The looming strategic update to Australia’s 2016 defence white paper is an opportunity for creativity and practicality.

It’s too easy to imagine the update describing what’s happened in the last four years and moving on to say that the strategic, force structure and investment priorities in the 2016 plan are still ‘about right’—even with the marked changes in Australia’s strategic environment since then.

If that were to happen, it wouldn’t just be a bad case of reflexive bureaucratic self-protection; it would be a missed opportunity for the government to adapt Defence and defence investment to the world we live in.

Given we’re talking about how our nation spends $40 billion a year and how it employs 76,000 Australians directly and thousands more in defence industry, this is an issue of public importance. Beyond that, how Australia builds and uses its armed forces also matters to our security and to the security and prosperity of our region—particularly the South Pacific and Southeast Asia.

Back in 2016, there was US–China strategic competition, along with forecasts of changing military balances. The impacts of climate change were discussed. No one but an apologist, though, could claim that the judgements made then are unaffected by the pace, extent and nature of change since. Those developments have wildly outstripped assessments and assumptions made back in 2016.

Hypotheticals and potential paths from then have either happened or not happened, and these events or non-events have consequences. And new challenges—notably the Covid-19 pandemic—just weren’t in serious contemplation.

US–China technological and strategic competition has intensified during the pandemic, with rising nationalism and heightened mutual suspicion. This now clear path was only one of several potential directions for US–China relations back in 2016.

Aside from the dynamic between the world’s two biggest powers, another hypothetical from 2016 has now turned into a reality. A more coercive China is now a direct lived experience for Australia and one that’s only just begun.

Covid-19 has exposed the vulnerability of global supply chains, particularly for critical items in times of crisis. Medical emergencies and military conflicts are the most obvious areas in which this vulnerability must be addressed.

And there’s the now manifest need to take a ‘two-track’ approach to the Australia–US alliance.

On the first track is access to American technological and defence capabilities, along with contribution and access to the US and other Five Eyes intelligence that is becoming more critical to Australia’s national power.

That’s for two reasons: to project military power with regional partners in response to disasters and instability, and to have sufficient strength—along with close partners and allies—to deter those who would otherwise act against our interests. An increasingly assertive Chinese military in the hands of Beijing’s authoritarian rulers is a primary focus here.

On the second track of the alliance, though, is a need to acknowledge that an ‘America first’ US is acting in ways that serve some perceived national interests, but do not always serve Australian interests. An example is the disdain under President Donald Trump for multilateral action and institutions. The US, even more than many other nations right now, is also very internally focused given the civil unrest and looming election.

Australian strategy and policy have to manage the fact that American power, while still a primary deterrent of major war, is also now less predictable and less about orchestrating coalition action than at any time since the end of World War II.

The net result of this picture is that Australia must retain the benefits to our capability and security that flow from the alliance, while managing sporadic divergences between our interests and how the US uses its own power.

Denying the divergences would be as much of a strategic error as seeing them as a reason to disconnect from the benefits that American technology and intelligence bring to our national power.

The last big shift is in national expectations of what the Commonwealth, including Defence, can and should do to mitigate domestic and regional natural disasters, including bushfires, floods and pandemics. More of the same ad hoc application of people and machines not trained or equipped for the mission, as we saw with the national bushfire crisis last season, is helpful but insufficient given the emerging needs.

What flows from this is a much bigger rethink of plans made back in 2016 than anyone envisaged even as recently as September last year when Defence Minister Linda Reynolds announced the update.

If the major responses from Defence to our changed world amount to adjusted language and minor tweaks, though—or, worse still, simple implementation of 2016’s plans—they will not be enough.

Three examples from the capability investment area show what this might look like, and also sketch out more imaginative and potentially more successful alternatives.

If the update’s ‘new news’ is enhancing firepower by acquiring some advanced missiles and precision munitions, that won’t do the job. Buying a few hundred of Lockheed Martin’s long-range anti-ship missiles, or LRASMs, and a few new sea mines is window dressing. In any major conflict, 200 missiles would be just enough to get through the first days or, if you’re lucky, weeks of a crisis. Then everyone would need to pause politely while long lead orders were filled.

