Failure not an option in this generational opportunity

The magnitude of the nuclear submarine challenge should not obscure a wider strategic problem. Our defence industrial base is so thin and under-resourced that we are at serious risk of losing a high-intensity military conflict within a few weeks against a well-prepared adversary.

Tinkering at the edges won’t make any difference. Nothing less than a revolution in our approach to defence industry, innovation and weapons acquisition is going to solve a problem that threatens to derail the ambitious nuclear submarine program and the Albanese government’s restructure of the Australian Defence Force.

This is a strategic failure long in the making. And it’s not just an issue for Australia. The US defence industrial base is in serious trouble and Europe’s is on life support. Their problems are also ours since most of our military equipment is imported from the US or Europe.

A study by the Centre for Strategic and International Studies, a Washington-based think tank, found it would take the US 15 years at current rates of production to replace stocks of commonly used weapons systems if they were destroyed in battle or given to partners such as Ukraine. Replacing the current US inventory of medium-range missiles would take even longer – almost 20 years – and aircraft carriers a mind-numbing 44 years.

NATO Secretary-General Jens Stoltenberg warned last month that the waiting time for large-calibre weapons had more than tripled. The shortage of basic ammunition and missiles is even more serious. Germany would run out of both in only two days of fighting at the expenditure rates of the Ukraine conflict, which is draining the combined inventories of Europe and the US. The ADF wouldn’t last a week.

Russia is struggling to keep up a steady supply of weapons and ammunition to its troops, too. But given its higher rates of usage, Russia’s much-maligned military has demonstrated a superior ability to conduct a long-duration war than the West. The reason? Vladimir Putin rebuilt his country’s defence industrial base and weapons inventory across 20 years while we ran down ours, erroneously believing that large-scale conventional wars were improbable.

China is likely to be far better prepared for a Taiwan conflict than Russia was for its invasion of Ukraine. As the engine room of global manufacturing, with an economy and industrial base that dwarfs Russia’s, China has the capacity to fight a lengthy conventional war in its own backyard that is unsurpassed.

Although there are no reliable publicly available figures quantifying its ammunition stocks, we know China, having overtaken the US in missile development in 2020, has a missile supply superior to that of any other country. Recent wargaming revealed the US could run out of long-range precision-guided munitions within a week in a conflict with China over Taiwan.

How did we get here? While complacent democracies sought to reap an illusory post-Cold War peace dividend by winding down military spending, autocracies did the opposite. They spent big on their militaries and defence industries. A Washington Post investigation found the US had 51 major air and defence contractors at the end of the Cold War. Today it has five, having shed a third of its defence workforce. The number of aircraft manufacturers fell from eight to three and 90 per cent of all missiles are made by only three companies.

In short, liberal democracies – including Australia – have been out-thought, out-planned and outbuilt.

Australia’s defence deficiencies are well-chronicled. We have failed to develop the sovereign capabilities to defend ourselves against a range of genuine threats. Defence industry has insufficient scale; the ADF is overly reliant on imported equipment; we have minuscule stocks of modern missiles and ammunition; our peacetime acquisition system can’t provide the capabilities we need quickly; red tape and bureaucracy are strangling defence innovation; and 2 per cent of gross domestic product won’t come close to funding the government’s AUKUS agenda.

A declassified draft version of a confidential report into how Defence manages its suppliers is highly critical of its parochial institutional practices and insider culture. The independent review of the major service provider arrangements sees this culture as resistant to new ideas, efficiency and management.

This is hardly the ideal foundation stone to support the edifice of a nuclear-powered submarine industry that will be the most complex, expensive and demanding national endeavour Australia has ever attempted. The iconic Snowy Mountains Scheme pales into insignificance by comparison.

But that’s not the whole story. The submarines are only the first pillar in the construction of the AUKUS house that will require an unprecedented integration of defence, industry, immigration, education and technology policies.

Pillar two envisages a sharing of the most sensitive, advanced technologies available to Australia, the US and Britain across a broad range of sectors. They include autonomous underwater vehicles, quantum technologies, artificial intelligence and autonomy, cyber, hypersonic capabilities and electronic warfare.

Pillar two is also about “broader intelligence, industry supply chain resilience, advanced manufacturing and exports, knowledge exchange and mobility”, says this masthead’s former business commentator, Ticky Fullerton. It’s “the Three Amigos on friend-shoring” and “the Three Eyes, not Five Eyes, in intelligence”. That’s true for the moment. But don’t rule out Japan being invited to participate in an expanded three-plus-one arrangement that could extend to South Korea, India and other like-minded countries across time.

A report by business advisory heavyweight PricewaterhouseCoopers in collaboration with the US and British chambers of commerce sees AUKUS as “a once-in-a-generation security and technology partnership”.

Rather than competing for the same people – submariners and nuclear scientists spring to mind – the report recommends that the three countries should leverage a shared pool of skilled workers via new AUKUS visas, a tripartite management agency and streamlined, cooperative security vetting processes. If successful, AUKUS collaboration could transform not just defence but the whole Australian economy, creating a host of new industries, employment opportun­ities and productivity enhance­ments that could rival the reforms of the Hawke-Keating era.

This will be “incredibly challenging”, management and information technology expert Lesley Seebeck says, requiring the AUKUS partners to “align their capability development, collaborative research and respective defence industrial bases”.

Writing for the Australian Strategic Policy Institute, Seebeck characterises pillar two as having a dual purpose – broad exploration and rapid translation. Neither are suited to the existing frameworks and culture of Defence or the wider public service she says. “Keeping pillar two behind the high walls of Defence will drive up costs and starve any prospective innovation system.”

But “if pillar two fails, AUKUS will be a failure. Plain and simple”, says Bill Greenwalt, US deputy under secretary of defence for industrial policy in George W. Bush’s administration.

