Framework Agreement between the Government of Australia and the Government of the French Republic concerning Cooperation on the Future Submarine Program
This chapter examines the Framework Agreement between the Government of Australia and the Government of the French Republic concerning Cooperation on the Future Submarine Program (the proposed Framework Agreement), which was signed on 20 December 2016 and tabled in the Parliament on 7 February 2017.
The proposed Framework Agreement is not an agreement to design or build Australia’s Future Submarine. Rather, the proposed Framework Agreement establishes a framework for cooperation to support the delivery of the Future Submarine Program (the FSP). The design and construction of the Future Submarine was awarded to the French Government-majority owned company DCNS in April 2016.
This chapter will present background information on the FSP, before providing an overview of the Agreement, focussing on:
- transfer, ownership and use of technology and information;
- Australia’s sovereign operation and security of supply;
- local industry engagement and cooperation;
- research and technology development;
- governance and contract performance matters;
- dispute resolution mechanisms;
- withdrawal or denunciation;
- and costs.
The Chapter will then present the Government’s reasons to take the proposed treaty action, and discuss the issues raised by the evidence received in the Committee’s review.
The Future Submarine Program
Submarines are ‘the most complex, sensitive and expensive defence capability acquisition government can make’,with over 70 systems incorporated into a conventionally powered submarine. Submarines are a ‘critical element’ in Australia’s national security and its maritime security planning. Australia’s $1.6 trillion economy ‘depends on secure sea lanes’.
The Department of Defence (the Department) states that the FSP will deliver ‘an affordable, regionally superior, conventional submarine capability, [that is] sustainable into the foreseeable future’. At $50 billion, the FSP is the largest defence capability acquisition ever undertaken in Australia.
The acquisition of 12 submarines was announced in the 2016 Defence White Paper. The Department states that the first submarines are likely to enter service in the early 2030s. Construction will extend into the 2050s.
The FSP will replace Australia’s current fleet of Collins Class submarines. The 2009 Defence White Paper forecast the replacement of the Collins Class with a ‘more capable class of submarine’ with longer range, higher endurance and a greater breadth of capabilities. The Future Submarine will be a ‘unique design for Australia’ as there are no ‘off-the-shelf solutions that meet our unique capability requirements’.
At a public hearing, the Department stated that Australia’s objectives in the FSP include:
‘developing a regionally superior submarine capability’; and
‘maximising Australian industry involvement in the submarine program without compromising cost, capability, schedule or risk’.
Following a competitive evaluation process, in April 2016 the Government announced that DCNS was selected as the international design partner for the Future Submarine. In selecting DCNS, Australia has chosen the Barracuda class which is the ‘latest, state-of-the-art, nuclear attack submarine’ developed in France. The Barracuda class will be modified to meet Australia’s design requirements and will be converted to a conventionally-powered submarine.
DCNS Australia explained that the French Government is providing Australia with its leading submarine technology:
The French government has offered Australia the Suffren class, or the Barracuda class—which you would probably be more familiar with. That is the latest, state-of-the-art, nuclear attack submarine that France has. France is transferring the knowledge of that submarine to Australia. That is not a trivial thing. This is not an export submarine; this is France’s best submarine technology.
A contract for the design and mobilisation of the new submarine was signed in September 2016 between the Australian Government and DCNS.
The full contract is not publically available. A redacted copy was tabled in the Senate on 1 December 2016 where the Minister for Defence, Senator the Hon Marise Payne, made a public interest immunity claim on the removed text.
The Department advised that Australia’s objectives in the FSP as listed above ‘have been facilitated through commercial arrangements between Australia and DCNS as well as the Framework Agreement’.
It was further announced in September 2016 that Lockheed Martin Australia had been selected as the Combat System Integrator for the FSP.
The FSP was described by participants in the inquiry as ‘an unprecedented opportunity’. Defence SA commented that the scope, time span and complexity will ‘dwarf’ all previous defence acquisition programs:
It is important to recognise right from the start that this is an Australian submarine being built by design partners from France, the US and across the globe. It is not a French submarine. Consequently, the program will inevitably undergo many challenges. This should come as no surprise, as we are building one of the most complex articles ever manufactured in Australia…I have absolute confidence in Australia to overcome these challenges.
The Australian Manufacturing Workers’ Union (AMWU) also commented that the FSP will be ‘a driver of high-tech research, high-skilled jobs and economic growth for the export of high-value products for decades to come’.
Local industry involvement
Upon announcing the selection of DCNS in April 2016, the Prime Minister, the Hon Malcolm Turnbull MP stated that the FSP would ‘directly sustain around 1,100 Australian jobs and a further 1,700 Australian jobs through the supply chain’.
The involvement of the Australian defence industry was a factor in the competitive evaluation process that selected DCNS. The 2016 Defence Industry Policy Statement states that Australian industry involvement is critical to the construction and sustainment of the FSP into the future.
In April 2016, the Government also confirmed that the submarine fleet will be constructed in Adelaide. Adelaide is the home of Australia’s largest naval shipbuilding hub, Techport Australia, owned by the Government of South Australia. The Commonwealth-owned Australian Submarine Corporation (ASC) is the anchor tenant at the site.
The role of the ASC in the build of the Future Submarine has not been announced by DCNS or DCNS Australia. At a public hearing, ASC commented that the company is in ‘ongoing discussions with DCNS and look forward to those continuing’. ASC continued:
ASC is happy to provide our expertise and experience and the benefit of the lessons learned from the Collins to assist DCNS and the nation into the future… and we look forward to continuing our role as a platform lead in the submarine enterprise and, in coming years, supporting the transition to the Future Submarine Program as an integral part of Australia’s sovereign submarine capability.
Acknowledging that its role will be determined by DCNS and the Government, ASC stated that it is unlikely to be involved in the FSP for another 12 to 18 months, until the project enters a construction phase.