New purchases will work only if they’re accompanied by new production lines for Australian-built weapons. The US, Israel and Norway come to mind as partners whose weapons are in already in use in the Australian Defence Force and who may also benefit from having alternative centres of production in times of crisis—particularly if Australian government investment were to help create the new facilities.

This alternative approach wouldn’t just give the ADF a more powerful inventory, but would also ensure weapons were available in numbers during crises and address painfully exposed vulnerabilities.

If the update on the ADF’s undersea capability is about the Collins-class submarines being enhanced until the first Attack-class vessel arrives in 2035, that will also fall short of what’s required. Defence needs to give the government some significant capability injections much earlier than that in order to address rapid strategic and technological change, and to mitigate risk from a slow-to-arrive next generation of submarines.

Capabilities like Boeing’s Orca large unmanned underwater vehicle represent an alternative path. New platforms like the Orca could be in service early in the 2020s and complement the Collins boats through manned–unmanned teaming. With the collapse of airliner orders, Boeing is no doubt open to new business from reliable customers.

Additional variants of the navy’s offshore patrol vessels that include anti-submarine warfare capabilities would be another practical, near-term initiative worth pursuing.

Proceeding with implementation of the 2016 defence infrastructure plans with only minor changes, as we’ve seen with recent announcements in the Northern Territory, will prove inadequate. The Gordian knot on investment in essential fuel supply to Tindal airbase needs to be cut by investing in a fuel pipeline instead of trucks. That, together with forward-basing of naval vessels at Manus Island and starting a public conversation about a new eastern base for the growing fleet, would show the blend of imagination and practicality our environment demands.

I’m still hopeful about what the update will contain, not just because imagination is alive and well in Russell, but because we also have a more critical, demanding public that’s well aware of the growing strategic pressures Australia faces. Just as importantly, we have a demanding and empowered government that sees defence, defence capability and defence industry as key to Australia’s future.

For years Australian universities have exposed themselves to excessive dependence on revenue from international students, particularly from the People’s Republic of China. Unconstrained growth in this sector is changing everything from the design of Australia’s inner cities to the quality of the on-campus student experience.

Overdependence on anything is risky, and it’s clear that the Covid-19 crisis has turned this risk into an immediate threat to the viability of some universities. The tertiary chickens have come home to roost.

In late 2019, 212,264 people from China were on student visas at all levels of education in Australia. At the same time, only 104 students were here from Timor-Leste. That’s after 20 years of cooperation and development assistance, along with $2.44 billion in military stabilisation and peacekeeping operations.

Similarly, after many years of involvement in Afghanistan (during which 41 Australian soldiers were killed and 261 wounded and $8.47 billion was spent on military operations), a mere 29 Afghan students studied here last year. One can only conclude that despite the effort and expenditure, what we’re doing with those two countries is not translating into deep, enduring person-to-person connections.

After years of increasing revenues from skyrocketing international student enrolments, the vice-chancellors of Australia’s leading universities get paid obscenely high salaries, like the CEOs of large private corporations. Unlike the CEOs, whose shareholders expect them to manage risk and not just blindly pursue low-hanging opportunity, the vice-chancellors don’t appear to have had a viable strategy to manage the risks inherent in a business model that is excessively dependent on overseas students, especially from the PRC.

In 2019, before the Covid-19 crisis, nearly one-quarter of the higher education sector’s revenues and students came from overseas, and 37.3% of international enrolments were from the PRC. Some leading universities were drawing around 70% of their international student revenue from China. In December 2019, there were 164,730 Chinese student enrolments in the higher education sector. These enrolments were concentrated in coursework master’s degrees in management and commerce.

There have, of course, been warnings about this situation. Last year, for example, the Centre for Independent Studies’ Salvatore Babones argued that Australian universities had reached ‘China max’ and were massively exposed to risk. One risk was the perception of the declining quality of an Australian education. This resulted in an imbalance between the high cost of studying in Australia and the arguably low quality of teaching and learning making Australian universities less attractive.

