Defence SA, $17,158,000

Membership:

Mr van Holst Pellekaan substituted for Mr Wingard.

Minister:

Hon. M.L.J. Hamilton-Smith, Minister for Investment and Trade, Minister for Small Business, Minister for Defence Industries, Minister for Veterans' Affairs.

Departmental Advisers:

Mr A. Keough, Chief Executive, Defence SA.

Mr R. Barnett, General Manager, Corporate Services, Defence SA.

Ms J. Barbaro, Executive Director, Government Relations, Marketing and Communications, Defence SA.

Mr K. Naughton, Chief of Staff.

The CHAIR: Welcome back, minister. For the next hour you are appearing in your capacity as Minister for Defence Industries. I declare the proposed payments open for examination and refer members to Agency Statement Volume 4. I call on the minister to make a statement, if he wishes, and to introduce his advisers, please.

The Hon. M.L.J. HAMILTON-SMITH: Thank you, Mr Chair. Can I acknowledge the presence of the CEO of Defence SA who is with me up here, Mr Andy Keough, and also Mr Rob Barnett, the General Manager of Corporate Services at Defence SA, and behind me Julie Barbaro, who is the Executive Director, Government Relations, Marketing Communications at Defence SA, and my Chief of Staff, Kevin Naughton.

As everyone knows, Defence SA is an independent agency reporting directly to the minister, and I would just like to make some brief opening remarks, if I may. There have been a number of fantastic and positive outcomes in defence industries in the past 12 months since the committee last met, and they are to be welcomed. The announcement of the build of at least two offshore patrol vessels as a risk-mitigation exercise for the future frigate program, and to lessen the impact of skills lost from the AWD program, and is welcomed. I would dearly like it to be more than two offshore patrol vessels, but we can talk about that during questions.

The announcement, of course, that the build of the nine frigates will be in South Australia and the down-select three—the Italian, the Spanish and the British options are welcomed—and the 12 submarines, of course, are to be on a DCNS design, which is the absolute topping. The programs are in that order: OPVs, frigates and submarines, so it is important to get the sequencing right, because we have a problem at the moment and there will be further job losses at the ASC between now and when these programs begin, so we are not through the worst of it yet.

These projects would not have been awarded to the state without the efforts of the state government in lobbying the federal government and working with others who were friends of this program to bring it to a decision. That included federal senators from all parties and persuasions, the Defence Teaming Centre, the unions and industry generally. It is a credit to South Australia that we argued the case and won, but also, to give credit to the coalition, when they realised that the people of Australia and South Australia were so determined to see this done in Australia, they finally realised that the build in Japan option was not is be viable and made the right decisions.

It is now imperative that we capture as much of that work in Australia, and that now is the focus. We are only at the beginning of this journey. The work on the offshore patrol vessel should commence promptly, and capture and retain the outstanding skills and experience of South Australian shipbuilding workers and maintain our industry base. This will require some swift decision making in Canberra, because it will avoid costly blowouts of the future frigate program if we get on with it.

On 23 May this year member for Sturt, minister Pyne, announced that more than 90 per cent of the construction on Australia's 12 submarines would be performed in Australia, and that DCNS had confirmed this. It is important that the federal government now honours that commitment: more than 90 per cent of the work, the dollar spend on the submarine, to be built in Australia. That has been the promise, and that is the promise on which I think the people of South Australia and Australia will hold the government to account.

I think it is also important now that we all work together. There has been a vigorous campaign to bring the federal government to this decision; that is now over. There can be no sour pills or grumbles over that; we are where we are—all on the same page. It is now crucial that federal government, state government, industry and unions all work together to deliver the best possible outcome.

The media will quickly savage this project if there is any sign of disharmony, disunity or a lack of, if I can call it, a 'team Australia' approach in the way we get about this, and certainly 'team France' will quickly realise that we are not working together if that is the case. Certainly the South Australian government, the Premier and I, have indicated very plainly and clearly to the federal government and all federal ministers that we will work with them cooperatively, and with whoever we need to work with, to get this job done.

For that reason, I think it would be crucial that the defence minister, Marise Payne, and the junior minister, Mr Pyne, the three defence ministers, in fact, form a ministerial council. Every other federal minister does this. The federal health minister has a council of state ministers. The federal transport minister has a council of state ministers. Just about every federal minister does it. Minister Robb, when he was trade minister, had a three or four times a year gathering of all the state ministers. That does not happen in defence. This project will not work unless it does.

The federal minister needs to get all the states around the table and will need all the states to make this work. The federal government will struggle to make this program work without cooperation from South Australia, Western Australia and New South Wales in particular, because that is where the fleet is based, and also Victoria and Queensland, where a lot of our defence industry is located. It is really up to them to show the lead. Having made those opening remarks, I am ready for questions and invite them from the committee.

The CHAIR: Thank you, minister. Member for Stuart, do you have an opening statement at all?

Mr VAN HOLST PELLEKAAN: I will say a few very brief comments before going into questions. I agree with much of what the minister has just said. I do note that his list of credits with regard to the people and organisations who put work and effort in to get us where we are with regard to federal government contracts to be fulfilled in South Australia did not include the state opposition. That is an unfortunate omission, and I do not think it is unreasonable at all to put on the record that the South Australian state opposition worked exceptionally hard with many parties, and most importantly with the federal government. I think it is unfortunate that we were omitted in that because, as the minister said, we all need to work incredibly hard on this together moving forward to get the very most out of these contracts for South Australia. That is exactly what the opposition has been doing every single day up until now, and we will certainly continue to do that.

