October 2011Defence Annual Report 2009-10, Australian Department of Defence, November 2010

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