There are many challenges. Speed is one. Our first nuclear-powered submarines won’t hit the water for another decade so they won’t be ready for any near regional conflict. Rotating US and British submarines through Perth is a stopgap measure.

Pillar two could be ready to roll out quickly “but only if ITAR is radically changed”, Greenwalt says, referring to the International Traffic in Arms Regulation, the onerous regulatory regime that governs the export of US defence and military related technologies.

ITAR is a significant impediment to the development of AUKUS-derived Australian defence exports. Its reform would be a game changer. Failing that, AUKUS could be carved out from ITAR and placed under a tailored regime that protects US intellectual property but not at the expense of Australian exports.

The Americans are working on the problem, but the legislative and bureaucratic hurdles are high. Influential Democrat congressman Joe Courtney, who co-chairs the Congressional Friends of Australia Caucus, points to the thicket of congressional committees and government agencies involved in export control where legislation would have to be negotiated and implemented.

But we have to get our own house in order and not blame the Americans or British for their failings and restrictions. To deliver on AUKUS and develop a robust defence industry will require substantial changes to funding, innovation, defence procurement and culture if we want a more dynamic and responsive ecosystem that can future-proof the nation’s security.

It’s increasingly obvious that the government will struggle to fund the submarine program, pillar two and the capabilities already announced or in prospect. Most defence experts believe this will require another 0.5 per cent to 1 per cent of GDP on top of the 2 per cent we already spend on defence. In today’s dollars, that could mean anywhere between $12bn and $25bn a year in additional spending from 2027.

Jim Chalmers claims the submarine program will be “completely offset” in the near term by savings from the cancelled French submarines and other programs. But it’s hard to see how Defence can be funded adequately in the longer term without the equally unpalatable choices of significantly raising taxes or reallocating money from the caring economy.

The obvious way out of this fiscal and political bind is to mobilise large-scale capital from traditional institutional funds, including the Future Fund and the $3.3 trillion superannuation sector. This should appeal to a Treasurer who touts the virtues of co-investing with the private sector in his quest to reshape capitalism and achieve better economic, social and environmental outcomes.

Chalmers should seize the opportunity to make defence a beneficiary of government-directed investment flows. As Ukrainians have found to their cost, economic, social and environmental gains aren’t achievable without security.

How would this work in practice? Defence could continue to fund nasty but necessary weaponry while institutional investors are incentivised to put their money in defence infrastructure and national security enablers, relieving pressure on the defence budget and reducing the burden on taxpayers.

Ideally, the incentives would include long-duration investment opportunities of between 15 and 30 years and a competitive return on investment – meaning 4-5 per cent above inflation as measured by the consumer price index. Government also must be prepared to assume some of the risk.

Incentivising innovation is a different but no less critical challenge. In the first Cold War, governments were at the leading edge of defence innovation, whereas they now lag the private sector. Recapturing lost innovation won’t happen unless the public and private sectors are joined at the hip and work collaboratively in partnership with universities to enhance performance and productivity by establishing commercial hubs and critical technologies centres.

The government’s plan for an advanced strategic research agency tasked to fund research will not deliver the stimulus required without private investment and the infusion of venture capital.

We should take a leaf from the playbook of the US Army, which established a venture capital office 20 years ago. And last December, worried about the lack of trusted capital in critical technology sectors, the Pentagon set up the Office of Strategic Capital to build “an enduring technological advantage by partnering with private capital partners”.

The broken defence acquisition system requires major surgery and a new operating model. We need to get serious about using public-private partnerships. Bringing the nous and deep pockets of business to the table is cost-effective and the quickest, smartest way of strengthening our struggling defence industry and preparing it for the post-Defence Strategic Review era.

Defence could benefit from adopting, or adapting, another American initiative that is proving its worth. Like Australia, the US has been dogged by cost overruns and delayed project delivery for many of its major defence programs. But the development of the B-21 long-range stealth bomber is on cost and on time because it is being run by a narrowly focused team of skilled, experienced engineers and program managers in what is known as the Rapid Capabilities Office.

Their secret, says Defense News analyst Stephen Losey, “is they learned how to limit bureaucracy”. They were trusted to “use their judgment and go fast without micro­management”. The US Air Force also kept the B-21 requirements stable.

There are obvious lessons here for our brave, new venture into the world of nuclear-powered submarines, which Defence Minister Richard Marles has rightly described “as a massive industrial endeavour”.

Improved funding, innovation and procurement won’t be possible without cultural change, the fourth and most difficult part of the defence industry ecosystem to reform.

Cultural change has to be driven from the top, starting with the Prime Minister and his key national security ministers. They must reward initiative, hold capability managers to account, empower leadership teams, bring in outside expertise, insist on more public-private partnerships and commit to the development of a world-class Australian defence industry.

Effective co-ordination and integration will be critical. The government can already point to a plenitude of senior officials groups, joint steering groups and the 17 trilateral working groups as evidence AUKUS is being well co-ordinated. The establishment of a submarine delivery group from Vice-Admiral Jonathan Mead’s nuclear-powered submarine taskforce is a sensible early initiative.

But experienced industry players and professional investment managers from the private sector also should be brought into the mix. They would provide an added layer of expertise, entrepreneurialism and contestability of advice that can only benefit the AUKUS project, which has to be a whole-of-nation enterprise.

Anthony Albanese characterises AUKUS as transformational, a word that is often overused by politicians. But not in this case.

In an earlier, more optimistic era Australians united behind the Snowy Mountains Scheme. Can a more divided, pessimistic Australia do the same and unite behind AUKUS?

Some think not. But given the stakes, and the enormous expenditure of political capital and national treasure that will be required to build our defence industrial base and make AUKUS a success, failure is not an option.