The proposed Framework Agreement establishes general obligations to engage Australia’s local industry, and this is examined below.
The objectives of the proposed Framework Agreement are set out in Article 3 and can be grouped into the following categories:
the transfer, ownership and use of technology and information;
asserting Australia’s sovereign operation and security of supply;
local industry engagement and cooperation;
research and technology development; and
governance and contract performance matters.
Significantly, the obligations contained within the proposed Framework Agreement extend to DCNS. The Department advised that it is their understanding that DCNS, as a French Government-owned company, will be required to comply with the terms of the Framework Agreement.
DCNS Australia also confirmed that the obligations in the Framework Agreement between the two governments are represented in the commercial contract between the Australian Government and DCNS.
Transfer, ownership and use of technology and information
First and foremost, the proposed Framework Agreement facilitates the transfer of French‑Government owned information that is ‘critical to the design, build, operation and sustainment’ of the FSP.
Article 5 commits Australia and France to facilitate the transfer of technologies required for the purposes of the design, development, build, operation, sustainment and disposal of the Future Submarine. The NIA states that in so doing, the Agreement ‘will provide Australia with all necessary rights to use or own the information, and to share such information as needed with its contractors and other third parties participating in the FSP’.
This obligation is further enhanced by Article 6(1) which obliges France to do all things necessary, and take all action required, to ensure Australia obtains all relevant information owned by France required to design, build and enable Australia’s sovereign operational and sustainment capability for the Future Submarine.
Information that was created prior to the entry into force of this proposed Framework Agreement will remain the property of France (Article 6(2)). Australia may use such information for the purposes of the FSP (Article 6(3)). Australia may only transfer French‑owned information to a third-party where France has provided its written approval to do so (Article 6(5)). The use of such information by a third party will be subject to strict conditions on access, use and disclosure (Article 6(6)). Australia will not be required to pay a licence fee or royalty for the use of this information (Article 6(8)).
Any information that is created by either Australia or France under the proposed Framework Agreement or, otherwise created in the performance of the FSP, will be owned by Australia except information generated under collaborative research and development activities (Article 6(9)). France may only use Australian‑owned information for the purpose of performing tasks required by Australia and under specific circumstances (Article 6(10)).
Australia and France must also protect classified information provided or generated under the proposed Framework Agreement in accordance with a separate agreement signed in 1985 (Article 9). The Committee has also examined a new classified information agreement with France. The Committee’s report on its inquiry is in Chapter 3 of this Report.
The proposed Framework Agreement requires Australia and France to administer export control rules and licences in a manner that supports the FSP and promotes efficiency (Article 7). The NIA states that this will ‘reduce disruptions and delays to transfers of technology and information critical to the FSP’. Similarly, the Agreement obliges Australia and France to minimise the impacts of customs duties, as well as import and export taxes which may be applicable to the FSP (Article 18).
Australia’s sovereign operation and security of supply
Security of supply is critical to the delivery of the FSP and Australia’s ability to maintain sovereign operational and sustainment capability. Article 8 states that France will not ‘interfere’ with Australia’s free use of the Future Submarine and shall not hinder the supply chain of the technology necessary for the ‘design, build, delivery, operation and sustainment of the Future Submarine, including in times of peace, crisis or armed conflict’ (Article 8(2)).
The proposed Framework Agreement also requires Australia and France to inform each other of proposed significant changes to their controlling interests in the major industrial entities involved in the FSP. This obligation would extend, for example, to the French-Government owned DCNS. More specifically, should the French Government no longer hold the controlling interests in DCNS, France will be obliged to ensure its obligations under this Agreement will continue to be met (Article 8(3)).
Local industry engagement and cooperation
Article 13 recognises ‘the importance of maximising Australian industry involvement in the FSP and developing Australian-French industry partnerships through their respective industry policies’.
The proposed Framework Agreement confirms Australia’s authority and responsibility for decision‑making under contracts and sub-contracts for the FSP (Article 13(2)). The NIA does not address how Australia will exercise is decision‑making role with respect to sub-contracts that are entered into between subcontractors and DCNS for the design and mobilisation of the FSP; or between subcontractors and Lockheed Martin Australia for the combat systems integration for the Future Submarine.
Under the proposed Framework Agreement, France is required to:
provide advice to, share information, know-how, know-why, skills and experience with Australia particularly on industry policy and industrial environment to assist Australia manage and develop local industry involved in the FSP (Article 13(2)(a)); and
not hinder French industry efforts to involve Australian industry in the design, build and sustainment of the Future Submarine and as such, Australian companies will be able to bid for work in all phases of the FSP on an equal basis with French companies (Article 13(2)(b)).
Both Australia and France are obliged under Article 13(3) to facilitate the exchange of information, skills and expertise relevant to the FSP between their respective industries and foster innovation, research and technology development.
Research and technology development
The proposed Framework Agreement requires Australia and France to coordinate and collaborate on research and development activities with the aim of generating innovating technological solutions needed for the FSP (Article 14).
Governance and contract performance
The governance framework for the FSP is established in Article 4. It recognises that proper governance will be ‘crucial to the effective implementation of this Agreement’ (Article 4(1)). The Article provides that the respective Ministers of Defence, or their representatives, will meet at least annually.
Article 4 also establishes a Steering Committee to be co-chaired by representatives of both Australia and France. The Steering Committee will meet at least twice yearly and report regularly to the respective Ministers of Defence. As an advisory body, the Steering Committee will be responsible for:
monitoring and coordinating the implementation of the proposed Framework Agreement;
overseeing the progress of the FSP;
identifying and resolving issues related to the implementation of the proposed Framework Agreement, including any changes to domestic laws and policies that will have an impact on the performance of the Agreement and contracts (including subcontracts) relating to the FSP design and construction;
developing and recommending measures that would enhance the effective implementation of the proposed Framework Agreement; and
maintaining oversight of the security aspects of the FSP.