Defence industries in general is an exceptionally important sector of our state's economy. At the edges, it does merge with broader manufacturing, it can merge with mineral resources and the oil and gas sector, but the tens of thousands of South Australians who are employed within the broader defence industries sector are extremely highly valued by the opposition and incredibly important to our state, and the opposition will certainly work collaboratively with all parties to ensure that that sector of our economy grows the best it possibly can. I refer to Budget Paper 5, page 28. The first thing I would like to ask is about Techport. When did Defence SA commence work towards a master plan for Techport, and what work has been done already?

The Hon. M.L.J. HAMILTON-SMITH: I thank the member for his question. Firstly, the government has spent in the order of $300 million down at Techport, in accordance with a master plan that has been in place for some time. There has been a master plan over many years to develop the precinct. In December 2015, the ASC Air Warfare Destroyer Board approved funding for an extension to the existing South Australian government-owned CUF wharf to the value of $5 million. The commonwealth requested that Defence SA undertake the proposed construction works and advised that they will fully fund the improvements to the strategic asset. Works commenced in July and will be completed in November 2016, prior to the launch of AWD ship 2.

About Techport CUF construction, the common user facility construction commenced in 2007, with the majority of works completed and the site becoming operational in February 2010. A small amount of minor residual works have continued to be undertaken to ensure the facility meets the requirements of the AWD program. The last of these works was completed in 2015-16. The CUF was completed on time and under budget, with a total capital of $254.529 million, and represents a project saving of $2.223 million, with the budget reduced and $2.2 million returned to the Treasurer in 2011 and a further final savings on completion of $23,000.

The CUF is a world-class shipbuilding and repair facility with the largest capacity shiplift in the southern hemisphere. There has also been dredging, essential maintenance and dredging of the CUF shiplift pocket to maintain operations to meet the state's contractual obligations. Funding of $1.1 million was initially allocated in the 2014-15 budget and further dredging operations are planned to commence in the first quarter of 2017.

Techport Australia CUF wharf expansion—a total approved capital expenditure of $5 million, fully funded via a $5 million revenue contribution by the commonwealth. Techport Australia CUF construction—the total approved project budget, $256.7 million, the final capital cost is $254 million, the total savings are $2.23 million. The dredging I have mentioned. The CUF was delivered on time and on budget in February 2010, as I have mentioned. There is a 213-metre long wharf with a 9,300 tonne capacity shiplift, a runway, dry berth, ship transfer and ancillary systems.

That delivers to the current requirement to produce the air warfare destroyer. What is needed now is clarity from the commonwealth on exactly what the requirements will be at the CUF going forward for support to submarines and frigates. The master plan that exists will be amended once there is clarity about what is going to happen, when it is going to happen and how it will be done. Some important questions need to be answered before we can work out what to do next in terms of extending the CUF.

For example, although we own, as a state government on behalf of taxpayers, substantial parts of the CUF—the shiplift, the runway through to the shiplift, the land behind to the west where the submarine builder will need to build their facility—the commonwealth does also own parts of the land, as does the private sector. So we need to know what the government's plans are for ownership of the precinct. Does it intend to sell any of its land? Does it intend to sell any of the ASC? If so, to whom and under what structures and on what basis, because that will determine who pays for any improvements to the shipyard. That is one question that needs to be answered.

The next question that needs to be answered is what is happening with the program for OPV? When, what and how many ships will be built in Australia? Linked to that, of course, is what is happening with the frigate build. And then, what will happen with submarines? For example, who will build the submarines and who will build the frigates? Will it be the designer? Are they considering the option of DCNS being the shipbuilder or will they ask the ASC to build the ship to the French design? Will they offer up the ASC? Will another player, such as an Austal, come in? All these questions need to be answered before we work out who pays for, and who funds further improvements to the site.

Defence SA, on behalf of the government, has done a body of work on what will be required, and we have come up with a figure that we think someone will need to spend in order to make it ready for offshore patrol vessels, frigates and summaries. It depends to a large extent now on the contract that is signed for subs, the contracts for OPV and the contract for frigates. So it really is up to the commonwealth now to negotiate and discuss with the designers, and with us, what their plans are for the site.

No-one in the country is better equipped, better organised or better able to provide advice to the commonwealth on the future infrastructure needs at Techport than the state government. It is a further reason why minister Payne and minister Pyne need to be in close communication with the state government about plans going forward, so that we can together work out how we can best reinvest in this site to ensure that it is job ready for OPVs, frigates and submarines and who pays for what. To what extent does the commonwealth, the state government and the private sector pay for the improvements that will inevitably be needed?

Mr VAN HOLST PELLEKAAN: You said that you have come up with a figure that will be needed in total, separate of who actually pays for it, to be ready for OPVs. What is that figure?

The Hon. M.L.J. HAMILTON-SMITH: We will be ready to discuss that with you once the commonwealth has made its decisions because, frankly, it needs further input. For example, who is going to build the OPVs? What infrastructure do they need to build and what will be their wharfage requirements?

If we are only to produce two or three of these things and the other nine are to be built in Perth, which was the position before the election, that may limit considerably the amount of infrastructure that needs to be built at Techport and the opportunities for South Australian industry as a flow. They might build their main facility in Perth, flat pack these ships, ship over the bits and we might just be bolting it together. Therefore, we will not need to build as much infrastructure as we would need to build if all the ships were built here and, if you like, assembled in Perth.

