Analysis of DMO Contracting July 2007 September 2012

Transcription

1 ABDIU/001/2013/REP Analysis of DMO Contracting July 2007 September 2012 Issue 1 (Abridged Version) Graeme Dunk 18 February 2013

2 Contents 1 Introduction Abbreviations Data Data Reduction Assumptions Limitations Comparison with Defence Capability Plan Part I Contract Placement Part II Analysis of Contract Ownership Introduction Contract Profile Australian-Owned Companies Contract Profile US-Owned Companies Contract Profile European-Owned Companies Contract Profile UK-Owned Companies Contract Profile New Zealand Companies Contract Profile - Other Contract Profile Foreign Military Sales Summary Part III Defence Industry Primes PART IV Analysis of Sector Trends FIGURES Figure 1 DMO Contracts from FY07/08 to FY 11/ Figure 2 Percentage placement of DMO contracts with Australian-registered companies... 6 Figure 3 Placement of DMO contracts with Australian-registered companies... 6 Figure 4 DMO Contract Distribution Jul 2007 Sep Figure 5 Percentage of DMO contracts placed direct to US Government by FY Figure 6 DMO Contracts placed direct with US Government in $ terms TABLES Table 1 Consolidated Means, Medians for DMO Contracts

3 1 INTRODUCTION The Defence Materiel Organisation (DMO) is one of the largest contracting organisations in Australia with an annual budget of approximately $9B. In late 2012 the Australian Business Defence Industry Unit (ABDIU) sourced data on contracts placed by the DMO from the Austender website ( with the intention of analysing the data to discern any apparent trends. The impetus for this work has been anecdotal information provided to the ABDIU by some members regarding perceived DMO contracting activities and behaviour. This report is focussed on the presentation of the analysed data and only limited discussion is provided on why/what any trends may indicate. This is a subject for later documents. The historical profile for the total amount of DMO contract placements for the financial years 2007/08 to 2011/12 is shown at Figure 1 below. Figure 1 DMO Contracts from FY07/08 to FY 11/12 This document is an abridged version of the complete report that has been distributed to ABDIU members. This shortened report is for wider distribution. 3

4 2 ABBREVIATIONS ABDIU Australian Business Defence Industry Unit ADF Australian Defence Force AWD Air Warfare Destroyer CCSM Collins Class Submarine DCP Defence Capability Plan DIPS Defence Industry Policy Statement 1 DMO Defence Materiel Organisation FMS Foreign Military Sales G2G Government-to-Government PIC Priority Industry Capability SIC Strategic Industry Capability 3 DATA 3.1 DATA REDUCTION As noted at the introduction the data for this analysis were sourced from the Austender website for contracts placed by the DMO. A total number of 83,742 records covering the period 01 July 2007 to 30 September 2012 were downloaded for this analysis. The data were sorted according to the stated Contract Start Date and these dates have been used as the basis for this analysis. The contract information was analysed to investigate the following factors associated with the structure of the Australian defence industry: The amount of DMO contracts placed with companies registered as an Australian operating entity; The percentage of DMO contracts (by value) placed with Australian-owned companies (Note: only the Foreign Military Sales component of this section is contained in this abridged version of the report); The extent of domination by the Global Primes, as defined in Defence Industry Policy Statement (DIPS) (Note: not included in this abridged version of the report);and Contracting activity by category. 1 Building Defence Capability: A policy for a smarter and more agile defence industry base, Commonwealth of Australia DIPS 2010 Table 1, page 29 4

