Opportunities To Improve The Australian Industry Capability Policy

Whilst AIC Policy is not new, the revised reporting requirements, renewed focus on contracting thresholds and greater scrutiny on AIC Plans during the tender process means the policy is beginning to take hold and is poised to put Australian industry at the forefront of bid strategies going forward.

1. There is confusion about the finer detail of the $20m threshold in the Australian Industry Content Policy Guidelines. During my time with Lockheed Martin I often fielded questions from Original Equipment Manufacturers (OEMs) for the Combat System Program, such as:
   1. Does the $20m threshold only relate to the initial contract? What happens if the initial contract is $15m and a contract change proposal, which is typically negotiated between the contractor and Prime/Defence takes the value over $20m?
   2. If the Program Office or Prime contractor fails to invoke the Australian Industry Content (AIC) requirements, where is the governance in the system to ensure this is captured?

   The DTC recommends the Policy Guidelines are enhanced to make the $20m threshold clearer.

2. The implementation guide produced by CASG is a great tool for assisting Primes and overseas OEMs to better understand the requirements of AIC Policy from a practical implementation perspective. The DTC recommends a process is established to ensure links and references to policy are kept updated and relevant.
3. Instead of the policy being regarded as an additional compliance requirement, the DTC suggests industry fast-track its training and awareness of the policy to invoke cultural change which will support smarter sourcing and procurement decisions. This would encourage industry to view AIC less of a governance burden and therefore an overhead cost, and more about good business practice.
4. The AIC Policy places expectations on the Prime to demonstrate how it will commit to supporting and developing Australian industry. Many OEMs – and the majority of Primes that have offices in Australia – do not have a good understanding of this concept. The DTC has received comments from Primes and OEMs that the responsibility to develop and nurture Australian industry is a cost to doing business which is not covered by the contract and therefore should not be the responsibility of the Prime. It has been claimed that during negotiations, costs attached to supply chain development activities are not regarded as program costs and therefore these activities must be funded from a Prime’s profit. This has led to comments being made that the government is shifting the economic cost and responsibility of developing an Australian industrial base to Primes and OEMs. The DTC believes there is a degree of misunderstanding in the market on this concept and feels clarification could be provided by providing more information to OEMs and Primes on this point. It is appreciated that the AIC Policy team continually provide information to the market both through group workshops and 1:1 sessions with Primes, OEMs etc. In fact, the DTC has received significant feedback from industry on how much this service is valued. However, the DTC believes there is scope to increase the level of information provided to the market on this concept, focusing more on the provision of advice from a practical implementation perspective. The DTC appreciates this may be difficult for Defence to achieve for probity reasons. A valuable outcome for industry would be to use a third party to deliver this information, leveraging from the guidance and expertise of the AIC Policy team and hands-on industry experience.
5. The policy repeatedly requires organisations to provide evidence of activities. In most cases, very little guidance is provided as to what evidence may look like or examples provided of what acceptable evidence might be. The DTC would like to see examples of suitable evidence provided, where possible.
6. Whilst the policy talks about the provision of a draft AIC Plan, it also provides scope for the draft plan to be matured during contract negotiations. The DTC feels industry, particularly the SME community, requires a degree of confidence that the AIC Plan submitted in the tender – and the subsequent approved AIC Plan – should not be drastically different documents. SMEs would like to have greater visibility of the governance processes which will be applied in ensuring the final AIC Plan does not differ drastically from the original draft Plan.
7. The guidelines talk about the approval processes for changes to AIC Plans as part of Contract Change Proposals (CCPs). It appears these processes vary from program to program within Defence with the level of knowledge and understanding of AIC Policy requirements and approval processes varying significantly. The inconsistent understanding and application of AIC Policy by Defence programs makes it difficult for industry to do business with Defence. The DTC feels greater education and collaboration between Defence’s industry offices within programs and the AIC Policy Team needs to occur to align the practical implementation of the policy guidelines with the governance mechanisms at the program level.
8. The policy requires contractors to regularly report progress against Plan, however this reporting is done internally to Defence. The DTC has received feedback from the SME community that they would like to see greater visibility of progress against the plan. Whilst the DTC appreciates there is a fine balance between reporting progress and divulging commercial information, the DTC feels a balance could be struck where high level values are reported. This could be reported as a graph, thereby assisting contractors to demonstrate transparency and progress against Plan.
9. The Local Industry Activity Tables require contract values to be reported exclusive of GST, while the Overheads Tables requires values to be reported inclusive of GST. The differential treatment of GST is confusing to industry, especially overseas OEMs. The DTC would like to see GST treated consistently for reporting purposes, to remove any opportunity for confusion. If Defence insists GST inclusive values must be used for the Overheads Table, then it is suggested this be clarified on page 19 of the guide.