Then there is the question of the frigates. Which frigate designer will be chosen, what do they want built in order to sustain the delivery of the frigates into the water as launched, and how much area will be needed? Finally, the submarines: what footprint does DCNS want to build upon, how much of the work will be coming to Australia? If it is going to be 90 per cent, then quite a bit more land than will be required than if it is 19 per cent, for example.

Until we get an answer to all of those questions, we cannot give you an accurate figure and anything we put out I think would be a bit of conjecture, except to say that we have done some sums, we think we know what might be needed if all the work comes our way, but there are so many variables to it and, until we get clarity from the commonwealth, we will not be able to give you an exact and reliable figure.

Mr VAN HOLST PELLEKAAN: Given that the OPVs are due to start in 2018, is it fair to say then that there is money that the state government will have to pay that is not currently in the forward estimates?

The Hon. M.L.J. HAMILTON-SMITH: The commonwealth needs to have a conversation with us and the other states about its plans for OPV because we simply do not know what the requirements will be for OPV. For example, as I have mentioned, if the OPV infrastructure is going to be built in Perth, and we are going to see the freighting over here by ship or by rail of parts, and it is going to be assembled here, then the infrastructure needs may not be very much at all.

If, however, it goes the other way and we build the plant and most of the infrastructure here, they will be. The question is best put to minister Pyne and minister Payne: what do they anticipate the infrastructure needs will be for their OPV project? They have not yet announced any time lines and, as soon as they do, I will be able to answer your questions because we will be able to consider their plans. Until they do, we are only guessing.

Mr VAN HOLST PELLEKAAN: But right now, whatever that amount is, none of it is in the budget. There is nothing in the budget as it currently stands that goes toward that work that you are talking about.

The Hon. M.L.J. HAMILTON-SMITH: That is correct. We do not budget for thin air, and we do not budget for hypotheticals: what we do is we build surpluses.

Mr DULUK: There is no surplus in this year's budget.

The Hon. M.L.J. HAMILTON-SMITH: There is a surplus in the budget. If you read the budget paper carefully that is spelt out in black and white, and there are future surpluses. As well as that, there is a question about whether the state government needs to build that at all. This is not our project. This is the federal government's project and they are the customer. The point I would make to the shadow minister is: what has the federal government provisioned in their budget to build the infrastructure, because if they want it built, it may well end up that they are the ones who finish up paying for it to be built.

Mr VAN HOLST PELLEKAAN: Minister, the $1 million for the master plan progress is in the 2016-17 year. Does that mean that the update to the master plan will be complete in the 2016-17 year?

The Hon. M.L.J. HAMILTON-SMITH: I am advised that that $1 million will be spent by Defence SA to diligently and professionally develop what we think will be needed so that when the commonwealth comes to us and asks what we think should be done, we are able to provide an intelligent and informed response, and that is why we have done it. There are a number of options there and I will wait until the commonwealth explains its intentions, but we as a state government could decide that we want to be a partner with the commonwealth in this and help to build and fund some infrastructure on the basis that that would be paid back at a later time by the programs; or we might decide that the best thing to do is to ask the commonwealth to fully fund that infrastructure development based on the information we prepare; or it may be that the private sector builds a substantial part of that infrastructure themselves, and that depends on the ownership structure of ASC and who does what in regard to the building; or it could be a combination of all three.

We stand ready to consider playing a role in that process. We value our ownership role at Techport, and I just make the point that had this state government not spent the $300 million it spent down there, we would not even be here discussing this. I have no doubt that we would not have the Air Warfare Destroyer project, it would have gone somewhere else, and we would now be talking about what supporting role we could play as ships and submarines are built in another state. It is only because the government had the foresight to build this. I know that was something at the time that the opposition recognised and accepted and supported wisely.

Mr VAN HOLST PELLEKAAN: The $1 million for the upgrade to the master plan will be spent by 30 June next year. OPVs are meant to commence in construction in 2018. It is a fairly tight time line. Is it your intention to bring any expenditure, if it is over the $5 million mark, I think it is, to budget and so to Public Works Committee with regard to upgrades to Techport or the common user facility?

The Hon. M.L.J. HAMILTON-SMITH: I will answer the question about Public Works and then I will hand over to Mr Keough. If the state government is spending a significant amount of money down there it would be my intention to ensure that that comes before Public Works. The member for Finniss is still on the Public Works Committee. He and I were on that committee for a long time. It is a very hardworking committee. It does a good job and the more openness, the better. I think the government brought every previous investment it made down at Techport to Public Works in the normal way and I would certainly be aiming to ensure that happens. So, be assured that if we are spending the money, it will come for full scrutiny. In regard to the other detail I might hand over to Mr Keough to respond.

Mr KEOUGH: Probably just to address one of the issues about the master planning, we are looking at the asset we have up there continually and thinking through ways that we can better optimise the asset to meet defence's needs and also to meet our potential commercial opportunities up there as well. So, it is an ongoing process and has been going on since we opened the site. In terms of infrastructure studies, you may be aware that the Department of Defence is conducting an infrastructure study into the infrastructure up there at the moment, and that is due to complete later this year, we expect around September.

