The Chinese Communist Party’s first leader, Mao Zedong, once said that ‘political power grows out of the barrel of a gun’. Mao’s words echo a fundamental truth of China’s system of government—that the ruling party has its own military wing, the People’s Liberation Army. Soldiers in the PLA swear an oath to defend the CCP, not the Chinese nation, meaning that their primary task is to safeguard the interests of the party. The CCP’s ultimate goal is to ensure that its influence over the nation becomes so totalising that the interests of the two are indistinguishable. In this respect, the PLA ends up serving the dual role of safeguarding the CCP and defending the Chinese nation.

Just as the CCP has its own armed wing, it has its own commercial wings embedded in all of China’s powerful state-owned enterprises. These SOEs operate in a hybrid fashion, seeking out business ventures that generate profits while carrying out the interests of the Chinese state. China’s SOEs are legally required to have a party branch at the highest levels of the company hierarchy, and senior members of the board such as the managing director concurrently serve on the SOE’s party committee. This organisational structure makes sure that any business ventures undertaken by the SOE serve the interests of the company, the state and, most importantly, the CCP.

Xi Jinping has accelerated the party’s dominance over the state, military, nation and business. Chinese companies are expected to do the party’s work even if that means collaborating with its armed wing in the PLA or working with its political warfare agencies like the United Front Work Department. Under Xi Jinping’s leadership, the CCP is seeking to apply its internal disciplinary code to Chinese SOEs strictly and extra-territorially.

Our new ASPI report, Leaping across the ocean: The port operators behind China’s naval expansion, explores the links that two major Chinese maritime SOEs have with the CCP’s organs of political influence, its disciplinary apparatus and its militarised branch, the PLA.

COSCO and China Merchants, two companies that have taken a commanding position in overseas port operations and international maritime logistics, are subject to stringent control by the CCP and are increasingly willing to protect party interests overseas. A third of COSCO’s employees are members of the CCP, and a member of its party committee was a party disciplinarian in China’s Ministry of Public Security and the CCP’s United Front Work Department. China Merchants also has deep links with the CCP. One member of China Merchants’ party committee is a former deputy head of discipline inspection at the CCP General Office, and likely had a close working relationship with two current members of the Politburo Standing Committee.

Xi’s bid for total control over China’s SOEs has profound implications for countries that are open to foreign investment. Before Xi, the national security risks posed by the CCP’s integration into China’s SOEs could be ameliorated by requiring investigation, transparency and disclosure during a country’s foreign investment review process. These measures are no longer sufficient now that Xi has begun to strengthen his grip on the CCP and wield the coercive elements China’s national power.

Chinese companies are required by the country’s domestic law to assist with intelligence collection and national defence mobilisation. We should expect China’s SOEs to comply with any legitimate request by the CCP to assist with either mission in peace, war or the grey zone in between.

Indeed, there’s good evidence that such support is already being provided. For instance, COSCO operates its own militia, which is likely capable of conducting paramilitary activities such as maritime surveillance, counter-piracy missions and search-and-rescue operations. One of COSCO’s joint ventures has also been involved in taking Chinese tourists near illegally built PLA facilities in disputed areas of the South China Sea. The company’s involvement in the Greek port of Piraeus has also been supported by active-measures campaigns conducted by the United Front Work Department. COSCO appears to be developing the capability needed to comply with CCP requests to assist with intelligence operations, national defence mobilisation or grey-zone activities.

Australia and its like-minded partners, including the US and Japan, can no longer take a reactive approach to the expansion of China’s overseas port operations. Together, COSCO and China Merchants operate 36 ports around the world. If Chinese SOEs assume control of any more ports, Beijing will have secure access to some of the world’s most crucial shipping nodes and logistics hubs. In wartime, that could significantly undermine the freedom of action that Australia or its allies would need to defend their maritime interests and sea lines of communication.

