Budgets, the economy and the Defence Strategic Review

Current debate over how to defend Australia in a more threatening strategic environment points to an urgent need to strengthen the capabilities of the ADF, partly through purchasing new types of weapons incorporating the latest technologies. 

Standing in the way of that need being realised are two factors. One is a trillion dollars of government debt and intense demands for higher expenditure on other public priorities ranging from health care to climate change. The other is a perception that any shift in defence investment away from more established to new types of weaponry would threaten jobs and growth. 

Among the few options available to Defence to overcome both obstacles is avoiding a significant price premium for preferring the domestic over foreign supply of major weapons platforms and systems through a more targeted approach to Australian industry participation. 

That option need not detract from Australia’s independence or economic welfare. Indeed, available data indicates positive outcomes can be achieved, on both fronts, if at least part of what’s saved through avoiding high price premiums in some areas of defence capability development can be re-invested in others.

However, that depends on avoiding the defence industry policy pitfalls of the recent past. Linking an updated defence capability plan to an outdated industry policy is, at best, a high-risk venture. More realistically, it represents a path to disappointment.

This paper addresses how Defence can not only save money when purchasing a new cadre of weaponry but do so in a way that benefits the economy. Both issues relate to affordability which may ultimately determine the impact of the Defence Strategic Review.

Marles’s Defence Strategic Review—an exploding suitcase of challenges to resolve by March 2023

Stephen Smith and Angus Houston have an enormous amount to do and almost no time to do it.  Prime Minister Albanese and Deputy Prime Minister Richard Marles chose them to be the independent heads of the Defence Strategic Review.  

The Review is to report before March 2023 so that the Albanese government can make decisions on it at the same time as they are deciding about the path that gives Australia 8 nuclear submarines within an AUKUS partnership that makes these safe and effective. 

Before they even get to thinking about their task – ‘to ensure Defence has the right capabilities to meet our growing strategic needs’ —Smith and Houston will need to confront the ugly fact that Defence’s current plans are already unaffordable despite the large and growing defence budget the Albanese government has committed to. 

Nasty choices and sub-optimal trade offs are needed before any new ideas that take money are even put forward. And the only mega project not yet agreed to that can provide potential savings is the $20-27bn Army plan to buy an additional 450 heavily armoured vehicles for purposes that aren’t clearly connected to Australia’s needs in our region. These must now be made clear if it is to proceed, in whatever form.

But even multi-billion dollar megaproject is a distraction to the real work. The Review must give Marles what he needs to provide practical, urgent direction to defence in four big areas:

  • Climate change and the Defence Force’s inescapable – but unwanted – role;
  • China’s direct security challenge in Australia’s near region – making our strategic environment uncomfortably clear, not complex as we like to tell ourselves;
  • New ways to increase Australian military power quickly – because no taxpayer is going to give defence more funding if it can’t show it has different, faster ways to increase the ADF’s, military power; and
  • The danger of prioritising ‘integration’ in all things in pursuit of the military nirvana of ‘every sensor a shooter and every shooter a sensor’ – because this highly aspirational goal is the enemy of getting capabilities into the hands of our military fast.

This Strategic Insight unpacks the exploding suitcase of Defence and sets out the key paths the Review can take.

Japan’s security strategy

This special report demonstrates the extraordinary proactivity of Japan towards issues of regional order-building, security and defence policy, and military capability development and teases out the implications for Australia as a closely aligned partner.

The author collates and presents a wide range of disparate official source documentation and thematic analyses to render an appraisal of Japan’s security strategy in a comprehensive but digestible format. The report concludes that, while Japanese activity in the security sphere has been unprecedented and prolific, Canberra must also be aware of certain limitations in terms of resources, and political caveats to Japan becoming a ‘normal country’ or bona fide ‘great power’.

Canberra, too, must be a creative, practical policymaker if the full benefits of the deepening special strategic partnership with Japan are to contribute to a truly free and open Indo-Pacific.

