ABDI on levelling the playing field

by Graeme Dunk

In last month's editorial I wrote about Creating the Investment Environment.  One of the topics considered within this subject was to Level the Playing Field.  This aspect is considered further in this article. 

A lot is written and spoken in Government and policy circles about the level playing field within which defence industry operates in Australia.  The problem is that the "level-ness' of the playing field depends upon the perspective of those doing the officiating, not the ones doing the playing; and this perspective is not always the same.  The "level playing field" is often spoken about in conjunction with "Value FOR Money", but it is more useful to consider it in conjunction with "Value OF Money".   This is where some of the discrepancies lie, and hence where (at least part of) the solution should be found.

If you consider the Value Of Money from the Defence perspective, a dollar spent in Australia equals a dollar spent overseas.  The effect on the Defence Budget is the same, and hence it is (somewhat) understandable that Defence takes the view that their responsibility is to ensure that the ADF acquires the best capability within the available funds (Value For Money).

From a Whole of Government perspective however the view is different.  A dollar spent in Australia is not the same as a dollar spent overseas.  In the latter case, the dollar disappears overseas and there is no flow-back benefit to the Government - no taxes are collected, no jobs are created or retained, no skills are developed, no demand is created for other goods and services.  A dollar spent in Australia however returns money to the Government in the form of taxes and other related outcomes (such as employment, the development and retention of key skills, etc).  

A report by Trevor Taylor and John Louth for RUSI in the United Kingdom (The Destinations of the Defence Pound) showed that 36% of every pound spent in the UK was returned to the Government.  Tax rates and structures may be different but a similar result could be expected in Australia.  Given that no money returns to the Government when contracts are placed offshore, the real level playing field is one that factors in the percentage differential between in-Australia activity and that directed offshore.  If we assume that the return to the Government is in the order of (conservatively) 30%, in terms of proposal evaluation therefore, $1 (offshore) = $1.3 (onshore).

Mechanisms are required to implement this and redress the unevenness in the playing field.  These mechanisms should not be difficult to develop as they are in essence accounting issues, and involve the "top up" of the Defence Budget if/as required so that Government Budget dollars = Defence Budget dollars.

Such a mechanism would require companies responding to Defence tenders to report the amount to be spent in Australia, and would have the effect of supporting and developing the local industry at no extra cost to the Government bottom line.