More urgent, however, is the priority to build the resilience of countries that may be vulnerable to handing over critical infrastructure such as ports to Chinese SOEs. Coercion need not come from the PLA engaging in denial operations to secure access to a port shortly before a war breaks out or from an offensive cyberattack on a port’s digital infrastructure. Under Xi, the CCP has proven all too willing to rely on organs such as the United Front Work Department to orchestrate active-measures campaigns designed to compromise a country’s sovereign decision-making. Chinese SOEs may not be drivers behind such activities, but they offer the vehicles for them.

Australia, Japan and the US have some of the tools needed to help build countries’ resilience to coercion from the Chinese regime. They could begin by developing an international ports strategy through the ‘blue-dot network’, which was established in 2019 as a way of setting standards for high-quality infrastructure projects. Canberra, Tokyo and Washington should use the network to create a ‘Michelin guide’ for international port operations and investments. They could then post diplomatic personnel with expertise in critical infrastructure to agreed strategic locations around the world to promote blue-dot alternatives to investments backed by Chinese SOEs as well as advise on how to counter foreign interference.

Australia and its partners don’t have the power to change the nature of the CCP—and competing with Beijing dollar-for-dollar is a non-starter. But what we can do is create a world that is more resilient to the coercive measures Xi has developed a habit of using. A diplomatic strategy geared towards achieving that goal would make it much harder for the CCP to continue finding the logistical hubs needed to increase the PLA’s overseas presence and secure its success in wartime or grey-zone operations.

The subsidiary of a Chinese defence conglomerate nicknamed ‘the Huawei of airport security’ is increasingly dominant in border-control and security-screening technologies globally.

Last month, Canada’s foreign affairs department backflipped on its plan to buy security scanners for 170 overseas embassies and diplomatic missions from Nuctech, a Chinese company part-owned by the Chinese government and once run by former Chinese president Hu Jintao’s son, Hu Haifeng. The reversal followed media coverage that provoked a review of the department’s procurement practices for security equipment.

At a parliamentary committee hearing on 18 November, Canadian government officials were grilled by MPs over the decision to entrust such a delicate security function to a company with close links to the Chinese state.

‘I’m sitting here, and I’m dumbfounded that this could have possibly happened’, said Conservative MP Kelly McCauley. ‘I’m sorry for sounding so critical, but good lord.’

The Canadian parliamentarian is not alone. There’s unease around the world about Nuctech’s growing dominance of the market for security-screening and border-control technologies, including among European parliamentarians, the US Senate Committee on Foreign Relations and the US National Security Council.

The Canadian case brings into sharp relief the changing security calculus in using technology equipment from long-established Chinese suppliers. The integration of hardware with computer networks has added a new dimension of data risk.

Security scanners in Canadian embassies might be a relatively small matter. But the widespread use of products and services from a state-controlled Chinese company with strong links to the defence sector for operational security functions in major airports and border crossings all over the world is a much larger issue.

Nuctech is the global market leader in vehicle and cargo security screening and a major player in several other security and border-control markets. It has factories in Poland and Brazil. It claims to export equipment, systems and services to 170 countries. The company intends to ‘move towards the future vision of contactless security checkpoints’, and biometrics, data and artificial intelligence are central to its products.

Earlier this year, responding to the pandemic, Nuctech ramped up production of its FeverBlock infrared face-temperature screening system, touting ‘thousands of orders’ for use at international airports and border posts. Data about people, vehicles and cargo crossing international borders or transiting through airports would have significant value to a range of actors, from corporations to national intelligence services.

Australian state and federal government departments have spent tens of millions on Nuctech equipment and services since the Australian customs service gave the company its first overseas order in 2001.

And, as in the Canadian case, Australia’s current processes and rules for government procurement may not take into account emerging data risks.