Macroeconomic factors such as slowing Chinese growth, currency controls and exchange variations proved to be a greater risk. To this we can add a political risk of the Chinese Communist Party using student numbers as another source of economic vulnerability through which to demand Australian political acquiescence to CCP priorities.

Unlike American universities, whose finances are less exposed to the foreign student market, Australian universities failed to protect themselves in case of a catastrophic fall in overseas student enrolments.

In Babones’s assessment, the risk presented a moral hazard. That is, the universities’ pursuit of international student dollars presented them with substantial benefits, but if the business model failed it would be the Australian government and taxpayers who would have to bail the universities out.

One could argue that this is a microcosm of a broader unfettered Australian pursuit of Chinese money and the view that sees it only as upsides, with no impact on our sovereignty, resilience or freedom of action.

With the Covid-19 crisis, these risks have been realised. The university sector could lose up to $6 billion in revenue, and individual universities could lose up to half a billion dollars each. The Australian National University is reportedly expecting a $225 million financial hit this year, with similar cuts in revenue in coming years. No doubt the brunt will be borne by casualised staff. But the impact on education for Australian students and on research (which has benefited from the universities’ increased foreign revenue) is not clear. Will the Australian public have to bail universities out and suffer because of the moral hazard created by the universities themselves?

But even if things soon could return to the ‘normal’ of Australian universities’ highly abnormal dependence on revenue from PRC students, would we want them to?

There is an alternative.

The universities’ current embarrassment presents an opportunity for an ambitious plan that will wean the universities off their dependence on PRC income while developing our other neighbours and strengthening our relationship with them.

The shape of a plan to cut our university sector’s dependence on China could look like this: in return for the universities reducing their PRC student numbers by 100,000, the Australian government would fund 100,000 students from Southeast Asia and the Pacific—where we should be investing in deep, enduring interpersonal connections. We should bias the award of these ‘scholarships’ to countries that are democracies.

This would have some similarities with the government’s Australia Awards program, but there are fewer than 2,500 students in that program, and 90% of them are postgraduates. Moreover, the Australia Awards provide living allowances, driving up the cost per student. The proposed larger scheme would not provide such allowances to all its students; there are no doubt many enterprising young people who would be motivated by the waiver of tuition alone.

The new scheme would offer a mix of undergraduate and postgraduate courses, as well as secondary or bridging courses for those who need help to be ready for the start of tertiary education. In place of the current preponderance of business and management studies, the Australian government, in consultation with the governments of the beneficiary countries, could offer a more rounded mix of degrees driven by student requirements, not by the need to repay student loans. This would benefit medicine and nursing, education, engineering, IT, and even arts and social science degrees.

By using its buying power, the Australian government could require the universities to charge no more than the current average cost of a degree for an Australian student, which is around $20,000. It should be a take-it-or-leave-it proposition. To stop the universities from saying, ‘Thanks for the extra cash, we’ll take it, but we’ll also keep pursuing as many fee-paying overseas students as we possibly can’, as part of this deal the government would impose a cap on total overseas student visas, with subsidiary caps on individual countries and institutions.

To attract students from countries such Afghanistan and Timor-Leste, a proportion of scholarships would need to provide living allowances. But if the universities do in fact deliver a great product, a fee waiver should be enough inducement for many prospective students.

How much would it cost? A program with 100,000 students at $20,000 for tuition each would be $2 billion per year. If we assume another $2 billion for a sliding scale of living allowances depending on need, plus $500 million for bridging courses for students needing English and other preparatory training, along with program administration and overheads, that’s $4.5 billion per year.

That’s a lot of money for the government to find in this Covid-19 era. But, in the short term, it can in part be regarded as stimulus spending for the tertiary sector. Whatever one may think of the universities’ commercial strategies over the past decade, their staff include many of our most talented people. We want them to stay here and keep teaching and researching.

In the longer term, as well-educated students start returning to their home countries, demonstrating the benefit of an Australian education, new markets could open up, allowing a reassessment of the balance between paying and scholarship students.