Australian views on the Indo-Pacific Economic Framework

Australian officials surveyed for this research view the Indo-Pacific Economic Framework (IPEF) as an opportunity to bring more investment into the Indo-Pacific region, shape standards setting, form collective solutions to supply-chain risks, and influence the direction of clean energy infrastructure. The IPEF is viewed as a potentially innovative way to boost regional investment rather than as a mechanism to strengthen the usual substance of trade agreements, such as market access into the US.

While we note that the officials interviewed aren’t the ultimate decision-makers and that there’s a new government in Canberra with its own emerging priorities, this report offers insight into the potential opportunities for Australia to shape the framework.

The Australian Defence Force and its future energy requirements

The global energy system is undergoing a rapid and enduring shift with inescapable implications for militaries, including the ADF. Electrification and the use of alternative liquid fuels are occurring at scale across the civilian economies. Despite that, fossil fuels, such as diesel and jet fuel, will be around for a long time to come, given their use in long-lived systems like air warfare destroyers, Lockheed Martin’s F-35 aircraft, M1A2 Abrams tanks, and in capabilities still in the design stage but planned to enter service beginning in the mid-2030s such as the Hunter-class frigates.

Australian supply of these fuels is provided by globally sourced crude oil flowing through a handful of East and Southeast Asian refineries. Supply arrangements for these critical commodities are likely to become more fraught, however. This is already occurring because of the fracturing of global supply chains and the drive for national resilience in many nations, driven by Covid-19, the return of coercive state power and, of course, Putin’s war in Ukraine. Australia’s dependence on imports for liquid-fuel security, at least as it pertains to the ADF, extends well beyond insufficient reserves and refineries.

The government and Defence must recognise this long-term risk to a fundamental input to our military capability and start acting to mitigate it for the future.

The cost of Defence ASPI defence budget brief 2022–2023

The cost of Defence ASPI defence budget brief 2022–2023

One hundred & thirty-three million, one hundred & ninety-one thousand, seven hundred & eighty dollars & eighty-two cents per day.

Executive summary

Shortly before the recent election, the previous government released a defence budget that continued its record of delivering the funding it promised in the 2016 Defence White Paper (DWP) and subsequent 2020 Defence Strategic Update (DSU).

This year, the consolidated defence funding line (including both the Department of Defence and the Australian Signals Directorate) is $48.6 billion, which is 2.11% of GDP based on the Budget papers’ estimates of GDP. That funding represents a very substantial nominal growth of 7.4%. It’s the 10th straight year of real growth, but with inflation running hot, it’s hard to determine a precise percentage; we’ve estimated it at 3.8% based on the Budget papers, but, if inflation stays around 5%, the real growth figure will be less. That will hurt Defence. Just as inflation eats into Australian families’ budgets, it’s eroding Defence’s buying power.

Despite disruptions to supply chains, Defence and its industry partners have achieved significant increases in acquisition spending. While Defence may have fallen short of its acquisition spending target in 2021-22, it still achieved a $2.1 billion increase on the previous year, which was itself a $1.5 billion increase. That’s translating into growing local spending, both in absolute terms and in relative terms compared to overseas spending. We’ve written previously that the Australian defence industry will need to eat a very large elephant as Defence’s acquisition and sustainment budgets grow.

So far, it’s demonstrating that it has the appetite to do that.

Capability continues to be delivered across all domains. There’s no doubt that the ADF is getting better. But we’re seeing the realisation of risks inherent in an acquisition program built around megaprojects. Such projects take years or decades to design and deliver, while spending huge sums for little benefit in the short term. When they encounter problems, those problems are big. The Attack-class submarine program has cost over $4 billion and delivered nothing. The Hunter frigate program continues to experience delays and won’t get a vessel into service for over a decade. The Boxer combat reconnaissance vehicle project has spent close to $2 billion, but only 25 training vehicles have been delivered. While the nuclear-powered attack submarine (SSN) program has the potential to deliver a huge step-up in undersea warfare capability, it’s the mother of all megaprojects and has a risk profile to match. As the megaprojects ramp up (with over $20 billion in infantry fighting vehicles potentially added to the list of committed funds), their cash flow requirement will increase, tying the government’s hands at a time of rapidly growing strategic uncertainty and evaporating warning time.