Chinese defence sector links

Nuctech is nested in a web of corporate relationships in China’s state-owned defence sector. Nuctech’s parent company, Tsinghua Tongfang, is controlled by one of China’s largest defence entities, the China National Nuclear Corporation, a vast state-owned conglomerate that specialises in dual-use nuclear technologies. Two other CNNC subsidiaries, the China Nuclear Power Technology Research Institute and the Baotou Guanghua Chemical Industrial Corporation, are on the US banned entity list, which restricts US companies from doing business with them on national security grounds.

A Nuctech subsidiary, FoundMacro, with which Nuctech shares a Beijing office, makes ‘counterterrorism’ products, including a vehicle-mounted microwave denial system that ‘assists secret arrest’, and an AI-enabled predictive warning surveillance system using sentiment analysis technology jointly developed with Russia.

In Xinjiang, the autonomous region in northwestern China that has been the site of mass arbitrary detention of Turkic and Muslim minorities since 2016, Nuctech is a supplier of public security equipment to the regional government and subregional jurisdictions. It has donated security equipment for use at border checkpoints and has marketed a range of products at police trade fairs including as recently as 2019. It has also fitted out the region’s highways with at least 40 sets of X-ray inspection systems and installed passenger-screening equipment at transport terminals.

Nuctech overseas

Nuctech was banned from US airports in 2014 after a confidential government report that has never been released. But in Europe, Nuctech airport-screening and public-security equipment is in wide use. Nuctech supplied security equipment to the 2020 World Economic Forum in Davos and the 2016 Olympics in Rio de Janeiro. A corruption scandal in Namibia, a bribery scandal in Taiwan and an anti-dumping action in the EU have not halted Nuctech’s increasing capture of market share in the security technology sector over the past two decades.

Wang Weidong, Nuctech’s vice president, credits the company’s innovation and good after-sales service with its success.

There are other views, most prominent that voiced by Axel Voss, a member of the European Parliament, that subsidies from Beijing have enabled Nuctech to embark on a deliberate policy of undercutting overseas competitors to fuel its dramatic global growth.

Nuctech in Australia

In Australia, Nuctech systems are installed at major ports and some airports. Nuctech has a number of contracts with state governments for the provision and maintenance of body scanners at prisons and courts. Publicly available data on the AusTender website indicates that the Australian government has done tens of millions of dollars’ worth of business with Nuctech since 2001.

In April, Nuctech was one of nine suppliers that received a standing offer from the Department of Home Affairs to supply and maintain ‘X-ray, trace and substance detection technologies for the Australian Border Force’s existing fleet of equipment’. Australian government regulatory inspection reports suggest that Nuctech, rather than the Australian government, is the ‘sole responsible authority for maintenance’ of its screening equipment installed at Australian ports.

Nuctech reported selling 100 sets of its FeverBlock infrared screening system for use in Australia and New Zealand earlier this year. Nuctech says the system ‘is suitable for rapid body temperature screening in public places … based on AI algorithms to accurately locate the face position, automatically measure the distance of the person, and perform it in real time’.

The Australian government also gifted over $300,000 worth of Nuctech X-ray machines to the Papua New Guinea customs service in 2018.

A spokesman from the Department of Home Affairs told us that the department and Border Force ‘currently only use Nuctech equipment for X-ray scanning of shipping containers’. The department did not answer questions about data-security measures.

National security risk

Nuctech’s own publicity materials indicate that the types of data at least some of its systems collect would be of interest to a range of governments and private entities. For example, its ‘land border system’ for inspecting vehicles at Kazakhstan’s Port Kolzhat, installed in late 2018, ‘automatically collected’ through the integrated system ‘vehicle dimensions, container number, gross axle weight, X-ray image, CCTV video and other information’.

The extent to which Nuctech services interlink with national border-control and customs databases, including passenger identification systems, is not clear. Its products include cargo X-ray scanners (one developed using technology created by Australia’s peak science agency, CSIRO); devices for detecting explosives and narcotics; and body scanners that incorporate a range of collection modes, including facial recognition, fingerprint scans and human body scanning ‘micro measurement’. It also sells systems incorporating ‘AI, big data and video analysis technologies to realise automatic identification of high-risk passengers’.