Their aspiration is to assess the site to put in place world-class shipbuilding facilities in preparation for future frigate, particularly in the shipbuilding side. It is a very good aspiration they have and, as the minister said, we really need to wait until they have concluded those studies to work out what part we need to play. The master planning funding we have allows us to progress issues that we know we are going to have to potentially do. It might be, for example, access to the whole Techport area. All those broader planning considerations we need to think about, and I think we can get on and start doing that in expectation for the preparation of the government's view on what they think is going to go in there.

You do rightly point to the time—2018 is not far away. In shipbuilding terms that is just around the corner and at the moment our conversations with a number of stakeholders indicate that the most likely course of action is to use the facilities they have there, that ASC has there or at ASC South. That may need some upgrades to meet the full scope of work that is to be done with the OPVs, but that is our expectation. If that was the case, that infrastructure is actually on ASC's site: that site is owned and operated by ASC, and ultimately the Department of Finance is the owner of ASC.

We would not expect any requirements for expenditure to put infrastructure onto their site. However, we do run the common user facility up there, which is where the AWD is being assembled, and we are always in discussion with the Department of Defence to work out whether there is any requirement for us to look at investment on that site.

Mr VAN HOLST PELLEKAAN: Minister, turning to Budget Paper 5, Budget Measures Statement, Page 70, France engagement strategy: how many of defence SA's FTEs will be assigned or involved or working on that program?

The Hon. M.L.J. HAMILTON-SMITH: If I may, before I answer that question, I just want to emphasise some points from the earlier question. For any media who may be listening—I notice there is one up there—there are three main points the state government will be pushing from here on. First, as Mr Keough alluded to, we need to see a naval shipbuilding plan that brings together the programming of the OPV, the frigate and the submarines and says what is going to be done, when it is going to be done and where it is going to be done. That is critical. We do not have that yet.

Second, as I mentioned in my opening remarks, on 23 May, minister Pyne made a promise that 90 per cent or more of the submarine work would be in Australia. That is a promise and it is a promise that needs to be kept. Third, there is the absolute need now for either minister Payne or minister Pyne—the state government is not sure who is the senior minister; historically, the defence minister has been the senior minister and the other two ministers have been junior ministers or it may be that the Coalition has now decided they will both be equal, I am not sure—to form a ministerial council, as every other federal minister does, that brings together all the states so we can work on this together. They are the three critical points that I just want to make.

Mr VAN HOLST PELLEKAAN: Chair, the minister had already made all three of those points.

The CHAIR: Sorry?

Mr VAN HOLST PELLEKAAN: You had already made all three of those points, minister.

The Hon. M.L.J. HAMILTON-SMITH: I just wanted to re-emphasise them because it is very relevant to the question, and I want to make sure everyone understands that we are only at the beginning of a process. People may think that this is over, that we are going to build 12 submarines and it is all over. We are now in a discussion about whether we get to build 90 per cent or 9 per cent of this in Australia or South Australia—or 90 per cent or 19 per cent.

It could well be that we get a hybrid by stealth because contracts are signed that provide for a significant amount of this to be done in France or somewhere else and for it only to be bolted together here. They are the discussions that have to be had in the context of the contract. Everything depends on the contract for the submarines but also, as the shadow minister points out, we have to get on with the OPV because we do not know what to build, where to build and how to do it until we have decisions. I just make that point.

In relation to your question about the France engagement strategy, on the budget paper to which you refer, there is an entry for $1 million for the France engagement strategy. That is a budget line for Premier and Cabinet (DPC), but it is a budget line that will be accessed by Defence SA and others as part of making the France engagement strategy work. It is not only about defence. Defence and the submarine program is the platform of it all, but the Premier is very keen to ensure that we look at expanding our whole relationship with France, which will include other trading opportunities.

For that reason, we are going back in October to Euronaval, the biggest naval expo in Europe and, in that same week, SIAL, the big food expo, will be underway in Paris, so it will be a full trade mission with food and wine, other exports and defence all in one. You asked then: how many people specifically from Defence SA would be funded from within that budget line? At the moment Defence SA will be bidding against that funding for various initiatives, but we will not be using that funding to employ any additional people.

For the moment, we have access to the Office of the Agent-General (OAG) in London, including the Agent-General himself, Bill Muirhead; Mr John Rees, a fluent French speaker with extensive experience in this area; and James Mraz and others at the OAG. They are already attending in France, as they did with me a few weeks ago, and they are working on these issues for us. We are not planning to fund any new FTE from specifically within that budget line but, in the future, we will look at whether or not Defence SA needs to have a person in either France or London, and we are giving that active consideration. I will just ask Mr Keough to elaborate.

Mr KEOUGH: As you may be aware, the Premier has formed a French strategy group to coordinate the state's engagement in France and broader engagement in France, as the minister has said. I co-chair that along with the Chief Executive of DPC, Kym Winter-Dewhirst. There are a number of tasks which are being coordinated through that body, and my staff will engage with those tasks on an as required basis. Principally, at the moment, in terms of the strategy in FTEs, it is really me and some of my time. Again, I reach into my staff, now and again, for them to be involved. A good example is Euronaval, which is being coordinated through that mechanism. We will have up to four or five people working on that at various times to support that.