The new government will have some significant issues to address. Perhaps the biggest one is the size of the defence budget. The incoming government has said that it supports the current level of funding. While that continues to grow in real terms, it was originally developed in 2015 and hasn’t changed since then, despite the significant worsening of our strategic circumstances. Russia’s illegal and unjustifiable invasion of Ukraine has reminded us that war has not gone away and remains a tool of authoritarian states. China’s influence in our near region is growing and could result in a permanent Chinese military presence. The US is looking to its allies and partners to do more, as they must.

As always, the government will need to adjudicate between competing priorities for funding. At a time when Australians are dealing with the rising cost of living, spikes in energy prices and the grinding pressure of housing affordability, it may be tempting to reduce defence spending in the face of competing budget priorities. However, the government should be aware of the results of doing so. The budget is already full, with no pots of unallocated cash. Any short-term windfall delivered by the cancellation of the Attack-class submarine is already gone-as the cancellation of the SkyGuardian armed uncrewed air vehicle to help deliver a $9.9 billion offset for the REDSPICE cyber program reveals. So even holding the defence budget strictly at 2% of GDP will result in substantial, multibillion-dollar reductions to the DSU funding line, inevitably leading to cuts in capability.

Furthermore, it’s not clear that the DSU funding line is even sufficient to deliver the current investment plan. That program includes platforms far larger or more numerous than those they’re replacing as well as entirely new capabilities, all requiring a much larger workforce. Many capabilities have ended up costing more than was originally budgeted for in Defence’s investment plan. The SSN program will cost significantly more than the Attack class; it’s anybody’s guess how much more. So the first order of business should be for the government to understand the affordability of the current plan.

Then it will need to assure itself that the planned force structure is aligned with what the government thinks the ADF should be doing. It’s easy to make a case for the tactical utility of any capability, but how does it fit in the overall strategy? The government will need to make decisions about which sovereign capabilities it needs to hold and where it can rely on allies and partners. And the nub of our current security challenge is that the former are growing while the latter are shrinking.

A further challenge that the government will need to consider is Defence’s people problem. The number of contractors in Defence’s external workforce continues to grow at significant cost, but Defence can’t deliver its ambitious capability program without them. Is that growth the best option available to Defence or simply the only one? Moreover, the investment program will require 20,000 more uniformed personnel to operate the capabilities it’s acquiring. With the ADF averaging net annual growth of only 300, is that target attainable? And, if it’s not, is the future force structure viable?

In these testing times, the government needs to seize every opportunity available to it to increase capability rapidly, even if that means overruling Defence’s long-term vision for the future force. That means doing more with what we’re already getting, such as increasing the lethality of the offshore patrol vessels that are soon to enter service.

There are encouraging signs that Defence is engaging more actively with ‘the small, the smart and the many’; that is, cheaper, disposable, highly autonomous systems that can be produced rapidly by Australian industry. Investing more heavily in such systems is a crucial hedging strategy against the risk inherent in the megaprojects; plus, such systems will figure heavily in future warfare, whatever may become of the megaprojects.

Similarly, the new AUKUS partnership’s advanced technologies programs and the sovereign guided weapons enterprise offer the prospect of delivering meaningful capability soon. Yet we’re two years into the guided weapons enterprise and still have heard nothing about which weapons will be produced and how it will be done. We can’t apply the kinds of timelines and processes inherent in the megaprojects to these lines of effort.