Any use of Nuctech’s AI or facial-recognition systems is likely to be, as part of normal operation, sending collected data to Nuctech. US security agencies appear also to be concerned that any connected security-screening device—even an X-ray scanner—could access sensitive personal or commercial databases, such as passenger travel history or shipping manifests, and transmit that information to Chinese state actors.

A European spokesman for Nuctech, sensitive to this line of criticism, wrote in Politico in October that ‘data generated by Nuctech’s products during use belongs to our customers only—the company does not have any access to it whatsoever’.

A director-general of the Canadian Centre for Cyber Security, Michele Mullen, told the Canadian parliamentary committee that the risk was not imaginary—the technology has rapidly developed and with it the risk. She said Nuctech’s X-ray machines now typically come with hard drives and USB ports, so they could conceivably be used for data downloads ‘with malicious intent’.

‘Because technology is evolving, things we didn’t use to look at, we now should start looking at’, Mullen told the hearing. ‘Capabilities … with embedded operating systems and USB ports, that didn’t used to exist on X-ray machines, now do.’

Like all Chinese companies, Nuctech is subject to the suite of national intelligence laws that require it to provide any data to the Chinese security agencies if asked. The Chinese government has systematic access to private-sector data through an extensive range of overlapping state security laws that apply to any corporation with data servers inside China. Nuctech’s close linkages with the Chinese state-owned defence sector underscore these risks.

As Australia has recalibrated its understanding of the national security risks posed by a more assertive China in the past few years, and begun to grasp the extent of alignment of Chinese corporate interests with the party-state’s global interests, the Australian government has legislated against ‘corrupt or coercive’ foreign interference, reformed its foreign investment regime and provided the university sector with guidelines on problematic research collaborations. It has banned Chinese telecommunications giant Huawei and other companies ‘likely to be subject to extrajudicial directions from a foreign government that conflict with Australian law’ from involvement in building Australia’s 5G network.

In March this year, five of Australia’s most sensitive government departments, including Home Affairs, scrambled to remove servers made by the Sydney-based company Global Switch, after its parent company, the UK’s Reuben Brothers, was acquired by a Chinese state-owned consortium, Elegant Jubilee, that claimed to be privately owned.

Ironically, the same department is outsourcing elements of border screening, with its sensitive data risk, to a company linked to a state-owned Chinese defence conglomerate. It does not appear to be uniformly considering sensitive data risks with procurement from countries that may pose cybersecurity risks.

If government procurement processes and rules are not flagging risks from foreign state-owned entities and sensitive data risks, it’s time for a framework on government procurement and other collaboration with foreign companies in sensitive sectors. Customs and border control should clearly be one of those sectors. Such a framework would identify services and technologies that may put sensitive data at higher risk and apply a thorough and uniform security assessment to companies bidding for procurement tenders in those higher risk areas.

Update: On 18 December 2020, the United States added Nuctech to its banned entity list ‘for its involvement in activities that are contrary to the national security interests of the United States’. The determination cited Nuctech’s ‘lower performing equipment’ as the reason behind the designation.

In this episode, ASPI’s Brendan Nicholson and Peter Jennings talk about Australian Prime Minister Scott Morrison’s recent visit to Japan to meet with Japan’s Prime Minister Yoshihide Suga and the in-principle reciprocal access agreement. They discuss the significance of the agreement and what it signals about the two countries’ future engagement in Southeast Asia and the Pacific.

Anastasia Kapetas, The Strategist’s national security editor, speaks with Robert Glasser, ASPI visiting fellow and former head of the UN Office for Disaster Risk Reduction, about the Royal Commission into National Natural Disaster Arrangements. They discuss the commission’s report, which was released in October and included 80 recommendations, and offer their thoughts on the report’s efficacy in helping Australia prepare for future natural disasters.