Contractors may also be invited to participate in the Steering Committee.
Cost, quality and performance monitoring
The proposed Framework Agreement also sets out matters for program management support to be provided by France (Article 10). This support covers technical expertise and management issues including:
monitoring contract performance including progress, risk, schedules and costs of contracts entered into between Australia and contractors located in France; and
assisting to resolve any issues or concerns raised by Australia in relation to the performance of any contract or sub-contract for the FSP.
Similarly, under Article 11 France may not hinder the access of authorised personnel from Australia to information relating to the cost transparency and performance monitoring of the FSP.
Australia and France will also develop specific government quality assurance services to determine that contractual requirements regarding quality of material and services are met under the FSP (Article 12).
All disputes arising under the proposed Framework Agreement must be settled by consultation and negotiation between the Australia and France (Article 20).
If a dispute arose regarding the compliance of DCNS with the terms of the proposed Framework Agreement, the Department advised that Australia would seek to resolve that dispute through the governance framework. The Department stated:
Should there be some concern that DCNS were not acting in a way that was in the spirit of the [Framework Agreement] and limiting Australia’s ability to deliver what it wants to deliver, then there is certainly… a mechanism by which we would have the ability to raise that. And we would raise that with the French Government with an expectation that the French Government would keep to the treaty conditions and seek to resolve it.
Withdrawal or denunciation
The proposed Framework Agreement may be terminated by mutual written agreement (Article 23(4)), or unilaterally where a Party’s ability to implement the Agreement is ‘fundamentally impacted by exceptional events, circumstances or matters’ (Article 23(5)).
Were the proposed Framework Agreement to be terminated unilaterally, the Parties will consult to determine if common ground can be found to allow continuation of the Agreement. If no common ground is found within 12 months, the termination will take effect 24 months after receipt of the original notice to terminate (Article 23(6)). The NIA explains ‘this period would allow the Parties to appropriately manage the consequences of termination’.Obligations with respect to ownership and use of information and security will continue beyond termination (Article 23(10)).
The FSP is a $50 billion defence capability acquisition. Specific costs associated with the implementation of this proposed Framework Agreement are not stated in the NIA.
Rather, the NIA states:
The Parties will bear their own costs of implementing their obligations under the Agreement. Australia will incur costs associated with implementation of the governance framework (Article 4), for any FSP management support (Article 10), and in the event of certain claims (Article 19). Costs arising under separate instruments referred to in the Agreement will be governed by those instruments.
Reasons to take the treaty action
The NIA asserts that the proposed Framework Agreement serves the national interest ‘by formalising assurances from the French Government that are critical to the design, build, operation and sustainment of the Future Submarine’.
At a public hearing, the Department elaborated:
The agreement provides a robust framework to underpin the delivery of the Future Submarine Program, and I consider it to be unequivocally in our national interest.
The Department was of the view that the key legal risk – the acquisition of intellectual property – is ‘very well traversed’ in the proposed Framework Agreement. The Department is ‘confident that the document actually equips Defence to manage the legal risks’.
Issues raised in evidence
Participants in the inquiry were generally supportive of the proposed Framework Agreement. For example, the ASC noted that a treaty-level agreement will provide for the ‘strong, ongoing government-to-government cooperation [that] is required to underpin a project that will span many decades’.
However, it was noted that the terms of Framework Agreement must be reflected within the terms of the contract between the Government and DCNS, as well as in supplementary agreements with the French Government, in order to be effective and in Australia’s national interest.
For example, Defence SA commented that the Framework Agreement ‘needs to be prepared for the best of good days and the worst of bad days,’ and ‘must be linked to the contract in order to really hit the ground’. Similarly, the Australian Industry and Defence Network Western Australia commented that the proposed Framework Agreement ‘will have a significant effect on the Future Submarine contract’, elaborating:
It establishes the culture and behaviours and that culture needs to flow down. The contractor and the contracting parties need to be aware of the intent and the substance of the treaty.
Dr Andrew Davies was of the view that the supplementary agreements and arrangements foreshadowed in the proposed Framework Agreement will be ‘critical to how [the Framework Agreement will] work in practice’. Dr Davies explained:
The treaty is really a statement of principle. How things work in practice and how technologies and intellectual property are transferred will be absolutely critical… So it is the operationalisation of those sorts of transfers that are absolutely critical to setting up an effective and efficient build process.
The Department confirmed that ‘further instruments between Australia and France will need to be negotiated over the coming months and years to implement and supplement this agreement’.
In addition to these general comments, four critical issues were raised in evidence to the Committee:
the importance of intellectual property acquisition;
how, and to what extent, local industry participation can be maximised;
opportunities and focus of research and innovation collaborations; and
security and integrity of information.
Each of these issues is examined below.
Intellectual property acquisition
The proposed Framework Agreement’s articles on intellectual property (IP) acquisition were a focus of the Committee’s inquiry.
Mr Brett Walker, a former chief legal officer at the Commonwealth Scientific and Industrial Research Organisation commented that in a project of this scale, it is ‘critical’ that appropriate technology transfer provisions are put in place to ensure that Australia has sufficient rights to operate, maintain, repair and upgrade the Future Submarine.
Similarly, Defence SA emphasised the need for clarity in what constitutes ‘background intellectual property’, that is owned by France, and ‘foreground intellectual property’ that is owned by Australia:
But, as we go into elements of it, particularly critical elements, we should be very clear about the IP—what we own, what they own and our rights and access to that—because it is fundamental for us maintaining our sovereign submarine capability.
This was a critical lesson from the design, build and sustainment of the Collins Class Submarine.
