Using strategic collaboration/ enterprise contracts to urgently achieve Australia’s defence strategy overhaul

Crocodile Dundee was gracing movie screens the last time Australia took a hard, independent review of the state of its defence. It was then “one of the most secure countries in the world…distant from the main centres of global military confrontation”, according to the defence review concluded in 1986.

The recent review, commissioned by Australia’s new centre-left Albanese-led Federal Labor Government, and released in unclassified form on 24 April 2023, starkly concludes that Australia’s “strategic circumstances are now radically different.”

The risks of military escalation and major conflict in the Indo-Pacific region are rising. “No longer is [Australia’s] alliance partner, the United States, the unipolar leader of the Indo-Pacific.  Intense Chine-United States competition is the defining feature of our region and our time.  Major power competition has the potential to threaten our interests, including the potential for conflict. The nature of the conflict and threats have also changed”, according to the Review.  This situation demands a radical and urgent makeover of Australia’s defence strategy.

With the strategic picture darkening, Australia’s defences are “no longer fit for purpose”, according to Australia’s Defence Minister, Richard Marles, endorsing the conclusions of the review. To defend itself as well as to preserve peace in its Indo-Pacific region, Australia must be able to project power farther from its shores.

The main Australian power projection will be via the AUKUS nuclear-propelled submarines. But Australia must also develop longer-range strike capabilities, with munitions built in Australia, Mr Marles said.  Severe workforce pressures must also be addressed.

Realising the ambition of the Review will require significant financial commitment and major reforms.  One area ripe for reform is procurement.

According to the Review, “Defence’s current approach to capability acquisition is not fit for purpose. The system needs to abandon its pursuit of the perfect solution or process and focus on delivering timely and relevant capability.  Defence must move away from processes based around project management risk rather than strategic risk management. It must be based on minimum viable capability in the shortest possible time.”

Infralegal recommends that Defence embraces long-term strategic collaboration/enterprise contracts with its key industry partners under which:

• strategic priorities and high-level implementation plans (like continuous naval shipbuilding) are agreed, which can underpin the investments that defence industry will need to make to deliver the agreed priorities;

• Defence engages with its key industry partners on sovereign and other strategic initiatives that can be progressed beyond and between individual projects to improve enterprise team integration, information sharing, productivity and risk management — and thereby continuously improve enterprise outcomes and value for money for Defence;

• interests are aligned by remunerating the industry partners using payment models that separate cost recovery from margin, reimburse direct costs under transparent open book arrangements, and tie the partner’s margin and contribution to corporate overheads to achievement of the agreed strategic priorities;

• Defence, satisfied that such initiatives are delivering it improved value for money, can share this value and reward its industry partners for their investment in these activities, by allocating projects and other work to them without the need for time-consuming and expensive bidding competitions;

• the money that would otherwise be spent on bidding competitions can instead be invested by Defence, its industry partners and their supply chains in the sovereign/strategic initiatives, to further accelerate the strategic priorities; and

• Defence can reduce the need to man-match its contractors and instead better utilise the Defence industry workforce to overcome its own workforce pressures.

This approach will require a new exemption to the Commonwealth Procurement Rules, as the existing exemptions and rules for limited tenders are unlikely to be sufficient.

Infralegal also recommends that Defence embraces Dispute Avoidance Boards (DABs) as a mechanism to better manage the risk of cost and schedule blowouts on Defence projects.

The Albanese Government has said it is “determined to reform Defence and its capability acquisition processes to ensure our defence forces have the capabilities they need and sooner”. 

Strategic long-term collaboration/enterprise contracts and dispute avoidance boards ought to be embraced as part of this process.