Australia should establish a separate budget allocation for special defence industry grants to build up companies in the north in support of the armed forces.

Northern Australia is strategically crucial, and so, therefore, is developing a defence-supporting industry there. But northern Australia’s limited economic depth presents huge problems for its companies in showing the business capacity needed to secure current Australian Defence Industry Grants.

To overcome these obstacles, the budget line for separate Northern Australian Industry Grants need not be large. Yet the targeted funds would create a scalable defence industrial base in northern Australia and foster economic growth there.

Discussions on northern Australia’s industry capability and capacity often fall into generalisations that the region is too hot, far, expensive or complex. However, these perceptions are usually based on outdated or no lived experience. They overlook the evidence of northern Australian industry achievements, such as the remarkable success of INPEX’s Ichthys liquefied natural gas project and the significant contributions that industry and communities in Darwin, Townsville and Cairns have made to support past Australian Defence Force operations and exercises. These achievements are a testament to the potential of northern businesses, which, with the right support, can significantly contribute to the Australian defence industry.

Northern Australia certainly experiences livability challenges. Similarly, the capacity and capability of the market within a limited economy need to be better understood: that market will only sometimes fix problems as well as markets do in the southern states. But that does not mean we should give up on defence-supporting industry in northern Australia.

Some people in Defence believe the ADF can raise, train and sustain itself in and from Australia’s southern states. They routinely argue that the ADF needs to be able to go to or through northern Australia when required.

The 2020 Defence Strategic Update, the 2023 Defence Strategic Review and the 2024 National Defence Strategy are remarkably consistent in emphasizing northern Australia’s importance. If shortening internal lines of communication is key to winning wars, we all need to consider what can be done in the north. Unfortunately, policy has been slow to catch up. The Australian Defence Industry Grants initiatives illustrate this point.

They’re crucial to fostering growth and innovation within the defence sector, aimed at enhancing defence capabilities while stimulating economic development. By providing financial assistance and incentives, they empower Australian defence companies to invest in research and development, upgrade infrastructure and expand their manufacturing capabilities. This support is instrumental in nurturing a robust domestic defence industry, contributing significantly to Australia’s sovereignty and security. The process reduces our reliance on foreign suppliers for critical defence equipment and technology. Furthermore, the grants foster collaboration between industry, academia and government, driving innovation and competitiveness in the global defence market while creating job opportunities and economic growth across the country.

As taxpayers would expect, the assessment criteria for these grants focus on reducing the risk of failure and, in doing so, ensuring a high return on investment. In practice, the assessment criteria lock out small and medium enterprises in Northern Australia.

It is hard for such companies to show necessary indicators of commercial success and capacity when they still lack equipment or personnel needed to participate in defence supply and value chains. It’s a chicken-and-egg problem that presents a systemic barrier for northern Australian companies seeking to enter defence supply chains.

It’s tough for a business in Townsville, Cairns or Darwin, operating in smaller economies, to compete with companies in Adelaide or Perth. If we want economic growth in northern Australia and the ADF to have resilient supply chains there, intervention is needed.

Success for many of northern Australia’s small and medium enterprises involves a modified version of consultancy firms’ ‘land-and-expand’ strategy. Their business models focus on securing capital to create capability or capabilities that will allow them to secure an anchor client with which they can crowd in other businesses and build further capacity and capability.

Our defence grants system is necessarily competitive, designed to give the Australian government a high return on investment. However, if we are to have a scalable industry base that grows to meet the needs of the ADF and allies and those of the broader public and private sector, some adaptation is needed. This does not mean a significant increase in the overall budget but rather a reallocation of funds to ensure a more balanced distribution across the country while still focused on strategic objectives.

Rather than balancing the existing grant system and introducing positive discrimination, the best approach would be to create a parallel grants system with its own budget line focused on building northern Australian capacity and capability. The focus for such a system would differ from that for a program focused on all of Australia and the defence ecosystem.

If Australia is to harness greater economic and geostrategic value from northern Australia, it must implement tailored policies. While the federal government cannot directly address the challenges of distance and climate, it can facilitate the establishment of a scalable industry base across northern Australia. Adapting the Australian Defence Industry Grants system to provide a focus and dedicated funding line is not just critical but a strategic move to stimulate new industry capacity in northern Australia, which will contribute significantly to the country’s overall economic growth and security.