Practical application of AIC must progress

Australian Industry Capability (AIC) is one of the most contested terms in the Defence community, but what many fail to see is that the policy in this area actually is changing.

Defence is now working on an Enhanced AIC Framework at the direction of Minister for Defence Industry Melissa Price. Picture: Sean Davey.

Australian Industry Capability (AIC) is one of the most contested terms in the Defence community, with no agreed upon definition. Content? Capability? How is it measured? Does an ABN equal AIC? What does intellectual property transfer look like in practice? And then sovereignty gets thrown into the mix, muddying the waters further.

Perhaps what many fail to see is that the policy in this area actually is changing. The update to the Commonwealth Procurement Guidelines in December last year, a government wide change, sees how value for money is calculated change.

“These changes reflect the Australian Government’s commitment to sustainable procurement practices; emphasise the importance of paying suppliers on time, particularly small businesses; and includes a new Appendix A exemption that allows for the direct engagement of a Small and Medium Enterprise for procurements up to $200,000,” the Department of Finance said. The Finance Department confirmed that the changes are not retrospective. In all, the new policy is 38 pages and a relatively easy read.

These changes will take some time to filter through the beast that is Defence procurement and sustainment, much like turning an aircraft carrier; it can be done but it’s slow. The biggest issue that the Defence Industry community has raised is that though the rules change and evolve, how the Defence workforce that applies these changes is patchy. Mindsets are harder to change than policy. The Capability Acquisition and Sustainment Group in Defence that manages the majority of Defence programs in this space now has a dedicated SES and section to run this approach.

Education of all parties about changes to such things is key and has not traditionally been done well. Defence is now working on an Enhanced AIC Framework at the direction of Minister for Defence Industry Melissa Price. This will also include an audit element that will have consequences for companies that do not deliver on their AIC promises. Once again, this is not a retrospective program.

This is one of the issues that Defence faces; with large, complex, multigenerational programs that operate well beyond political cycles how are these policies applied in a timely way?

“Government-to-Government procurements, including Foreign Military Sales (FMS) and Direct Commercial Sales, are not exempt from AIC Program requirements,” according to Defence. “AIC Program requirements for these procurements are to be addressed through AIC deeds. All industry arrangements recorded in AIC deed annexes are contract deliverables.

“AIC deeds formalise the expectation that international primes will market-test and engage Australian industry where cost-effective. Owing to the requirement to achieve value-for-money under the AIC Program, any determination that an AIC deed is required for a particular procurement is to be underpinned by a business case.”

It’s the term ‘cost-effective’ here that is hotly debated. Time equals money for Defence Industry in a way that does not apply to government. If it saves time, and therefore money, to engage with an already established supply chain, Primes will act in a way that supports the contract aims. The opposing pressures of keeping to cost and schedule versus engaging with Australian SMEs is a thorny one. The balance point will always be different depending on where you stand.

The big-ticket programs like the Attack class submarine, Hunter class frigates and Land 400 vehicles face layers and layers of policy underpinning their contracts, with said contracts being developed before many of the AIC refinements we now work under were applied. But today’s expectations are being applied nonetheless.

The COVID response from the Defence community in 2020 was a demonstration of what can be done when forcing functions are applied. Invoices were paid quicker by all parties forcing cash into companies, regular consistent meetings were held with ministers, senior Defence figures, chief executives and industry organisations to keep everyone in the loop. Defence companies and the ADF stepped up to answer the call of the government and wider community for manufacturing of PPE, ventilator parts and much more. The agility was there when needed.

Can Defence, government and industry do better to involve Australian SMEs and still demonstrate value for money to the taxpayer? Always. But there are signs that the changes coming are making headway into intractable pressures.

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Katherine Ziesing is the managing editor of Australian Defence Magazine.