ASPI senior analyst Huong Le Thu speaks with Moe Thuzar, coordinator of the Myanmar Studies Program at the ISEAS – Yusof Ishak Institute, about the 8 November elections in Myanmar. They discuss the election process, the National League for Democracy’s victory and what it means for the future of Myanmar and the region.

The first global pandemic of the digital age has accelerated the international adoption of surveillance and public security technologies, normalising new forms of widespread, overt state surveillance.

These technologies have been layered on top of already pervasive forms of privatised data surveillance through smartphones and the ‘internet of things’ (IoT). The pandemic has also fuelled the normalisation of surveillance in previously private contexts.

The risk of this new era of surveillance is that it has the potential to permanently shift power from citizens to the state and, in doing so, entrench global trends towards a more illiberal world.

The far-reaching consequences of the pandemic have seen public health reframed as a safety and national security issue globally. That in itself isn’t necessarily bad, but in many countries the securitisation of public health has generated sudden momentum to cross privacy lines until recently thought unacceptable in democracies.

These include the use of tools that integrate public health and private telecommunications databases and governments’ use of personal location data from smartphones to peremptorily trace whole-of-population interactions or to enforce voluntary quarantine compliance.

Smartphone applications have been used to combat the spread of Covid-19, with varying success, in at least 98 countries around the world. For example, apps to record users’ Bluetooth interactions for contact tracing have been used in Singapore and Australia.

South Korea and Hong Kong have favoured apps that use location data in personally identifiable forms, while the EU and New South Wales have used aggregated anonymised data.

In China, a health code add-on to a popular payment app based on undisclosed, automated assessments of the Covid-19 risk the user might pose quickly became a quasi-passport to public life for hundreds of millions of Chinese citizens.

More broadly, e-health applications are explicitly viewed as a global growth market in a post-pandemic world for state-backed Chinese firms.

The pandemic has driven advances in facial-recognition technology, a particularly problematic and intrusive form of surveillance that enables rapid connection of an individual’s physical presence with deep online data profiles. For example, by March 2020 the large Chinese biometric surveillance company Hanwang claimed its technology could recognise people in masks with 95% accuracy, after Chinese hospitals began requesting the capability in January.

Facial-recognition technologies integrated with thermal-imaging cameras purporting to detect people with fevers have been marketed by at least 10 companies to police forces and governments around the world since the start of the pandemic.

Fever-screening systems are reportedly being trialled at airports in Australia, the UK and India, using deep learning algorithms to quickly detect body temperatures in crowds of up to 2,000 people per hour.

Governments seeking greater social and political control have an opportunity to use Covid-19 as cloud cover to make capital investments in surveillance technologies, including those that enable, store and process mass collections of data on people’s location, activity (both physical and digital) and biometrics (including DNA and genomics).

The data will be sourced from IoT sensors that are in use across a range of platforms, including surveillance cameras and medical devices—as well as from mobile applications, social media and other personal internet use.

The aggregation of this data, particularly when coupled with advances in machine learning, will lead to more highly accurate predictive and sentiment analysis, which is likely to be used far beyond public health applications.

Non-democratic partnerships on strategic and emerging technologies—for example, between China and Russia—are likely to deepen, especially as US and EU sanctions against Chinese technology companies steer them towards alternative partnerships (like Huawei and Russia).

And we should expect a global push from powerful private and state entities to normalise the use of spyware technologies in people’s homes to monitor their everyday activities, from tracking of work-from-home effectiveness to remote oversight of university exams.

As evidence continues to mount that some data surveillance applications have been effective in slowing the spread of the virus in some countries, it’s vital to ensure that public health surveillance tools—rushed into use for an extraordinary crisis with privacy trade-offs—don’t become business as usual.

The changes wrought by Covid-19 risk increasing complacency among policymakers about using controversial surveillance technologies.

But tools implemented in the emergency context of the pandemic should not automatically cross over from public health purposes to policing, national security or political applications, as reportedly happened in Minnesota where authorities used contact tracing applications to track Black Lives Matter protesters.