Overall, the government has its work cut out for it. Whatever path it chooses, it will need to bring the Australian public along on the journey. To do that, the government will need to reset the conversation about the defence budget and how it’s spent. That will require a commitment to transparency, accountability and sharing information. That means accepting the risk that bad news will get out along with the good, but an informed public is fundamental to democracy.

AUKUS Update #1: May 2022

On the 16th of September 2021, the leaders of Australia, the UK and the US announced the creation of a new trilateral security partnership called ‘AUKUS’—Australia, the United Kingdom and the United States.

The three national leaders stated, ‘We will foster deeper integration of security and defense-related science, technology, industrial bases, and supply chains. And in particular, we will significantly deepen cooperation on a range of security and defense capabilities.’

At a time of rapidly increasing strategic uncertainty, when it’s increasingly clear that authoritarian regimes are willing to use military power to achieve their goals, it’s important to monitor the implementation of AUKUS so that governments and the public can assess whether it’s achieving the goal of accelerating the fielding of crucial military technologies.

To track the implementation of AUKUS, ASPI will publish regular updates on progress. This is the first of those updates.

Understanding the price of military equipment

Executive summary

Confusion reigns in discussions about the cost of the Department of Defence’s equipment projects. Whether we’re talking about media articles, parliamentary committee hearings, letters to the editor, duelling internet commentators or any other forms of discourse that address Defence acquisitions, the only thing that’s clear is that we’re almost always talking past each other when it comes to the cost of military equipment. Defence doesn’t help when it releases only a bare minimum of information. This sorry state of affairs reached its peak several years ago, when it turned out that when Defence said that the cost of the Attack-class submarine was $50 billion it really meant that the cost was somewhere around $90 billion.

The situation gets even murkier when commentators compare the cost of military acquisition projects here in Australia with ones overseas. It’s very rare that we can make a direct, apples-to-apples comparison between local and overseas projects, and very often it’s more like apples-to-orangutans. Being completely unaware of the basis of the costs they’re comparing doesn’t stop some commentators from making strong claims about the rapacity of foreign arms companies or the competence of the Australian Defence Department.

This report attempts to be a guide for the perplexed. It’s not a technical manual, but a plain-English discussion that unpacks the cost of Australian defence equipment projects. While it would be useful for those working in the field of defence and strategic studies to read the whole report, it can also be used a reference tool explaining key terms such as ‘constant’ and ‘out-turned’ dollars or different cost-estimation methodologies.

It’s important up front to acknowledge that the cost of modern military equipment can be eye-wateringly high, and there’s always a ‘sticker shock’ when we compare the costs of military systems with the costs of their civilian counterparts. Those costs are driven by the constant quest for better capability that provides an advantage in a life-and-death business. That striving in turn drives rates of cost escalation that greatly outstrip inflation in the broader economy. No Western country has yet found a way out of that endless cost spiral, and Australia is certainly not an exception.

Anyone discussing cost has to understand what’s included in the price. It’s here that comparisons of Australian and overseas projects are difficult. Australian defence project costs include all the elements needed to get a capability into service, which are known as the fundamental inputs to capability. They comprise much more than the military equipment itself and can include facilities, training systems, documentation, intellectual property, integration of the new equipment (such as a missile) onto existing systems (such as the aircraft that will launch it), science and technology programs, and so on.

Elements other than the equipment aren’t trivial and can sometimes make up half of the total acquisition cost. Australian projects also include significant risk provisions, known as contingency. In contrast, most overseas programs don’t include all of those elements, so their cost can appear significantly smaller.

In this report, I provide a hypothetical example that illustrates how the cost grows as we include these factors. If we start with available off-the-shelf equipment costing $1 billion and adjust for price escalation (including inflation and capability enhancements) and factor in all fundamental inputs to capability and contingency, we quickly get to a total acquisition cost of $3.5 billion. That’s before we include operating costs.

The report also briefly examines a current, real-world example by comparing the cost of Australia’s Hunter-class frigate project with analogous international projects. While we attempt to make some assessments, the exercise confirms that comparisons are difficult when we don’t have visibility of what’s included in the price tag.