Mr VAN HOLST PELLEKAAN: Thanks, Mr Keough. There is also another $420,000 in the Defence SA budget for Euronaval, so I do not want that money to be mixed up. Minister, you mentioned it is $1 million towards this France engagement strategy. It is actually $4 million. It is $1  million per year for four years, so it is a $4 million commitment from the federal government. It just seems curious to me that it is outside of Defence SA since it is so tightly linked to the DCNS contract.

The Hon. M.L.J. HAMILTON-SMITH: You mentioned the federal government; it is actually provided by the state government. The reasons for that are thus: first of all, the $420,000 to which you refer in that particular budget line is completely under the control of Defence SA, and it is about this year's Euronaval. I have been over there and met with the organisers. This is a big thing. Defence SA will be the biggest presence from Australia at Euronaval. Our stand is bigger than the Australian stand. In fact, the Australian stand I think is organised by the industry department, not by the defence department.

There are a couple of other Australian entities present. I think Austal is present, and I think CAE from Canberra is present in very small stands. South Australia will be the Australian presence at Euronaval. It is the biggest thing that happens in Europe. It is a big undertaking. We will be taking a supply-chain group with us. I think there are 20 tables, if you like, that we will have set up, and they will all be occupied by Australian industry. We are going to make sure South Australian companies have their best opportunity to participate in this program, and that is why that funding is there.

The $1 million you referred to in DPC is more strategic. In addition to the group that Mr Keough mentioned that he co-chairs with Kym Winter-Dewhirst, the Premier has commissioned another group under Susan Close, Minister for Education, with a lot of prominent, South Australian, French-connected individuals to look at the broader opportunities of our engagement. That is likely to include sister region relationships with those regions in France that make or maintain the ships at Normandy or Brittany, and we have had some discussions about that.

It will include engagement in food and wine, medical devices, manufacturing more broadly and an entire engagement strategy. The French and the South Australians want to approach this as an opportunity to really deepen our engagement. There will be some arts and cultural aspects to it. We are going to be joined at the hip now with France for 50 years, and we want to make sure that we understand each other, we do business with each other and we grow the opportunity out beyond defence, though I make it clear that defence is the main game. So, that $1 million is there to support the broader strategy and to deal with the unintended, as the opportunity develops.

Mr VAN HOLST PELLEKAAN: Turning to page 82 of the same book, towards the middle of that page there is a heading that reads Defence Industry Attraction. The expenditure of the $4 million we have just been discussing, as you just said, is associated with defence as the main game, but that $4 million is in the Department of the Premier and Cabinet. I now turn to $6 million for a defence industry attraction program which is in the Department of State Development. Minister, what is Defence SA going to do with the Department of State Development to pursue defence industry attraction which, I think, any normal person would think is core Defence SA business and core Defence SA Work?

The Hon. M.L.J. HAMILTON-SMITH: I thank the member for the question. These are very good questions. First of all, we have the Investment Attraction agency and we have Defence SA. Both are involved in attracting investment. The government considered, 18 months ago, whether it should roll Defence SA and the Investment Attraction agency together. I think Mr Keough will be delighted and relieved to know that we decided not to do that, and that was because the defence opportunity is so huge it warrants its own agency, its own leadership and its own funding. Therefore, the money that is being provisioned into the Investment Attraction agency is available, including for defence proposals if needed.

It was decided that we would bid for additional funding of $2 million per year—$6 million over three years—that was ring marked purely for defence investment attraction purposes. Part of the reason for that is that we expect that there will now be an opportunity for us to entice, invite or encourage a raft of defence primes and other companies to relocate here from other states and overseas. An example of that was my announcement just a couple of weeks ago in London that Babcock would be moving its Australasian headquarters to South Australia. That includes their Mission Critical Services function and their helicopter maintenance function from Queensland. We are in discussion, I think it is reasonable to say, with a number of other parties. Mr Keough leaves no stone unturned as he searches for people who want to relocate here from interstate or overseas. That money will be available to pitch to help with that and to facilitate that relocation; that is why it is there.

We wanted it ring marked purely for defence, but that does not mean that, if Defence SA comes up with a really good proposal, we cannot also go in for the funding that exists within the Investment Attraction agency. As the Treasurer said to me, 'If it is big enough, we will consider it out of headroom as a separate proposition.' This is a huge opportunity, and if big opportunities come our way we will grasp them. I will ask Mr Keough to just top up that answer.

Mr KEOUGH: It is positioned under the Investment Attraction agency. I should give you some confidence that I worked very closely with the CE of the Investment Attraction agency, Mike Hnyda. In fact, in most meetings I have with the key leaders from defence companies I have Mike there because he has great experience across not just the defence realm but all of the industry attraction activities that are going on. He can provide a broader perspective to the package that we are putting up to these companies. Quite often these companies are after a diverse range of support mechanisms, some financial, sometimes non-financial, and Mike is the expert when it comes to attracting business into the state.

Mr VAN HOLST PELLEKAAN: I now turn to page 28 of that same book and ask about another program, where $2 million of what would seem to be core Defence SA business is being given to the Defence Teaming Centre. As the minister knows, I, like him, am a strong advocate of the Defence Teaming Centre. The reason I am asking these questions is that we have a $4 million defence industry attraction agency under the Department of the Premier and Cabinet, a $6 million defence industry development program under the Department of State Development, and another $2 million going to the Defence Teaming Centre. The work that needs to be done is clearly very important, and I want to establish that fact without any doubt, but why is so much of what would normally be considered Defence SA's work being farmed out to other agencies and other organisations?