Arguments that ever more intrusive forms of surveillance are necessary or inevitable even in democracies serve a range of powerful agendas with fundamentally anti-democratic effects.

The proliferation of these technologies risks entrenching dangerous power imbalances all the way up from the private, domestic sphere through the relationship between national governments and their citizens, to international divisions between authoritarian and democratic states.

Surveillance and public security technologies, combined with digital propaganda and disinformation techniques, hand more effective tools to governments to monitor and manipulate whole populations and further entrench the state’s capacity to silence dissent.

At stake are the health of democracies and the character of global governance and international relations more broadly, with the risk of the technology tilting the playing field towards authoritarianism.

There’s another, more hopeful, possibility, shown in the response of countries such as Australia, New Zealand, South Korea, Japan and Taiwan, that the galvanising crisis of the pandemic might work to restore public trust, enhance public debate about and awareness of surveillance technologies, and bed down democratic processes for the handling of citizens’ data. But that optimistic future is by no means assured.

The EU, a traditional leader in this arena, recently took the first steps to force transparency in the sale and export of surveillance technologies by its member states. Companies selling technology with potential military use or human rights implications will be required to get a government licence to do so. Governments must publish the details of the licences.

Such an approach a decade ago would, for example, have exposed UK defence giant BAE’s export to Middle Eastern states of cyber-surveillance tools that were used by repressive regimes against dissidents during the Arab Spring in 2011.

Though likely to be of limited impact and only applying to exports, the EU regulation at least reflects a coalescing democratic approach that mandates a baseline of transparency to assess the risks posed by this technology.

In an accelerated surveillance era, populations of countries that have government accountability processes and a free and robust media and civil society will be in a relatively stronger position to negotiate.

As new intrusive technologies are introduced, democratic publics can demand more information, investigate abuses, publicly argue for a different approach, engage local politicians or stage protests.

But in authoritarian countries, the technology itself will play a role in effectively preventing the use of those mechanisms of dissent. And in weak democracies the increased use of these technologies could further undermine fragile freedoms.

Australia’s comparative success to date in averting the worst-case scenario of the virus and the government’s increasingly proactive approach to critical technologies, such as the banning of high-risk vendors from the nation’s 5G network, gives it standing on the world stage on this issue.

While not perfect, the cooperative model that the government used to manage Covid-19 involved the government working with, and being held publicly accountable by, public health experts and civil society groups. This good-practice example provides a successful alternative to authoritarian models that prioritise surveillance and censorship over transparency and accountability.

With a particular focus on the Indo-Pacific region, the Australian government should seek a global leadership role in promoting policies, standards and norms for the responsible use of surveillance and public security technologies, while also highlighting alternative models.

These efforts should focus on open dialogue, transparency and ethical use within a gender and human rights framework. For example, these technologies should never be used to target ethnic or minority groups as they are in Xinjiang.

Global discourse and decision-making in this realm are dominated by the US, Europe and China. But there is enormous opportunity for new partnerships in the Indo-Pacific.

But governments don’t hold all of the cards, especially when it comes to technology. Minilateralism and track 1.5 dialogues that bring tech companies and civil society together with governments, and that focus on raising broader regional awareness about data privacy issues, ethics and trust, surveillance and emerging technologies, are a necessary norm-building complement to government action.

A track 1.5 dialogue involving Japan, India, Indonesia, Singapore and Australia, for example, could help kickstart regional discussion on these issues.

Finally, the Australian government should introduce Magnitsky-like legislation that enables the sanctioning of individuals and entities involved in human rights violations.

Particular effort should be directed towards ensuring that the new legislation now being workshopped in Australia captures individuals and organisations selling surveillance technology to states that will employ it in human rights violations, at home or overseas.

Any proposed legislation needs flexibility in its crafting—similar to the new EU regulation’s catch-all provision—to cover cyber-surveillance technologies that may not exist today but will be coming online in the near future.