Lessons learned from Collins Class Submarine
A number of participants expressed concern that Australia must not repeat mistakes made during the design, construction and sustainment of Australia’s existing submarine fleet, the Collins Class submarine.
In 1987, Swedish company, Kockums was selected to design and build the Collins Class Submarine, integrating a combat system from Rockwell International. The intellectual property that was acquired in the Kockums’ contract was sufficient for construction but did not provide Australia with the necessary rights or information for the sustainment of the fleet.
In the late 1990s, cracking problems were discovered in the Collins Class propellers. Contrary to the contract, Australia shipped the defective equipment to the United States for analysis and advice. Dr Davies explained the significance of this action:
Propeller configuration is one of the crown jewels of submarine design, and Kockums took court action in 2001 when another propeller was to be shipped, resulting in the unedifying spectacle of the ship carrying the article being held off the US coast while the court action was resolved. The court found in favour of the Commonwealth, but a substantial reason for the decision was that the harm to Kockums’ position had already been done by an earlier shipment, which was hardly the basis for a trust-based relationship between the parties involved.
The ASC also reflected on this experience, commenting that ‘going forward, we would want to ensure that there was no ambiguity in those intellectual property clauses.
The Department acknowledged that Australia’s capacity to share information with industry and international partners was ‘severely constrained’ because, ‘there was not such a framework’ to enable its transfer. The Department also noted that, in some cases, ‘not all of the technical data flowed’ to Australia to enable the ongoing sustainment of the Collins Class.
Participants also cautioned that not all intellectual property and know‑how is vested in drawings and documents. To fully understand the submarines, Australia must be involved in the design phase. ASC noted that:
… [this knowledge] comes from your complex understanding of how things operate and your experience in maintaining them… That technology transfer from the people who may have been doing something for a period of time to Australians is, I feel, one of the key lessons learnt and something that is the strength behind ASC that we have developed over the last 30 years.
Defence SA expanded on this point, acknowledging the differences between the initial design phases of the Collins Class and Future Submarine and the impact on the delivery of that capability:
One of the differences between Collins and Future Submarine is that Collins was designed by an output of a competition between two offers. Based on that winning bid, the company, Kockums, went and designed a submarine to it. There was little interaction between the designers in Kockums, having agreed on the requirements, and the end user to understand the implications of those requirements.
Mr Deeks recommended that these past experiences could be overcome by embedding Royal Australian Navy personnel in the design and build phases of the FSP, ‘so that they can gain a fundamental understanding of the design velocity and the build methodology to enable them to better support the submarines at sea after they become operational’. Mr Deeks explained:
We must never lose sight of the fact that we build these platforms, these vessels, ultimately, to be used by operators at sea and it is they who are the ultimate customer. So we should go out of our way to make sure the customer is provided with all the information they need to be able to operate them in circumstances that we cannot predict, at this stage, how they might be used.
The AMWU also advocated for Australian involvement in the design phase, noting that:
… the multiplier effect of design work is much higher than for building work or maintenance work, and the opportunities for spin-offs and spill overs are much greater in the design phase that they are another phases… As we all acknowledge, we want the 12th submarine off the line to be better than the first submarine off the line. That is going to come out of having that concentrated design knowledge, know-how and ‘know why,’ combined with the feedback we are getting from the submariners who are on them.
The Department advised that uniformed defence personnel will be working in the design of the Future Submarine, which will be overseen by the Chief of Navy.
Importance of intellectual property through life-of-type
Access to intellectual property is also critical to the long-term sustainment of the Future Submarine. Mr Walker explained:
You do not want to, essentially, buy a black box which your contractors cannot access and, therefore, you cannot properly maintain and upgrade, and that is the same in any check-transfer project. You need to have those ongoing rights to access the information and IP to upgrade, maintain et cetera.
A number of witnesses reflected on the experience of the long-term sustainment of the Collins Class, commenting that that program focussed primarily on the build and delivery into service of the submarine, and not how the fleet would be sustained through life-of type. Indeed, under the program, the first submarine was commissioned in 1996 however it was not until 2003 that the through-life support arrangements were signed.
The ASC stated it was important to have learned from the Collins Class program that ‘managing the transition into service is a key. If we build the capability, it has to be there for the long‑term sustainment’.
Mr Deeks, an Australian submarine commander from 2001 to 2004, also identified the lack of access to the requisite intellectual property to allow submariners to undertake on-board repairs. In some cases, Kockums personnel had to undertake the work as no Australian personnel or industry had the necessary intellectual property to repair defects.
Mr Deeks was of the view that the lack of access to intellectual property to undertake repairs reduced the effectiveness of Australia’s defence capability:
The impact this had was poor operational availability and limited sea time and it had an adverse effect on recruiting, retention, training and morale. An ability to conduct underway repairs is equivalent to having more submarines in the force. If a submarine can remain on station operating independently of any shore based support, despite experiencing significant defects, it is like having additional submarines in inventory.
To maximise the capability of all twelve submarines, Mr Deeks emphasised the need to obtain all necessary intellectual property to allow Australian industry access to undertake all repairs and maintenance. He further recommended that this information be forwarded to submariners operating the Future Submarine so that significant defects can be repaired without external assistance.
Defence SA was of the view that the Department is developing the sustainment arrangements for the Future Submarine at this early stage, commenting that this ‘is a dramatic turnaround and a great improvement’.
Tripartite collaboration and integration
Australia’s Future Submarine will be designed and constructed by DCNS and its integrated combat weapons systems will be provided by Lockheed Martin. A weapons system is central to the submarine’s offensive capability and to delivering Australia a ‘regionally superior’ submarine.
Reflecting the critical importance of the weapons system to the Future Submarine’s capability, Dr Davies cautioned the integration of American systems with those supplied by France will ‘be make or break’ for the Future Submarine.