Another way to regard the funding is as a long overdue turnaround for our declining aid budget, which is now down to $4 billion per year or only 0.21% of GDP, a figure well below international benchmarks.

This program would be a major investment in the people of the broader region, one that will develop deep, human connections that will endure well after many Belt and Road Initiative projects have crumbled.

An Australian investment to build the human capital of Southeast Asia and the Pacific could become the centrepiece of an effort to lift our national engagement with the region, based on a foundation of people-to-people links. It is an infinitely more valuable approach than simply forever scaling up average-quality degrees for PRC students.

As we saw with the Colombo Plan, the long-term return on investment to Australia for building high-quality people-to-people relationships with our neighbours has been of enormous economic, social and strategic value.

This approach also gives our universities a one-time opportunity to rethink their currently failing business model, which is built on greed, scale and a less-than-optimal commitment to offering a high-quality educational and life experience.

Many academics who find themselves teaching in Australian degree factories would agree on the need to rethink the sector. In the post-Covid world, any business model built on a slavish over-reliance on a relationship with the PRC is irretrievably gone. Universities that rethink their approaches have a chance to design a solid future. Those that cannot make the break from dependence on money from the PRC will remain hostage to the fickleness of the CCP in ways that cannot be sustained.

Tuesday 12 May was to have been budget night, until Covid-19 intervened and the government moved the 2020–21 budget release to 6 October. This gives Prime Minister Scott Morrison and his team time to focus on the crisis and to gauge its impact on the economy and the government’s own financial position. We don’t have clarity on that yet.

ASPI normally releases its annual The cost of defence budget brief a fortnight after budget night. Since there’s no budget to analyse, we’ve delayed this year’s publication to October. But since there’s naturally speculation about the future of the defence budget, it’s worth recapping what we know (this post) and outlining some possible futures (stay tuned next week).

Back in that distant era BCV, readers may recall that, despite the media and political attention paid to the government’s commitment to return defence spending to 2% of GDP by 2020–21, the 2016 defence white paper noted that tying the defence budget to GDP created planning uncertainty because defence funding would go up and down as GDP predictions changed. Consequently, the white paper presented a fixed funding line out to 2025–26 (page 180). Since the white paper, the government has delivered that funding and the 2019–20 budget looked like being no different.

Because forecast GDP growth has slowed since the white paper was released, that fixed funding line has gone up faster than GDP, and it looked like it would reach 2.2% in the next few years. So, what takes precedence? The fixed funding line or 2%? In Senate estimates hearings on 29 November 2020, Labor asked that question. The defence minister responded that the government was ‘absolutely committed’ to the white paper funding line, even if it grew past 2% of GDP. That was, of course, BCV.

In February, the government published the portfolio additional estimates statements for 2019–20 updating the May budget. In the update, the defence budget had grown by $587 million since the budget was published, due mainly to almost half a billion dollars in compensation for loss of buying power from the falling Australian dollar, plus $88 million in supplementary funding for Operation Bushfire Assist (see table 1).

Table 1: Change in defence portfolio funding from budget to additional estimates, 2019–20 ($m)

	Department of Defence	Australian Signals Directorate	Total
Budget 2019–20 (May 2019)	37,825	917	38,742
Additional estimates 2019–20 (February 2020)	38,388	941	39,329
Change	+563	+24	+587

Source: Portfolio additional estimates statements 2019–20: Defence portfolio.

When it was issued, the 2019–20 budget for defence equalled 1.93% of the government’s GDP prediction. If we compare the revised defence budget with the government’s GDP prediction in its mid-year economic and fiscal outlook, the defence budget reaches 1.96% of GDP. But the outlook was released on 16 December—before the worst of the bushfire crisis—so its revised GDP prediction doesn’t reflect the economic impact of that emergency, let alone the Covid-19 crisis.

Before Covid-19, the force structure in the 2016 white paper was looking increasingly unaffordable, even with a defence budget that reached 2% of GDP. The former secretary of defence who presented that white paper to the government recently admitted as much. The evidence can be seen in many places; for example, the sustainment costs for some major incoming and future systems (like the F-35s and land combat vehicles) are expected to be several times higher than corresponding costs for the systems they’re replacing.