We also attempt to debunk the popular and deeply held view that Defence projects frequently go over budget. Based on the public evidence, the opposite is in fact the case. Once the government considers a business case and gives Defence approval to enter into contracts to acquire a particular system with a set budget, the department rarely goes over budget. However, it must be said that, before that point, Defence’s estimates of the funding needed to acquire a capability can grow significantly as its understanding of its requirements and the possible solutions develops. It’s here that the infamous ‘blowouts’ generally occur, not after actual acquisition commences.

Some commentators have suggested that focusing on the cost ignores the value those systems provide—why quibble over a few billion here or there when the security of the country is at stake? I’d argue that it’s difficult to assess value for money if you don’t understand how much money you’re paying. This study aims to help Australians understand how much they’re paying. It’s only then that we can make informed decisions about military spending.

Chapter 1: Introduction

One of the greatest areas of confusion in public discussions of the cost of defence is the price of military equipment. It’s hard to know what Australia is paying for its weapons, which makes it hard to know whether we’re paying the right price or getting value for money.

The Defence Department doesn’t release information on the price it’s paying for particular items, but only high-level project costs—and then only for some projects. Those numbers include a wide range of elements beyond the equipment itself. Public discussion is confused and confusing when commentators take the project-level numbers and crudely reverse-engineer the cost of individual items from them.

To address that shortcoming, commentators look for relevant cost information overseas. But often the issue gets even murkier when Australian costs are compared with overseas numbers. Some national defence agencies, particularly the US Defense Department, publish very detailed information, yet their numbers are generally not amenable to a direct apples-to-apples comparison with Australian data.

The following is an example that illustrates why we need to be cautious even when using numbers from a reliable source. The Defense Security Cooperation Agency (DSCA) manages the US’s Foreign Military Sales program which allows partner countries to acquire US-made military equipment at the same price as the US military. The DSCA has to notify the US Congress of potential sales that have been approved by the US State Department. Those notifications are public and are a useful source of information, but they can be misleading when misused.

In April 2020, the DSCA notified Congress of the potential sales of 10 AGM-84L Harpoon Block II air launched anti-ship missiles (Figure 1) to India for US$92 million and of 10 of them to Morocco for US$62 million.1 It would be wrong to assume that India was being gouged US$9.2 million per missile while Morocco was getting them at a bargain price of US$6.2 million. Both sales also included ‘containers, spare and repair parts, support and test equipment, publications and technical documentation, personnel training and training equipment, US Government and contractor representatives’ technical assistance, engineering and logistics support services, and other related elements of logistics support’.

In fact, the cost of a Harpoon missile itself is nowhere near US$9.2 million, or even US$6.2 million. At almost the same time as those DSCA announcements, the US Navy awarded a contract to Boeing in May 2020 worth nearly US$657 million for 467 Harpoon Block II missiles and support equipment for various foreign military sales customers.2 So the price of an individual missile was less than US$1.4 million.

This example shows that we need to be careful even when comparing numbers taken from the same source that seem to have similar scope. But it also shows that the cost of a weapon itself is only one part of the total cost of a project or program and that the weapon is only one part of an effective military capability. Depending on whether you’re developing a cost for the weapon or for the capability, you’ll come up with dramatically different numbers.

Figure 1: Harpoon anti-ship missile: US$1.4 million, US$6.2 million or US$9.2 million?

Source: Defence image library, online.

Unfortunately, many commentators aren’t careful when using cost figures whether from here or overseas. This results in murky numbers being used to justify strong claims such as that the US’s latest nuclear-powered submarine would cost substantially less than the Attack-class conventional submarine, or that Australia is being taken for a ride by unscrupulous company X or country Y, and so on.