In practice, Dr Davies argued, this is a three-way collaboration to be managed. The level of integration of the weapons system will determine the extent of the trilateral cooperation:
It depends on the tightness of the integration. If we are only talking about the combat management system, we can probably manage that under the existing treaty agreement we have between Australia and the United States for defence technology transfer. If we are talking about a deeper integration, where the whole combat system, including the sensors, is sourced from the United States, and that has to be mechanically and systems integrated into the detailed French submarine design, I think that would require an arrangement of some kind between France and the United States as well.
Dr Davies further noted that the level of integration will present challenges for managing intellectual property of all three parties. He stated that managing these property rights will be ‘necessary to deliver the capability we want’, and though the proposed Framework Agreement is a necessary step, ‘it needs to be part of a three-way arrangement that protects the interests of Australia, France and the United States’.
Mr Deeks also cautioned that ‘we do not want to find ourselves in the future where we have the [intellectual property] in-country, but we are limited by the former owner of the [intellectual property] as to how we can use it’.
Dr Davies also noted that the Collins Class program provides additional lessons in how to manage an international collaboration of this kind:
The Collins program provides some excellent lessons in how not to deal with an international partner in a submarine build. There was a substantial falling out between Australia and Sweden over intellectual property issues, which went as far as to land the two parties in the Federal Court in 2001. The issue was ultimately resolved… but it was a good illustration of the pitfalls of collaboration on sensitive defence technologies.
Dr Davies was of the view that the proposed Framework Agreement ‘should go a long way to avoiding’ the intellectual property disputes in the FSP. It was also suggested that a ‘framework of agreements’ or ‘bilateral agreements that support the trilateral enterprise’ will be required to deliver the capability.
The Department responded to Dr Davies’ recommendations, commenting that the proposed Framework Agreement allows Australia to agree with France to share particular information with the governments of the United States and the United Kingdom.
Similarly, DCNS Australia stated that DCNS has a ‘very simple’ relationship with Lockheed Martin:
That relationship with Lockheed is a free-flowing, free information exchange. Both companies understand the constraints on the protection of the countries’ information. As an example, DCNS will be responsible for the construction of the infrastructure for the future submarines. So Lockheed and DCNS are working closely. We will build the building that Lockheed will integrate the combat system in. To their specifications, we will provide the bricks and mortar, power supply and that sort of thing. Equally, they will provide us with all the requirements they need for the power, cooling, weight space and all that sort of stuff that we require for the submarines. I have not seen any evidence at all that there is an issue between the two companies. In fact, the relationship has been very simple.
Maximising local industry
At a public hearing, DCNS Australia confirmed its commitment that over 90 per cent of the Future Submarine build will occur in Australia. DCNS Australia further confirmed that the terminology used in the Framework Agreement – ‘maximising local industry’ – appears in the contract between DCNS and the Government of Australia, commenting that they are ‘executable and enforceable contract clauses’.
Defence SA commended Australia’s shipbuilding capability commenting that ‘having inspected shipyards in Germany, Japan, France, the US, the UK, Spain and Italy, I am yet to see any task or activity that we could not achieve in Australia at equal or better levels of performance’.
Despite Australia’s existing capability, a number of participants questioned the meaning of ‘maximising local industry’ and how this might be achieved. Dr Davies cautioned that Australia and France have different approaches to defence industry, and Australia should seek to protect its interests:
Australia and France share many values and we have broad shared strategic interests in maintaining what the defence white paper called the ‘rules based global order’. To that extent, we should be able to enter into long-term industrial and technological arrangements with confidence. But we have quite different approaches to defence industry. France has a much more nationalised approach to its defence industry sector and therefore has a strong and direct commercial interest in selling its products. The Government of France owns DCNS. We should not convince ourselves that sharing submarine technology with Australia is entirely an act of altruism towards a strategic partner. We should keep our eyes open, be aware of the economic imperative at work and protect our interests when necessary.
Dr Davies also questioned how, in practice, Australian industry will compete equally with French suppliers when the latter has established relationships with DCNS.
The Department clarified the extent and nature of Australian local engagement in the FSP, stating that the Department ‘will decide on the manner in which Australian industry is engaged and involved in the program’. It further stated:
In our contracts with DCNS, we will make sure that the Australian industry goals and plans are flowed down to suppliers. DCNS will recommend to us their preferred way forward, noting that in our contracts with DCNS we do capture the need to establish a sovereign capacity… So there is no unilateral decision by DCNS to use any supplier of their choice. We are involved in the procurement process right from the beginning through to the end.
DCNS Australia confirmed that this was also their understanding of the FSP’s procurement process:
They are involved, they have oversight and they have an ability to question us, challenge us and, indeed, instruct us to go back and revisit decisions to ensure that we are making the most logical decisions in terms of sovereignty for Australia. The department will not get in the way of a commercial process; however, we have to justify to the department every decision that we take.
However, the Department advised that a key objective of the FSP is to maximise Australian industry involvement ‘without compromising cost, capability, schedule or risk’.
The Department also stated that the FSP includes developing a ‘sovereign operational and sustainment capability’.The commitment to develop a sovereign operational and sustainment capability in Australia was strongly supported by a number of participants.
Developing a sovereign capability in Australia for the FSP would allow Australia to control access to information and have local capability necessary to maintain the operation of the Future Submarine. Mr Deeks remarked that this capability should enable the Australian industry to maintain and support the submarines independent of external overseas support.
BAE Systems Australia advocated that maximising local industry content should be a consideration not just at the point of acquisition of defence capability, but also in its sustainment:
Maximising AIC [Australian industry content] is not just about what gets made in Australia. More importantly, it is about why and how it gets made in Australia. Australian content is good for industry, as competitiveness is often driven by volume. This is great if the cost is right, and the work should be performed here in those cases. But what we need to drive is an increase in capability that sometimes may not necessarily be cost-effective in acquisition, but gains a critical, enduring capability for sustainment..