The Hon. M.L.J. HAMILTON-SMITH: The simple answer is that it is possible for the private sector to do it better. We take that opportunity. One has to look at the Defence Teaming Centre as one looks at Business SA. It is an important industry body, constituted by defence primes and SMEs across the defence sector. I think they have well in excess of a couple of hundred members. They are probably the lead defence industry association in the country. Bringing industry with us on this journey is a very important role. In fact, rather than have a sense of competition between the government and industry, we want to be a partner with industry. For that reason, an important KPI that I put on myself as minister and my agency, is how well we are getting along with both industry and the union movement—and others in this space—because we all have to be working together.

That is partly why we fund the Defence Teaming Centre to a degree. By the way, there is some baseline funding there for them so that they are able to engage and operate effectively as an industry, but we did also give them some project-specific funding for a vehicle program designed to ensure that we are able to export into countries in the region a range of light defence-related vehicles, and that is another purpose for the funding. It was at the request of Defence SA, so it was an industry stimulus measure.

This is the industry body and they are important to us. They work together with Defence SA, they are partners and, because they are industry, they are really crucial to making what we hope to achieve work. For instance, we recently had a big success with a company called Supashock starting the process of effectively selling its shock absorbers and technology to the Indonesian manufacturer Pindad which is the major armoured vehicle manufacturer in Indonesia with whom we have developed a relationship. We are looking to exports as well as the Australian customer for the future.

Mr VAN HOLST PELLEKAAN: Given that we all agree what an incredibly important time this is for South Australia—and has been for the last couple of years and will be, hopefully, for decades to come in defence industries—why is it that the Defence SA budget is staying stagnant? Certainly for the last two years and for this current financial year that we have just started, the total is staying very steady at $17 million per year, but all the additional money, including the $12 million that I have just outlined to three different other organisations, is going to areas other than Defence SA. Why is it that the government is not increasing the resources to Defence SA at all at this very important time but the extra resources that it is providing it is giving to other organisations than Defence SA?

The Hon. M.L.J. HAMILTON-SMITH: Let me just explain: if you look at page 186 of the budget, particularly the table under Program 1: Defence Industry Development, you will see that there has been a significant increase in the net cost of providing services.

Mr VAN HOLST PELLEKAAN: But that is offset by Program 2; the total has not changed.

The Hon. M.L.J. HAMILTON-SMITH: One has to understand how the programs work. Let's talk about defence industries—

Mr VAN HOLST PELLEKAAN: Net cost of services, minister, 'Program net cost of services summary' at $17 million nonstop.

The Hon. M.L.J. HAMILTON-SMITH: An intelligent way to look at the budget paper is to diagnose it and assess it and to ask what is actually being done with each part of it. I will come to the second part of it later. The estimated result in 2015-16 was $9.3 million, up from $8.2 million. So in terms of developing industry an extra million dollars was spent, and there is nearly $1.5 million extra being spent—that is an $1.8 million increase in the net cost due to additional expenditure in 2015-16 and it mentions all the things we are working on: Land 400, one of our critical opportunities, a multibillion dollar opportunity; Civilian Aerospace has been moved into Defence SA; Euronaval which I have mentioned; and industry attraction initiatives. So we are spending more money on defence industry development.

When you look at Techport Australia you can see that, again, expenses have been steadily increasing. Techport itself runs almost as a separate entity in that it has its defined role.

Mr VAN HOLST PELLEKAAN: The net financial contribution from the government is not increasing.

The Hon. M.L.J. HAMILTON-SMITH: Yes, and as has just been explained to me part of that reason is that we have $5 million from the commonwealth. That helps to explain why, having had the $5 million from the commonwealth, we have been able to increase our spending on defence industry development and increase our spending on Techport whilst showing no net increase—because the commonwealth put in $5 million. I just make the point that on page 186 it indicates how we are spending the extra $1.8 million, and a lot of new things are being done, but that $5 million from the commonwealth has—I will hand over to Mr Keough to go further.

Mr KEOUGH: When you look at the bottom line to the budget, there has not been a huge change or difference in it—

Mr VAN HOLST PELLEKAAN: Thank you, Mr Keough.

Mr KEOUGH: —but there has been a significant amount of funding allocated for defence-related projects. I thank you for your concern for my budget. However, I really see that my role as being the co-chair of the French strategy group, which ultimately reports to the Premier and Cabinet, allows me fairly good access to those other funds. So, even though they are not directly allocated into my budget portfolio, I still have the ability to reach in and work with those people who control the budget lines to access those funds.

As I said, the Investment Attraction agency is probably the best example where we are working closely with them. It is also not black and white at times because, as the minister said, you have companies that have defence work and civilian work. Babcock, with its Australian helicopters, is a good example. Yes, Babcock does defence work and civilian work, so in that case the Investment Attraction agency was the primary lead for that work. It did a lot of the work and we provide the support, certainly in the defence area, to allow that to be a successful activity.

So, we work closely together with IA and also with the Department of State Development, particularly in some of the funding it has passed through to DTC. We regularly meet with DTC on a fortnightly basis and talk through issues. We are small enough in South Australia, which is the advantage we have, to be able collaborate closely to ensure that we are optimising outcomes based on the state government expenditure.

Mr VAN HOLST PELLEKAAN: Thanks Mr Keough.

The Hon. M.L.J. HAMILTON-SMITH: Just before we—

Mr VAN HOLST PELLEKAAN: Thanks Mr Keough, I appreciate that.