5 3.2 ASSUMPTIONS The following assumptions have been made in respect of this analysis: The Austender data represents a true and complete account of the contracts placed by the DMO for the period under review. 3.3 LIMITATIONS The following limitations are stated with respect to this analysis: The analysis includes only those contracts placed by the DMO and does not include contracts placed by the Department of Defence. Percentages stated within this report may therefore need to be some correction to describe all defence contracting activity within the Australian defence market. The analysis in this report is for prime contracts placed by the DMO and does not show the effects of placement of sub-contracts by any of these Prime Contractors. The data show contract amounts in a single amount and do not reflect the actual cash flow over the life of any project or contracted activity. 3.4 COMPARISON WITH DEFENCE CAPABILITY PLAN Successive iterations of the Defence Capability Plan (DCP) have included projections on the expected in-country spend by the DMO for the acquisition and sustainment of defence equipment 3. The analysis shown herein shows (in some cases) significantly greater amounts than those projected in the DCP. These differences do not reflect any inadequacy of the analysis and are due to: The effect of assigning contracts as a single amount and not as a reflection of cash flow; and The inclusion of all contracts awarded by the DMO and not just those related to equipment. 4 PART I CONTRACT PLACEMENT This part of the analysis investigated the extent to which DMO contracts have been placed with companies registered within Australia. This investigation is important as these entities employ Australian personnel, maintain skills and train their employees, pay tax, and comprise the indigenous defence industrial capability. The relationship between the health of this indigenous capability and any future consideration of issues such as Priority Industry Capabilities (PICs) and Strategic Industry Capabilities (SICs) is worthy of investigation but is not considered further within this report. In the period under analysis the DMO has placed 70.89% of all contracts (by value) with companies registered in Australia. In many cases these companies are the local implementation of an offshore 3 See DCP 2009 Figure 2, DCP 2011 Chart 1, DCP 2012 Chart 1. 5

6 parent. The extent of local and foreign ownership of companies undertaking defence work in Australia is investigated later in this report. Figure 2 below presents the percentage of DMO contracts awarded to companies registered within Australia over the analysis period. Figure 3 shows the same data in absolute dollar terms. It is noted at this point for clarity that a company such as Thales Australia is recorded as a locally-operating company but Thales (UK) (or some similar variation) is not. The significant decline (especially in real terms) observed over the period is of serious concern given that local activity equates with employment, skill retention and the overall ability of the local industry to support the Australian Defence Force (ADF). Figure 2 Percentage placement of DMO contracts with Australian-registered companies Figure 3 Placement of DMO contracts with Australian-registered companies 6

7 Figures 2 and 3 illustrate a worrying trend for the local defence industry. The Australian Government has recognised that we have a defence skills shortage that needs to be addressed 4 and has undertaken a number of studies to address the issue 5. The trend shown above can only exacerbate the existing problem, not remediate it. The dangers of inadequate skilling have been highlighted by the Minister for Defence Materiel in 2011 who stated that You don t have to read far into the Rizzo Report into the Repair and Management of our Support Ships to see the risks that emerge when Defence lacks skills and experience in its workforce. 6 The overall health and capability of the defence industrial base, and the impact on this base over the longer term, needs to be closely considered when making acquisition decisions. 5 PART II ANALYSIS OF CONTRACT OWNERSHIP 5.1 INTRODUCTION The original aim of this analysis was to investigate the proportion of DMO contracts that have been placed directly with Australian-owned companies as anecdotal information tended to indicate that this was low and reducing. Moreover, anecdotal information also tended to indicate that the size of these contracts was lower than companies with overseas parents. The investigation of contract activity as a function of location of parentage developed as a by-product of this initial aim. Contracts under this analysis have been assigned according to company ownership at the highest identifiable level. In some cases this means that the contract passes through a number of companies (and countries) before being assigned under this analysis. A number of companies changed ownership during the period covered by the analysis that resulted in a change of regional ownership as described under this model. This has been taken into account in the way that contracts have been categorised. The distribution of DMO contracts over the period under analysis has been as follows, and represented diagrammatically in Figure 4: Australia 20.4% USA 21% Europe (includes both western and eastern Europe, minus the United Kingdom) 19.1% UK 13.5% 4 Minister for Defence Materiel, the Hon Jason Clare MP, speech to the Defence Skilling Summit, Brisbane, 5 September Minister for Defence Materiel, the Hon Jason Clare MP, speech to the Submarine Institute of Australia conference, Canberra, 14 November Skills Australia; Building Australia's Defence Supply Capabilities - Main Report for the Defence Industry Workforce Strategy, Canberra, Submarine Skills report being undertaken by Mr Warren King. 6 Minister for Defence Materiel speech to the Defence Skilling Summit, 5 September

8 FMS 20.4% Other (includes Canada, Israel, Asia and all other countries minus New Zealand) 3.2% Figure 4 DMO Contract Distribution Jul 2007 Sep CONTRACT PROFILE AUSTRALIAN-OWNED COMPANIES Information on the profile of contracts placed with Australian-owned companies is contained in the full version of this report. 5.3 CONTRACT PROFILE US-OWNED COMPANIES Information on the profile of contracts placed with US-owned companies is contained in the full version of this report. 5.4 CONTRACT PROFILE EUROPEAN-OWNED COMPANIES Information on the profile of contracts placed with European-owned companies is contained in the full version of this report. 5.5 CONTRACT PROFILE UK-OWNED COMPANIES Information on the profile of contracts placed with UK-owned companies is contained in the full version of this report. 8