In this report, I start by looking at why the ‘sticker shock’ for modern weapons is so high to start with. I then look at how different definitions of cost sit along the spectrum from weapon to complete capability resulting in very different scope. I explain key concepts in cost estimation. The report then provides a hypothetical example illustrating how these definitions and concepts increase the cost as we move from weapon to capability. We’ll reinforce that with a real-world example drawn from the Navy’s Hunter-class frigate program. The report ends with a chapter that examines the validity of the popular view that Defence’s projects often go over budget.

Full Report

To continue reading, please download the full report here.

About ASPI

The Australian Strategic Policy Institute was formed in 2001 as an independent, non‑partisan think tank. Its core aim is to provide the Australian Government with fresh ideas on Australia’s defence, security and strategic policy choices. ASPI is responsible for informing the public on a range of strategic issues, generating new thinking for government and harnessing strategic thinking internationally. ASPI’s sources of funding are identified in our Annual Report, online at www.aspi.org.au and in the acknowledgements section of individual publications. ASPI remains independent in the content of the research and in all editorial judgements. It is incorporated as a company, and is governed by a Council with broad membership.

ASPI’s core values are collegiality, originality & innovation, quality & excellence and independence.

Important Disclaimer

This publication is designed to provide accurate and authoritative information in relation to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering any form of professional or other advice or services. No person should rely on the contents of this publication without first obtaining advice from a qualified professional.

© The Australian Strategic Policy Institute Limited 2022

This publication is subject to copyright. Except as permitted under the Copyright Act 1968, no part of it may in any form or by any means (electronic, mechanical, microcopying, photocopying, recording or otherwise) be reproduced, stored in a retrieval system or transmitted without prior written permission. Enquiries should be addressed to the publishers. Notwithstanding the above, educational institutions (including schools, independent colleges, universities and TAFEs) are granted permission to make copies of copyrighted works strictly for educational purposes without explicit permission from ASPI and free of charge.

First published May 2022.

Cover image: ADF’s new Australian designed Hawkei protected vehicle at the Thales Protected Vehicles facility in Bendigo, Victoria. Defence image library, online.

Funding

No specific sponsorship was received to fund production of this report.

  1. Defense Security Cooperation Agency (DSCA), ‘India—AGM-84L Harpoon air-launched Block II missiles’, media release, US Defense Department, 13 April 2020
    DSCA, ‘Morocco—AGM-84L Harpoon air-launched Block II missiles’, media release, US Defense Department, 14 April 2020: https://www.dsca.mil/press-media/major-arms-sales/morocco-agm-84l-harpoon-air-launched-block-ii-missiles ↩︎
  2. US Defense Department, ‘Contracts for May 13, 2020’, US Government ↩︎

The Hunter frigate: An assessment

Powerful and survivable large surface combatants, in numbers commensurate with the expected threat and national budgetary limitations, remain central in the order of battle of any navy of a middle-power such as Australia, but they need to be fit for purpose. 

Australia’s government policy has acknowledged deteriorating geostrategic circumstances since 2009, culminating in its 2020 Strategic Update where we are not left in any doubt of the concern over China’s intentions and a stretched United States. The warships Australia acquires should be suitable for the circumstances it finds itself in.

Doctrine describes how the fighting will be done; policy determines which fight to prepare for. This report explores the disconnect between doctrine and policy, which has led Australia to building a warship that is unsuited for its purposes. It offers better alternatives, and suggestions to prevent being in a similar situation in the future, including using AUKUS to form a relationship with the USN to participate in its forthcoming new large destroyer program.

COCONUT WIRELESS – Dr Anthony Bergin, ASPI

This interview with Dr Anthony Bergin, Senior Fellow at the Australian Strategic Policy Institute (ASPI) is the first of a series focused on Australia-United States relations as a result of the AUKUS security deal signed in September 2021 exploring how the AUKUS deal opened potential for business and investment opportunities for Australian business to partner with US firms in the Pacific.

Click here to view the video.

Information about membership of the Australia Pacific Islands Business Council is available here.