The ASC also explained how Australian industry involvement in the construction phase of the FSP is critical to being able to sustain the fleet in to the future:
There is certainly a focus on acquisition cost but the sustainment cost is quite high for any platform, so investing early in build provides you the capability to undertake the sustainment and save sustainment costs in future. Even our experience in the capability we have is we are able to meet international benchmarks on submarine maintenance and support because we have access to that technology. If we were not involved in the build, it would be most likely that we could not maintain that support at that level.
Dr Davies noted the need for balance between sovereign capability and premium costs:
I think we sometimes wrap ourselves around the axle a little bit about sovereign capability… We need to have the support, yes. Sovereign is better, but it is a question of how you get there from here and what premium you are prepared to pay to do that… No argument from me that we need onshore support—absolutely. How sovereign it needs to be is the question.
The Department confirmed that its commitment to a sovereign capability in Australia is not just at the acquisition stage, but a consideration in the through‑life sustainment of the submarine:
Again going back to what the goals of the Future Submarine Program are—and that is to develop a regionally superior submarine with the sovereign capacity to operate it and sustain it through life—taking the view that the cost of the program is not simply the acquisition cost but the through-life support costs.
DCNS Australia also confirmed that the requirement to build a sovereign capability in Australia is central in its contract with the Australian Government:
The Committee should not ever misunderstand the intent of the French government here nor should it misunderstand the intent of the company. All the way through the competitive evaluation process and since we have been commencing our work on the design and finalisation contract, the intent of the company has to be to work with the Department of Defence to ensure that Australia ends up with what it has asked for, what we agreed to do during that competitive evaluation process—that is, to create that sovereign capability within Australia.
DCNS Australia advised the Committee that in seeking to deliver on this commitment, the company has contacted ‘hundreds of potential suppliers’ and has issued more than 700 requests for information to more than 200 companies. In addition, the company will conduct a series of industry briefings, with the first briefing in Adelaide held in November 2016, attracting more than 450 Australian companies.
To manage the local industry engagement, DCNS Australia has developed a Supplier Pre‑Qualification Questionnaire. As of 20 March 2017, 44 Australian companies have qualified.
Developing sovereign capability will require additional planning. For example, BAE Systems Australia advocated that the time is now to ensure the most effective capability-development is achieved and local industry maximised: ‘With the planned procurements Australia is today embarking upon, now is the time to get this right, and we in industry must work together with Defence to ensure that we do’.
This will, in BAE Systems’ view, require a commitment from government and industry and draw upon international expertise to deliver a stronger Australian capability. In addition, it will require a greater focus on increasing exports of Australia’s unique capabilities.
The Centre for Defence Industry Capability (CDIC) was launched in 2016 following the Defence Industry Policy Statement. Its purpose is to ‘help transform the Defence and industry relationship, and to fund defence industry development, critical skilling and export initiatives’. The Centre will also provide a framework to assess Australia’s sovereign defence industrial capability for the purposes of the FSP and other defence capability acquisitions.
The Government’s recent announcement of a continuous shipbuilding program was strongly supported by participants in the inquiry. For example, Defence SA commented that this will overcome the ‘boom and bust scenarios’ of previous defence acquisition projects. Defence SA described the impact of previous approaches:
In those days, and in those environments, the companies did not need to invest in their future workforce. They went out to the open market, they got the workforce in, they trained them up, they delivered the program and then they got rid of the workforce unless they could win further work. Right across industry you had this boom and bust playing out with these programs. That is why the importance of this program and the commitment to continuous build is so critical. It is very pleasing to see that, because we can now offer children who are just coming into primary school opportunities in the future to develop into these careers. It will not just be a job for a project; they will be embarking on a career that will lead them through 30 to 40 years of very valuable, very important work. That is why it is important.
BAE Systems Australia advocated that the investment in Australia’s local industry must be leveraged to deliver new capabilities and drive the industry forward. However, the company also acknowledged the challenges the local industry face:
Many Australian SMEs [small to medium enterprises] are simply not large enough to move up the capability ladder on their own. Many of these SMEs provide niche technologies that give the Defence force a capability edge, but to deliver their potential they typically need to be integrated as an element of a larger system. There are many SMEs, few medium enterprises and even fewer primes, and we need to recognise that in the Australian Defence ecosystem every player, large or small, has a place in delivering industry effectively.
The AMWU also noted impediments to Australian companies getting into the domestic supply chain, commenting that government-led discussion forums have provided little clarity for those new to the industry.
Another barrier to local industry identified during the inquiry was the difficulty in obtaining requisite security clearances. This is discussed in detail in Chapter 3 of this Report where the Committee reviews the Agreement between the Government of Australia and the Government of the French Republic regarding the Exchange and Reciprocal Protection of Classified Information.
It is anticipated that developing sovereign capability will provide opportunities for Australian industry to contribute to the global supply chain. Indeed, due to the size of Australia’s navy, sustaining a sovereign capability beyond the acquisition phase of the FSP will be difficult without opportunities for export.
Mr Deeks explained to the Committee that private industry is already beginning to plan for the continuous shipbuilding industry and seeking export opportunities to sustain their investment:
The federal government has stated very clearly that their objective is to create a continuous naval shipbuilding industry in Australia. Just relying on the domestic market to achieve that will be very difficult due to the size of our Navy and the forces required. So certainly we are very focused in Forgacs, and I know other companies are, in creating a continuous shipbuilding industry which includes export. So, there is no reason that should not apply to submarines, if that is the case.