9 5.6 CONTRACT PROFILE NEW ZEALAND COMPANIES Information on the profile of contracts placed with NZ-owned companies is contained in the full version of this report. 5.7 CONTRACT PROFILE - OTHER Information on the profile of contracts placed with companies owned in locations other than those described above is contained in the full version of this report. 5.8 CONTRACT PROFILE FOREIGN MILITARY SALES The FMS program is the US government-to-government (G2G) method for selling US defence equipment, services, and training. The relevant web site also states that: These sales also contribute to American prosperity by improving the U.S. balance of trade position, sustaining highly skilled jobs in the defense industrial base, and extending production lines and lowering unit costs for key weapon systems. 7 The US Government stresses and promotes the total package approach to its FMS contracts. This means that a normal FMS buy for a major system includes training, technical assistance, spare parts, and other support needed to sustain a system through the first few years of operation. 8 9 Figures 5 and 6 below show the amount of DMO contracts that are placed directly with the US Government. Figure 5 is presented as a percentage of the total DMO contractual activity for the relevant year while Figure 6 shows the same data in absolute dollar terms. By any measure there has been a marked increase in these directed contracts since the middle of Any amount that might be contracted back into Australia from a FMS contract cannot be quantified. There is an obvious inverse relationship between the FMS data presented at Figures 5 and 6, and the Australian in-country contract data at Figures 2 and 3. Whilst it is recognised that some capabilities are best procured under FMS, the impact of a potential acquisition strategy on issues such as maintenance of indigenous defence industrial capability, retention and development of skills, employment and the ability of local industry to support the ADF needs to be more closely considered US/24594/file/2905/Foreign%20Military%20Sales%20Program%20General%20Information.pdf 10 Figures 17 and Figure 18 do not include the $1.5 billion for the Defence acquisition of the Growler capability. The intention to acquire Growler was announced on 23 August

10 Figure 5 Percentage of DMO contracts placed direct to US Government by FY Figure 6 DMO Contracts placed direct with US Government in $ terms The full version of this report contains additional information on the FMS contract profile and on the size distribution of these contracts. The full version also contains a complete listing of the contracts placed direct with the US Government over the analysis period. This listing runs for 24 pages. 10

11 5.9 SUMMARY The full version of this report contains a summary of the distribution of contracts (by size) awarded to Australian, US, European and UK-owned companies. Table 1 presents a ready comparison of differences in means, medians and other relevant contract data for the contracts analysed over the period July 2007 to September Table 1 Consolidated Means, Medians for DMO Contracts Mean Median Contracts > $10m # Contracts Notes $396,866 $34, >24,000 The Australian-owned contract data is dominated by a single contract placed with the ASC for $2,604,754,000, with the next highest contracts being $637,128, and $242,634,752. If the highest contract is removed the mean contract size for Australian-owned companies reduces to $289,354 US-Owned $484,263 $40, >20,000 AUSowned Europeowned $636,423 $40, >14,000 UK-owned $566,980 $53, >11,000 Other $919,474 $58, >1,650 FMS $10,887,827 $494,

12 6 PART III DEFENCE INDUSTRY PRIMES Australian defence policy has as a core tenet the idea of Primes. In the Australian defence context Primes are defined as companies that contract direct to the DMO and employ more than 200 personnel working essentially full time on Defence projects 11. DIPS 2010 Table 1 lists these Primes as being ASC Australian Aerospace BAE Systems Australia Boeing Defence Australia Raytheon Australia SAAB Systems Lockheed Martin Australia Thales Australia Information on the market share of the Primes is contained in the full version of the analysis report. 11 DIPS 2010 page

13 7 PART IV ANALYSIS OF SECTOR TRENDS Contract data will be assigned to industry sectors to highlight contracting trends (should they exist). The following sectors will be examined: Aerospace Buildings, facilities and associated fittings C3 Clothing and personnel safety equipment Food Fuel, Oil and Gas HR Support Hardware ISREW IT and components Land Legal Services Maritime Medical Miscellaneous Professional Services Training and Simulation Transportation and Storage Weapons and Ordnance To be completed 13