As always, funding pressures manifest themselves in delays to the capital acquisition program. Defence informed the Senate in late January that:

To accommodate changing priorities within Defence’s budget, investment proposals can be reprioritised, funding re-profiled, re-scoped, deferred or divested. Since the release of the 2016 IIP [integrated investment program], 106 IIP capability projects have been affected through reprioritisations to accommodate Government and Departmental priorities.

Since there’s been no public update to the white paper’s investment plan in the four years since it was released, there’s no way of knowing what those 106 projects are or what the capability impact is. But it seems clear that projects have been delayed due to funding pressure.

Then the virus arrived, with the associated hit to the economy and consequently to government revenue. Nobody knows how big a hit it will be, or how long it will last for, or what its impact on the defence budget will be. Nevertheless, in early April the finance minister implied that the government was sticking to the white paper’s funding line regardless of changes to GDP:

The Government agreed back in the 2016 Defence White Paper that there would be no further adjustments to funding as a result of changes in Australia’s GDP growth estimates.

This was to provide funding certainty in the context of a massive investment program and to avoid the need to have to regularly adjust Defence’s force structure plans.

As part of the annual Budget processes, a 10-year Defence funding profile is agreed by Government which is designed to provide planning certainty to Defence.

If the government continues to deliver that funding line while the economy suffers prolonged doldrums, the defence budget will continue to grow as a percentage of GDP, potentially even to 2.4%. That relative growth is likely occurring already. If we assume that there will be no GDP growth at all in 2019–20 due to Covid-19, the defence budget presented in the mid-year budget outlook has already hit 2% of GDP, a year early. If GDP goes backwards this year, the defence budget could now be at 2.1% of GDP.

But, of course, it only counts if Defence spends it, and spending that money could be difficult. Defence has reduced its activity to manage the impact of Covid-19—for example, by suspending training missions in Iraq and Afghanistan and cancelling exercises here. The annual rotation of US marines through Darwin has been postponed. That reduced activity will reduce the spend.

Similarly, spending on acquisitions will likely slow. The US Department of Defense is predicting a three-month delay across most of its major projects. Here things seem to be mixed. Some projects appear to be tracking well. Work is starting on the first of the offshore patrol vessels in Western Australia. HMAS Waller’s full-cycle docking, the first to install sonar upgrades on a Collins-class submarine, should be finished on schedule mid-year. But there may be delays to other projects, such as the Tindal airbase upgrade.

Small to medium enterprises with less ability to absorb disruptions to cash flow are especially vulnerable to a slowdown—and if they go broke it can have disproportionately large impacts on the major projects they feed components into. Defence is trying to support them by keeping the cash flowing, telling ASPI that ‘$4.5 billion [has been] paid earlier than the contracted payment terms’. Still, it’s hard to see all projects delivering as planned with local and global supply chains disrupted by the virus. That’s likely to continue into next financial year.

So, it could be hard for Defence to spend all its money this year. Traditionally, when the department has big underspends, it tries to make quick acquisitions, like additional C-17As. If the government wanted Defence to spend, it could try to get more F-35As sooner than planned. F-35 production has been hit by Covid-19, but some European partners might offer us their slots to save cash.

Nevertheless, when it’s all done and dusted, Defence probably won’t spend its budget this year and hit 2% of GDP a year early. But should the government still honour its commitment to get to 2% next year? There have been suggestions that defence should take a budget cut as its share of the country’s economic pain. Next week, I’ll look at the potential impact on Defence of a cut.

Despite the Covid-19 crisis, geopolitical competition is not going into hibernation. With relations between the US and China taking a further adversarial turn, it is imperative that Australia find ways to continue strengthening and diversifying its strategic relationships.

How the pandemic will ultimately shape the regional order remains uncertain. Under any scenario, Australia’s partnerships across the Indo-Pacific will continue to be critical in navigating the region after the crisis passes. In this regard, Australia’s trilateral relationship with India and Japan is one asset that can be further developed and leveraged.