Despite recent efforts, particularly those led by the CDIC, Defence SA acknowledged that Australia is lagging behind in the international promotion of its local industry:
We are, however, compared to many other countries around the world, just starting to get into the game, whereas the globals—through the UK, the US, France and Germany—have had a long history, many decades, of working on the international forum. They have got a long head start on us, but I am confident that we can catch up quickly.
The Committee also received evidence that the anticipated growth in Australia’s local industry will also unlock new international opportunities. For example, Defence SA was of the view that there is potential for Australian industry to service foreign submarines operating in the Asia‑Pacific.
Similarly, Mr Deeks also commented that Australia has a strong defence industry and is internationally competitive:
We tend to underrate ourselves in terms of our industrial capability… Companies like my own parent company, Civmec, brought manufacturing back to Australia at a time when everyone would argue that manufacturing in Australia was dead. They compete against the world market in major projects against countries that have very low labour rates. They do that successfully because they can achieve levels of efficiency and productivity unheard of in these other countries. As a general statement, I think we need to back ourselves a little more.
BAE Systems similarly commented that Australian industry has ‘great innovation’ which has, and continues, to feed into the global defence supply chain.
Research and innovation collaborations
The proposed Framework Agreement provides for research and development activities with the aim of generating innovating technological solutions needed for the FSP. The Defence Science and Technology Group (DSTG) will support the program in the following areas:
the achievement and sustainment of regional security;
the qualification and acceptance of the future submarine; and,
the assessment of future submarine technologies.
In addition to specific government‑to‑government research projects provided for under the Framework Agreement, the FSP presents opportunities for public-private partnerships and collaborations.
Following the announcement of the FSP in April 2016, a number of Australian universities have formed new collaborative efforts with counterparts across Australia and in France. For example, in January 2017 Flinders University entered into agreements with a French consortium comprised of ENSTA Paris Tech, École Centrale de Nantes, Centrale Supélec and École Polytechnique.
Similarly, in 2016, the University of New South Wales (UNSW) and DCNS entered into an agreement for research and technology, focussing on the University’s leading innovative component technologies. At a public hearing, UNSW stated:
The nature of the work in the MOU [memorandum of understanding] is quite fundamental long-range research. It is not focused specifically on submarines. It is an umbrella agreement that contemplates and anticipates a number of different new areas coming up. For example, they cover areas like electrical control systems, materials for minimising impact on the environment and machine learning and artificial intelligence algorithms that could be applicable to multiple things.
The agreement with DCNS provides for the ownership of intellectual property of research output, to be negotiated on a case‑by‑case basis, with all background intellectual property remaining with DCNS. Noting the importance of Australian universities retaining the necessary rights over their research output, UNSW commented:
The approach is to use the university’s standard policy on intellectual property—that is, essentially it is negotiated on a case-by-case basis. The university’s starting position is that, for IP that is generated out of contract research, the university owns the intellectual property, and the commercial partner is offered a licence to commercialise. That is our starting negotiating position.
The agreement with DCNS builds upon other relationships the University has developed with the private sector. UNSW stated at a public hearing that its Faculty of Engineering has developed partnerships with industry operating in the global supply chain, opening up different pathways for the commercialisation of the University’s research. In 2016, the University attracted $25 million in revenue from these relationships with the private sector.
Defence SA noted that DSTG and the university sector will be ‘critical’ in achieving a successful translation of research priorities into actual products for improved capability. The organisation also commented:
Australia is very good at R&D [research and development]. However, we certainly suffer in the area of the commercialisation piece, and I think that is where we are already seeing commitments to organisations like CIDC, which is developing and managing the innovation pipeline to take R&D right the way through from the initial studies through to products.
Local industry is also seeking to leverage improved relationships with Australia’s university sector, in large part due to the international opportunities that such cooperation could deliver. Mr Deeks, the current Managing Director of Forgacs Marine and Defence commented in a public hearing:
I think we need to generate much closer relationships between Defence industry and academic organisations. I know that DCNS is a good example of how they do that in France… This is a long-term endeavour so we should be looking to train people for the long term. We should be shaping people to have a complete career within the Defence industry. That would allow us then to look for opportunities to support regional navies, and other overseas opportunities.
The AMWU was of the view that these commitments to research will help Australian businesses and workers to be involved in the development and implementation of cutting‑edge technologies. The AMWU commented that ‘this should result in the companies engaging in the global supply chain… beyond the Future Submarine Program [and consequently] the Australian naval shipbuilding industry will have a bright future ahead of it’.
Another issue raised in evidence was the security arrangements of the FSP to protect Australia’s sovereign operation of its submarine capability. Two concerns were raised: the security of Australia’s classified information following leaks of Indian-classified information by a DCNS sub-contractor; and the security through the supply chain. Both are examined below.
In August 2016, it was revealed that thousands of documents had been leaked from DCNS containing classified information relating to the design and capability of submarines commissioned by India. According to news reports, the leaked documents details the entire combat capability of the six submarines designed by DCNS for the Indian navy. The leaked documents were compromised by a sub-contractor, described as a ‘trusted insider’.
DCNS Australia commented that the company had ‘learnt a very valuable and quite a bad lesson’ and sought to reassure the Committee, commenting that ‘the security measures within the company were already very robust’. To address the vulnerability that allowed the leak to occur, DCNS has ‘implemented some tightening up’ of measures.
Following the leak, the French Government commenced an investigation into the matter. DCNS Australia advised the Committee that DCNS has filed a criminal complaint:
This serious matter is thoroughly investigated by the French national authorities. We are bringing all our support to conduct these investigations which are covered in France by the secrecy of the investigation.
DCNS Australia did not want to comment on the investigation occurring in France, stating:
Whilst I understand the interest, the reality is that what happened there is not an Australian story. It is a story between France, the government of India and others…You should be under no illusion regarding the seriousness that the [Australian] Department of Defence took that leak, and the response has been very strong and very determined. How we are now dealing with that so that it cannot occur in the Australian environment is quite significant.