The Hon. M.L.J. HAMILTON-SMITH: Let me just—we have not answered the question yet.

The CHAIR: The minister is entitled to consult his advisers and take as much time as he needs.

The Hon. M.L.J. HAMILTON-SMITH: You have asked a question, you have put an assertion. The argument you are trying to put in your question is that we are not spending enough on defence.

Mr VAN HOLST PELLEKAAN: I am trying to find out why the Treasurer is giving the money to organisations other than Defence SA to do your Defence SA work.

The CHAIR: What the Treasurer does is not the domain of this committee.

The Hon. M.L.J. HAMILTON-SMITH: And it is not true, anyway. I draw your attention to page 184 of the budget. Look at Program No.1, page 184, of the budget: it shows defence industry development going up from $9.3 million to $11.085 million, so we have spent over $1.5 million more on defence industry development. The reason you are arguing that overall spending has not gone up is that spending at Techport has gone from $7.768 million to $6.121 million from the estimated result to 2016-17. If you look at the budgeted, 2015-16, it is $9.1 million to $6.1 million. The explanation you have been given is that there was a contribution from the commonwealth that brought down that figure. So, your proposition that the Treasurer is giving money to others and not giving money to defence is completely and absolutely wrong.

More money has been put into this area. It has been offset by an injection of capital from the commonwealth for capital in Techport. So, one needs to read the budget figures program by program and, as Mr Keough pointed out, there is $1 million for the French strategy per year over four years, another $4 million, which can be accessed, so we are spending more on defence than we have for some time, particularly on defence industry development. But, there are capital switches in Techport to do with federal government funding.

Mr VAN HOLST PELLEKAAN: Minister, it is not wrong, because there is $12 million going to other agencies. So it is not wrong at all to say that there is money being given to other agencies to do what would be core Defence SA work. Have any concerns been raised within Defence SA about this process?

The Hon. M.L.J. HAMILTON-SMITH: Hang on. If you want to make propositions that are wrong and highly—

Mr VAN HOLST PELLEKAAN: You agreed before, because I asked you about each one of them.

The CHAIR: Order! It was an unnecessary comment, member for Stuart, and I ask you to move on to your next question. Ultimately, this minister is not responsible for all the spending of the Treasurer and that is not what we are here for, so let's move on. Member for Stuart, do you have another question?

Mr VAN HOLST PELLEKAAN: The next question is: have any concerns about this been raised by senior Defence SA staff? Have people within Defence SA, or in fact within your office, minister, said that it would have been better for that $12 million or a good chunk of it to be allocated to Defence SA rather than to the other three agencies?

The Hon. M.L.J. HAMILTON-SMITH: Your $12 million, I assume, is constructed from the $1 million to the French engagement strategy—

Mr VAN HOLST PELLEKAAN: Four million.

The Hon. M.L.J. HAMILTON-SMITH: And where are you finding the other $8 million?

Mr VAN HOLST PELLEKAAN: Six million to the Department of State Development under the defence industries attraction program and $2 million to the Defence Teaming Centre. That is $12 million.

The Hon. M.L.J. HAMILTON-SMITH: Your proposition is that they are funds that should be given to Defence SA?

Mr VAN HOLST PELLEKAAN: I am asking whether that is the case. My question was whether any senior staff within Defence SA or within your office have asked the same questions or made the same suggestions.

The Hon. M.L.J. HAMILTON-SMITH: The answer is no. The fact is that the $2 million that is earmarked for Defence but which is in the investment attraction agency's bucket is hypothecated for Defence. Defence SA, through me, will have a key say in how that is spent, in fact will control that and will probably get more. It is an indication that the investment agency and Defence SA are working closely together.

I have explained that the $1 million that is at DPC is not solely for defence-related initiatives in France. It is for a broader engagement strategy. If it was all in Defence SA, would it be available for other initiatives in the trade and investment area that were not defence related? That is a question mark. That is why it has been put in DPC. The money that has gone to the Defence Teaming Centre, as I have explained, is a collaboration between the government and the Defence Teaming Centre to ensure that we are all working together. It is not about who controls what. It is about how the funds are best expensed in the interests of achieving our objectives.

The other thing that the member will find out one day is that there is a need for quite a lot of cooperation between agencies and between DPC and agencies, and frankly, if the Premier decides to do things in a certain way that is the Premier's call. Certainly, he and I worked very closely together on the whole of France strategy and it is about more than just submarines. We are going to make this a much bigger thing than purely defence. The very proposition upon which the question was asked, which is that this $12 million is all defence money that should be put in the Defence SA bucket and is anyone upset about it, is not quite logical and does not flow.

Mr VAN HOLST PELLEKAAN: You have made it very clear that not one of your staff or the Defence SA staff raised any of these concerns with you. Moving on to page 187—

The Hon. M.L.J. HAMILTON-SMITH: What? Hang on, let's go back again.

Mr VAN HOLST PELLEKAAN: You said that—that was my question.

The CHAIR: This is your time, member for Stuart. If you are going to continue to throw these things around, you have to expect a response.

Mr VAN HOLST PELLEKAAN: That was my question; that was your answer.

Mr PENGILLY: He has answered.

The CHAIR: Assuming you are right and he has answered, then why the need for the extraneous comment? I am going to let the minister respond to the extraneous comment.