While significant attention has been paid to the rebirth of the ‘Quad’ dialogue among Washington, New Delhi, Tokyo and Canberra, Australia’s trilateral arrangements with India and Japan have also matured in recent years. Amid concerns over the US commitment to the Indo-Pacific, the three other Quad partners have steadily reinforced their own collaboration. For example, the three countries now consistently convene at the foreign-secretary level.

Upgraded defence and diplomatic engagement has been a cornerstone of this trilateral. Between 2014 and 2018, the number of Australia–India defence exercises nearly quadrupled, and in 2019 Australia sent its largest ever deployment to India. Japan’s increasing defence activity with India and their upgraded ties led to an inaugural ‘2+2’ meeting of the two countries’ foreign and defence ministers in late 2019.

For Australia and Japan, both alliance partners with the US, deeper strategic ties with India are not a substitute for steadfast US engagement in the Indo-Pacific. Yet, as India’s strategic clout grows, its contribution as a regional balancing power can be encouraged and complemented.

In February, Japan’s ambassador to Australia, Reiichiro Takahashi, spoke in Perth on the strategic underpinnings of this trilateral relationship:

All three countries have our own visions and plans for the Indo-Pacific that bear remarkable similarities in content, namely a desire for the rule of law, increased trade, stability, and development … [T]hey certainly share an equal concern for the maritime domain, and this in turn indicates how much potential there is for greater co-operation between us.

Since February, the health crisis and economic dislocation caused by Covid-19 has afflicted Australia, India and Japan. Nonetheless, the shared interests of the three countries have been reinforced in a region plunged into further uncertainty. These shared interests extend from managing the current crisis to preserving a rules-based regional order that’s at risk of unravelling.

Australia needs to find creative ways now to not only maintain these vital relationships, but strengthen them where possible. Given the extensive underpinnings of the Australia–Japan relationship, it’s Australia’s relationship with India that needs further developing.

There is no silver bullet for Australian officials pursuing deeper ties with India—strategic partnerships are developed over time through consistent engagement, dialogue and cooperation. Even in the constrained Covid-19 environment, there are a number of investments Australia can look to make.

On the defence side, concluding the mutual logistics support agreement with India remains a near-term opportunity. An anticipated outcome of Prime Minister Scott Morrison’s postponed January visit to India, the agreement will enable reciprocal access to military facilities and increase the two countries’ capacity to operate together. This could be concluded even without a prime ministerial visit and complement an India–Japan equivalent that’s also under negotiation.

Increasing the volume and complexity of Australia’s joint exercises with India will also offer benefits. The largest such initiative, AUSINDEX, featured anti-submarine exercises for the first time last year, alongside coordinated aerial patrols over the Bay of Bengal. The capacity to conduct joint exercises is likely to be limited in the near term, but ongoing defence engagement and planning of future operations remains vital. While Japan’s public support for Australian participation in the Malabar exercise involving India, Japan and the US is important—and Australian participation would be welcome—Malabar is but one of many joint exercises that can occur.

Diplomatically, maintaining senior-level dialogues is essential to turn shared interests into common action. This includes Australia’s ‘2+2’ with India and the formal trilateral dialogue, both currently held at the secretary level. Following the recent upgrade of the India–Japan 2+2, Australia could pursue a similar boost to its equivalent dialogue with India. Complementing Australia’s longstanding ministerial 2+2 with Japan, this would ensure all three countries were conducting such meetings at the ministerial level. These arrangements could underpin the upgrading of the trilateral dialogue itself to the ministerial level.

The maturing of the Australia–India–Japan trilateral relationship is testament to Australia’s strategic policy of helping to shape a regional order that is multipolar and balanced, and in which Australia has options. This has involved strengthening longstanding relationships like that with Japan, upgrading emerging ones like that with India, and building networked partnerships across the Indo-Pacific like the Australia–India–Japan trilateral.

The task remains unfinished, however, and Covid-19 further clouds Australia’s navigation of an uncertain regional outlook. While deepening Australia’s relationships is made more challenging amid the pandemic, a more precarious region makes those relationships all the more important.