In early August, the Finance Department issued a revised set of guidelines for Australia’s federal departments and agencies to apply when assessing the economic benefit of procuring high-value goods and services. Given the intense controversy surrounding how the Defence Department measures economic benefits when purchasing major items of capital equipment, the revised approach is of considerable interest.

In terms of overarching principles, the revised guidance begin in much the same way as the original introduced just a few years ago. An economic benefit arises when a procurement boosts national productivity, typically in areas in which Australian industry enjoys a comparative advantage. Any evaluation of benefits should have regard to the effective and efficient use of government funds.

For a benefit to emerge, suppliers should therefore be price competitive and rely for their production on resources that would otherwise be unemployed or substantially underemployed. On that basis, productivity improvement isn’t normally fostered when a significant price premium is paid for preferring one source of supply over another or when supply draws resources—like skilled labour—away from equally productive, or even more productive, areas of the economy.

But even if price premiums and resource constraints apply—which is frequently the case for defence projects—a (net) economic benefit might still be obtained if production of the good or service being procured is a relatively promising source of new knowledge in the form of technologies or workforce skills that ‘spill over’ to improve productivity elsewhere. So far, so good.

Unfortunately, that’s where certainty under the revised guidelines ends and the search for meaning begins. That’s because the revised guidelines go beyond the sources of economic benefit noted above to include a set of, undefined and unweighted, ‘broader benefits’ associated with the development and sustainment of industrial capabilities, including those accorded sovereign status by Defence.

Under the new guidelines, ‘broader benefits’ for defence projects are treated as separate from the most obvious and significant forms of economic benefit, linked to the notion of sovereignty and treated as if they alone can determine the outcome of a benefit evaluation. From that, it seems projects offering negligible—or even no—national economic benefits might still satisfy the revised guidelines if they deliver a regional economic gain, a socioeconomic gain or even a non-economic gain in the form of a military–strategic advantage.

If an economic gain of any kind needs to be addressed by Defence under the revised guidelines, several aspects of its measurement appear to lie beyond the department’s analytic capabilities. One is the supply chain effects of projects, which tend to focus on the contribution of small to medium-sized enterprises. Another is how many of the inputs used by projects have alternative opportunities for employment. Finally, the department is unlikely to be able to estimate by itself whether the resources that projects need originate from industries with lower—or higher—levels of productivity.

Fortunately, all three aspects fall should within the range of economic models readily available from consultants. However, those models provide no insight into spillovers. As a result, Defence is likely to carry primary responsibility for assessing what could be the single largest source of economic benefit to arise from its procurements. As the Productivity Commission has pointed out in a defence context, ‘It is easier to assert that spillovers will eventuate than to prove they have.’ That seems to be supported by recent experience.

On the rare occasions when Defence has attempted to gauge the spillover-related savings in sustainment from preferring domestic over foreign assembly of capital equipment, its methods have attracted considerable criticism.

The two latest attempts at estimating economic impact commissioned by Defence—for the F-35 fighter jets and combat reconnaissance vehicles—reference the potential for spillovers but offer little, if any, supporting evidence. A similar situation has emerged in relation to the most recent research, commissioned by industry, into the economic impact of naval shipbuilding.

Several factors complicate any attempt by Defence to assess spillovers. Judgements must be made well before equipment projects mature. There appears to be limited historical evidence in an Australian defence environment from which to draw. And the responsibility for assessments may rest with departmental procurement managers unfamiliar with the methodologies that underpin how spillovers should be estimated.

There are many stakeholders interested in how implementation of the revised guidelines unfolds—especially in what ‘broader benefits’ entail, whether robust estimates of economic benefit will emerge and how those estimates might be weighed against demands for industrial sovereignty.

In the absence of far greater clarity on those issues, it is difficult to see how the latest revisions do much to overcome our limited understanding of how investing in defence capital equipment affects ‘jobs and growth’. Indeed, in their current form, the guidelines may substantially reduce the public’s visibility of important issues associated with defence industry protection.