Funding uncertainty throws small contractors into crisis

Many defence small and medium enterprises are fighting for survival following the DSR, as unclear priorities and cancelled procurements leave them questioning their future in the sector.

Tasmanian SME Sentinel Boats invested heavily to design and build locally for the ADF Sea Boats tender, only for the procurement to be cancelled.

Many defence small and medium enterprises are fighting for survival following the Defence Strategic Review (DSR), as unclear priorities and cancelled procurements leave them questioning their future in the sector.

Industry leaders are calling for detailed plans and long-term commitments to provide stability.

There are several recent examples of cancelled procurements, but a standout is the halted acquisition of tactical watercraft through the ADF Sea Boats tender this month. After a two-year process, SME tenderers who had invested heavily in the process were left hundreds of thousands of dollars worse off.

Defence Industry Minister Pat Conroy says cancelling tenders should be “the last resort”. He says the Sea Boats tender was designed to support a surface combatant fleet that no longer is relevant following the overhaul announced this year. “For taxpayers, should we continue when it’s not the right mix for what we need?” he says.

Australian Industry and Defence Network Victorian president Adam Evans says cancellations such as this are added pain for SMEs already under pressure post-DSR with a general lack of detail and certainty to invest in the right areas.

“Although the old system was slow, it allowed SMEs to plan and invest with confidence, knowing the date, size, and scope of projects on the horizon,” he says. The DSR has been beneficial in providing a “very clear set of requirements in broad terms”, such as the need for nuclear-powered submarines, Evans says.

However, while there is likely “a much clearer version in protected chambers” detailing capability needs down to mission systems, “the public version is not that”, leaving industry guessing, he says.

“For two years, Australia’s defence industry hung its hopes on a clear list of priorities to self-organise and find a seat at the table, but what we collectively got was a good description of what they’re trying to do – then obfuscation, then confusion,” Evans says.

Conroy says the Integrated Investment Program (IIP) inherited from the previous government was “perpetuating a fraud on defence industry, with over-programming levels of 40 per cent”.

“We’ve done a complete rewrite of the IIP based on the DSR, creating a fully funded IIP that will give stability to defence companies,” he says. Additionally, he says the government has revitalised classified working groups to improve information sharing with the industry and is “empowering” the Office of Defence Industry Support to engage more actively.

Another cancelled procurement is the training simulator requirement within the LAND 121 project, for which the Capability Acquisition and Sustainment Group went to market in December last year. “Army’s capability managers identified the requirement, SMEs and primes invested in the tender process, but then CASG couldn’t move forward after tenders were submitted because the funding was reallocated for submarines,” says Brydon Johnson, managing director of Systematiq, a veteran-owned company that supports SMEs with tenders and project delivery.

“These small procurements mean a lot to SMEs as they are quick, within Australian capabilities and allow SMEs to step up and support the ADF directly,” he says.

“Examples like this mean smaller companies will be cautious about bidding and investing $250,000-$300,000 and upwards in a tender response for a $20m-$30m project which could be cancelled.”

Evans says Defence has been “slow to deliver bad news” regarding projects it no longer intends to proceed with, and that this needs to be shared more quickly to avoid SMEs keeping on staff, investing in R&D and extending their financial commitments.

Conroy acknowledges that there are tenders that have “gone on for too long” and the government is “focused on increasing the speed of Defence decision-making”.

The descoping of larger projects such as LAND 400’s Redback infantry fighting vehicles from 450 down to 129 also causes pain for SMEs, says Justin Olde, former business development vice-president at EOS Defence Systems and now chief executive of innovative drone company Boresight.

“There are SMEs building components for the Redback, but many now won’t turn a profit because they need the first 200 systems or so just to break even,” he says.

Olde says Australian SMEs, especially manufacturers, are left “fighting for the scraps” from foreign primes, with no long-term consistent contracts.

He contrasts this with the situation in the US, where SMEs are integral to the supply chain, consistently producing components such as seats and seatbelts for military trucks that are churned out of factories continuously, creating a stable environment for SMEs.

Australia needs to reach a similar level of integration and consistency within its own defence industry, Olde says.

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Sam Duncan is a contributing writer at The Australian, a former army officer and previously has worked in the defence industry, including for Systematiq.