DCNS Australia confirmed however that the information leaked was of a lower classification than the level set by the Australian Department of Defence. As a result there are ‘a whole series of other safeguards that are put in place to secure and control that information’. DCNS Australia was of the view that that higher classification would make it unlikely that Australia’s classified information could be leaked by a trusted insider:
The breach that occurred in France there was by a trusted insider stealing information. Again, within the Australian environment, it is highly unlikely—it is never impossible, but it is highly unlikely—that people could remove information from a system that is classified at an even higher level.
Responding to concerns, the Department advised that the leak of information was regarding a different class of submarines commissioned by India – the Scorpion submarine. The Department advised that ‘there is no indication that any information pertaining to the Barracuda class of submarines on which the Future Submarine will be based has been compromised’.
The Department advised that the incident did not shape negotiations for the Framework Agreement:
There was no reason to give rise to a specific conversation around a security matter separate from what we were discussing in terms of the framework agreement and how we would assure and implement security… So they are not related to the conversation that we had in negotiating the agreement between Australia and France in that way.
Despite this statement, the Department commented that information security and the protection of Australia’s classified information ‘is of utmost importance to both the Government of France and the Government of Australia’. The Department advised that the Steering Committee established by Article 4 of the proposed Framework Agreement has provided a mechanism to address such concerns:
One of the priorities of steering committee as it begins to form and work, and we have already had one meeting since [the Framework Agreement] was signed on 20 December, was to establish a subcommittee for security—not a subcommittee for security that is simply composed of program personnel but one that draws on the national resources of both countries to ensure the most thorough and comprehensive approach to security is taken from the outset of the program—and that remains one of our priorities at the moment.
The Department also confirmed that there is a ‘very strong framework’ for the protection of classified information,and noted that the proposed Agreement between the Government of Australia and the Government of the French Republic regarding the Exchange and Reciprocal Protection of Classified Information will provide an ongoing basis for its protection. The Committee presents its consideration of this agreement in Chapter 3.
Security through supply chain
The security of Australia’s information is not just a concern of the prime contractor, but also through the supply chain. Defence SA identified the security of supplies will be ‘one of the major challenges of the project’:
We will spend hundreds of millions of dollars developing this design. It will be a unique design, and the last thing we want to see is this design being transferred—in minutes—off on data files to someone else who should not have it.
Defence SA referred to the experience of the international project for the Joint Strike Fighter. Despite the security capability of the prime contractor, Lockheed Martin, the supply chain for the Joint Strike Fighter did not have that same capability, therefore leaving these companies ‘open to exploitation’.
The Committee strongly supports the proposed Framework Agreement, however, it is merely the first step in ensuring Australia’s national interests in the FSP are protected and maximised. The proposed Framework Agreement provides a solid starting point to overcome some of the critical and costly issues that have been experienced in other defence acquisition projects.
The Committee strongly recommends that the Department ensure the full lessons from Collins are learnt; including, but not limited to, ensuring the intellectual property of the Future Submarine is stored, managed, maintained and upgraded in a discrete entity to guarantee Australia is always able to operate, maintain and sustain the next generation submarine.
The Committee recognises that the objective of maximising Australian industry participation is critical both to Australia’s national economic interest, and to achieving sovereign capacity to sustain and operate the Future Submarines.
The Committee realises that the potential benefits of some of the proposed Framework Agreement’s terms, principally ‘maximising local industry engagement’, will rely on effective implementation of contractual and other arrangements. Although the Department and DCNS Australia confirmed that the development of a sovereign industry capability in Australia is a requirement of the contract between these parties, the obligation to ‘maximise local industry’ is not expressed in those terms in the proposed Framework Agreement.
In order for Australia’s local industry to be ‘maximised’, the local industry must be supported to expand its capability. The Committee is encouraged by early signs of private investment in developing this capability as a result of the Government’s commitment to a continuous shipbuilding program.
On the basis of the comments in relation to intellectual property and Australian industry participation above, the Committee requests a progress report back from the Department of Defence in the 2018 Winter Sittings of the Parliament on the acquisition of the necessary intellectual property and its ongoing maintenance, and in relation to the contractual and other arrangements that will secure maximal opportunities for Australian industry involvement.
The Committee is also encouraged by the prospect of Australia’s local industry working in collaboration with the university sector to develop and commercialise innovations that emerge from the research and development work involved in the FSP.
The Committee believes the Government should ensure that the further detailed agreements and arrangements have the effect of allowing Australian companies to bid for work in all phases of the FSP on a preferred basis, all other things being equal.
The Committee is alarmed by significant breaches within the DCNS’ build of the Indian submarine. Noting that the Committee reviews the Agreement between the Government of Australia and the Government of the French Republic regarding the Exchange and Reciprocal Protection of Classified Information in the next Chapter, the Committee reserves further comment and recommendation on the management of classified information for that Chapter.
The Committee recommends that the Department of Defence ensures that the full lessons from the design, acquisition and sustainment of the Collins Class Submarine are learned, in particular, to ensure that the intellectual property is appropriately managed to maintain Australia’s sovereign operation of the Future Submarine. The Committee requests that the Department of Defence provides a report back to the Committee during the 2018 Winter Sittings of the Parliament on the progress of obtaining the necessary intellectual property and its ongoing management, and in relation to the contractual and other arrangements that will secure maximal opportunities for Australian industry involvement.
In reference to Article 13(2)(b), the Committee recommends the Government seeks to ensure that the further detailed agreements and arrangements have the effect of allowing Australian companies to bid for work in all phases of the Future Submarine Program on a preferred basis, all other things being equal.
The Committee supports the Framework Agreement between the Government of Australia and the Government of the French Republic concerning Cooperation on the Future Submarine Program and recommends that binding treaty action be taken.