The Hon. M.L.J. HAMILTON-SMITH: We have an hour to really get to some intelligent and decent questions about how defence funding is being spent, and we are going on with what appears to me to be drivel, where you paraphrase my answers at the end and place them in a context that you like to place them in. I am more than happy with the way things are structured at the moment in terms of spending in this area. We have a significant amount of additional money deployed, and until we get decisions from the members opposite's colleagues in Canberra about where to next, we will not be in a position to make further investments. The sooner we can, the better.

Mr VAN HOLST PELLEKAAN: I turn now to page 187 and Land 400. Given that the government provided bidders for the Land 400 phase 2 contract an offer of assistance contingent upon committing to establishing their production facility in the proposed land combat system precinct at Edinburgh Parks, what response has the government received, particularly from the two shortlisted bidders?

The Hon. M.L.J. HAMILTON-SMITH: Let me say from the outset with Land 400 that this is a big opportunity for the country and for the state. Diminished at the outset by the way the coalition government set it up, they required no local industry content. They disaggregated the program from the whole of the vehicle fleet into parcels. I have been to two of the tank manufacturers and they told me that, when the federal government turned up, they asked them, 'Did you require any local industry content?' and the reply from the coalition government was no. So they just said to their industry participation people, 'You can leave now.'

I am delighted to hear utterances suggesting that that attitude has changed and that there may be, under the new ministers, a view that there should be a higher level of industry content. I think that would be very welcome. We have put together a package for all of the bidders. We have done it fairly and openly. We have offered to build a combat vehicles park and assist them with the scoping up of what they might be needing. Two bidders have been down-selected—BAE and Rheinmetall. That is wonderful. We would like to work cooperatively with them and with the federal government to put South Australia's case. I hope this is decided based on what is best for the project and without any political interference.

I completely refute the argument that because we have the ships we should not get the combat vehicles. When you look at it, the vast majority of defence spending is in other states. If we take naval ships, one-third is spent building them and two-thirds is spent sustaining them. That is mainly in Perth and Sydney. It is the same with armoured vehicles. There would be an amount of money spent building them but twice that would be spent sustaining them all around the country, so they already get the benefit.

This is the way to assist with the transformation from the automotive closedown into new industries. This is the opportunity for our workers to move seamlessly from one to the other. I really hope that Rheinmetall and BAE are able to put a South Australian option forward, and we will be working closely with them. I am actually delighted to hear minister Pyne say that he will be reconsidering the local industry content. I think that would be a good thing. If he can achieve that, that will be a good outcome because the more the better.

Mr VAN HOLST PELLEKAAN: Given how important we both agree this project is, has any money been allocated by the government for the land combat systems precinct in the forward estimates?

The Hon. M.L.J. HAMILTON-SMITH: Through the Investment Attraction agency we have put an amount of money into this. We have also commissioned funding to draw up all the design work for the precinct. We know how much we need to spend but we are not going to spend it unless we get the work. If we get the work we will provision the funding. We are not going to provision the funding to then not get the work. I will give it to Mr Keough to add some detail.

Mr VAN HOLST PELLEKAAN: At the bottom of page 189 it says, 'reduced depreciation due to the deferral of capital works'. What was deferred and what was the value of that capital work that was deferred?

Mr KEOUGH: I was just going to finish up with the Land 400 one, just to close out that point. I have a figure that we have allocated towards doing the preparatory work up there. That includes, in the bidding stage, working with each of the bidders to effectively design what their facility would look like and how they would build the vehicles here in South Australia on that site. We have land earmarked for their use. We have worked closely over the last two years on this Land 400 proposal, and I am reticent to tell you how much money we have allocated towards it because, as you would appreciate now, we are getting into the decision time and into the swing.

Between now and the middle of next year they will be doing testing of the vehicles so each of the down-selected bidders have provided three vehicles for the Army to trial, and once they do that and go through that assessment phase, then they will be making a decision, we expect late next year, three-quarters of the way through next year. The next 12 months are quite critical for that program and, as the minister said, it is a great program to transition, or assist in transitioning our automotive workers out of their current roles and those companies out of those current industries into higher value-adding defence work.

Mr VAN HOLST PELLEKAAN: Thanks, Mr Keough. Out of respect for the next committee, would you take the last question I have already asked on notice?

The Hon. M.L.J. HAMILTON-SMITH: Is this about the point two—

Mr VAN HOLST PELLEKAAN: The depreciation.

The Hon. M.L.J. HAMILTON-SMITH: I can tell you it is just a balancing item from the CUF works.

Mr VAN HOLST PELLEKAAN: Sorry?

The Hon. M.L.J. HAMILTON-SMITH: The CUF, the common user facility. It was just a slight delay in some aspects of the work at Techport.

Mr VAN HOLST PELLEKAAN: What was the value of capital work that was not undertaken?

The Hon. M.L.J. HAMILTON-SMITH: No, the $200,000 was a delay in some of the infrastructure work.

Mr VAN HOLST PELLEKAAN: But it was $200,000 of depreciation that could not be accrued because capital was not spent and I am asking how much capital?

The Hon. M.L.J. HAMILTON-SMITH: The capital has been spent. The reduced depreciation is a result of a delay in that work. What was the value of the capital work? We will have to get back to you on that.

Mr VAN HOLST PELLEKAAN: On notice, great. Thank you, minister.

The CHAIR: I declare the examination of the proposed payments completed and we will now move onto Veterans SA.