Australia needs to spend more on defence—and it needs to do so immediately. The strategic imperative has been firmly established in the government’s own major defence documents.
The Albanese government and the Coalition opposition agree that we are in the gravest geopolitical period in generations and this is only going to intensify.
But as the Australian Strategic Policy Institute’s latest Cost of Defence report finds, the rhetorical urgency is not being matched by action in the form of defence investment. The May budget is the latest demonstration of this mismatch, lacking spending for swift increases in capabilities that the Australian Defence Force would need if our region were to deteriorate quickly.
In particular, this year’s budget priorities are not directed towards strengthening the Australian Defence Force’s ability to fight in the next decade.
This is not doom-mongering; the government has acknowledged that the warning time before any conflict, which had long been set at 10 years, has shrunk to effectively zero time.
We have war in Ukraine and the Middle East, aggression and increasingly dangerous and unprofessional behaviour from China causing instability and confrontation in the South China Sea and across the Taiwan Strait, erosions of the rule of law and revisionist agendas from authoritarians. Instability is heightened by foreign interference, economic coercion and artificial intelligence-enabled dangers such as cyber attacks and disinformation.
If war were to break out at any time in the next 10 years, our military would essentially fight with the force it has today. Based on current resourcing, nothing significant will change over the decade.
Most of the major new capabilities in the government’s defence investment blueprint are two decades away from being fully fielded. That blueprint does contain some shorter-term enhancements, but these will not be fielded until the 2030s.
The welcome $5.7 billion in new defence spending over the four-year forward estimates period is devoted to just three priorities: the AUKUS submarines, the next fleet of surface warships and investment in long-range strike, targeting and autonomous systems. But two thirds of this funding doesn’t arrive until 2027-28. The relatively impressive longer term plan leaves us vulnerable in the immediate period ahead. More money immediately is not a silver bullet, and ambition must be balanced with how much Defence can actually spend each year. But the nation’s security requires a two-pronged strategy of enhancing our existing force to meet threats within the decade while investing in long term capabilities.
Other countries are furiously pursuing new capabilities that can be put into action quickly—such as creating masses of small drones and prototyping and developing new technologies.
We talk about technology and asymmetric advantage—playing to your strengths and finding effective means to exploit an opponent’s weaknesses–yet we lack a credible pathway to bring them into operation to bolster the force we have today.
Over the longer term, the picture starts gradually to improve. The $50 billion in additional spending over the next decade is an important commitment, even if far away. The plan for a complete recapitalisation of the surface combatant fleet will eventually give us the biggest and most capable navy Australia has had since World War Two.
But, so far, we are failing to grasp the opportunity to link our traditional large platforms such as submarines and warships to more modern developments in warfare—drones and various small uncrewed and smart capabilities. AI, robotics, electronic warfare and space capabilities remain aspirational, without any pathway for inclusion and integration into a truly focused force capable of meaningful deterrence and warfighting. That is why it is so important to realise AUKUS Pillar II, which is dealing with these capabilities.
It’s easy to criticise; harder to do. All governments are grappling with tight budgets amid competing demands and the unremitting expectations of voters and taxpayers. As a nation, we need to accept the need for higher defence spending. Hoping that conflict won’t come is not a viable strategy. If we are prepared for war, we have a better chance of deterring and hence averting it.
Europe is living that lesson now, having put all hope in the judgment that global trade and economic entanglement would bring security. Now it is clear that military investment is imperative to deter war or best prepare nations for it.
The government has a vital responsibility to speak plainly to the nation about the geopolitical risks and the possibility of conflict.
We need to grasp the challenge that is in front of us today, not in three or five years’ time. Otherwise, we risk delivering on Macarthur’s famous two word warning: “The history of failure in war can almost always be summed up in two words: “Too late.” Too late in comprehending the deadly enemy. Too late in realizing the mortal danger. Too late in preparedness. Too late in uniting all possible forces for resistance.”
Why take the risk of only acting after a crisis and saying better late than never? The world in turmoil demands we act in real time to both deter crises and be best prepared for them.
In 2003, Australia became the proud owner of the last of six new-build Collins-class submarines. Less than a decade later, the fleet was in a poor state of repair, and at times only one or two of the boats were available to the Royal Australian Navy. This account by Andrew Davies explains how the situation was remediated by bringing in a team of highly experienced naval professionals to take an uncompromising look at the arrangements in place to manage a vital national defence asset.
Despite a public perception that the submarines were inherently defective, the problems were in fact almost entirely due to dysfunctional and often rancorous organisational dynamics between the key players. In the space of just a few years, and with remarkably little required in the way of additional funding, the situation took a dramatic turn for the better.
As with earlier ASPI case studies on defence projects, Nobody wins unless everybody wins is designed to help those in Defence, industry and parliament and other interested observers to better understand the complexities of the business, all with the aim of improving how Australia equips and sustains its defence force.
https://aspi.s3.ap-southeast-2.amazonaws.com/wp-content/uploads/2024/12/12204818/Nobody-wins-unless-_everybody-wins-Banner_0.png335692nathanhttps://aspi.s3.ap-southeast-2.amazonaws.com/wp-content/uploads/2025/04/10130806/ASPI-Logo.pngnathan2024-05-28 06:00:002024-12-12 20:50:16Nobody wins unless everybody wins: The Coles review into the sustainment of Australia’s Collins-class submarines
This is a very different year for the defence budget. We are in a time of significant change and upheaval.
Uncertainty is rife, but some fundamentals can help in working through uncertainty, especially in the world of defence policy, planning, capability programming and budget. The order of those words is important.
Defence budgets are not arbitrary. Capability requirements must drive budgets. It doesn’t mean that the budget is unlimited but it demands that governments consider proposals for what is required and assess what can be afforded. If budgets drive capability, it risks the true capability needs not being put to government which results in failure to ask of government what they are elected to do – make decisions based on all available information.
The oft-cited metric of defence spend as a percentage of GDP is helpful as a point of comparison on the rate of effort of specific economies towards defence outcomes. It establishes a baseline from which we can measure – and therefore tell a story about – defence spending over time, and in the context of broader geopolitics. The low percentages across major European economies helps to illustrate why deterrence failed against the Putin regime and should be a lesson for all in relation to why defence spending is so important for managing tension and long-term peace.
But a percentage in isolation is not helpful in assessing whether the budget allocated to Defence will allow it to deliver the capabilities for which the government has asked.
The Albanese government released the 2023 Defence Strategic Review (DSR) and its Portfolio Budget Statements (Budget) within weeks of one another. The DSR establishes the future strategic direction for the Department of Defence and the ADF, including by identifying priorities that must be acted upon in the immediate term. The Budget represents a continuity approach with the strategic and budgetary guidance from the 2020 Defence Strategic Update and 2016 Defence White Paper.
There is, therefore, a disconnect between the two. This can be addressed and will be through a series of further reviews and specific activities to be progressed by Defence in the coming year. There are significant additional bodies of work yet to be finalised that will affect the future defence budget; all indications point to a steady and possibly substantial rise.
Australia must of course invest in defence capability commensurate with the challenges of the strategic environment. Crucially, however, the role of defence to help deter wars, while being ready for times of conflict, requires spending even in times of relative peace. A detailed discussion of how defence is budgeted to both deter and win wars, and the external and internal dynamics that drive budget (and other) programming and management, is more important today than at any time in the post-Cold War era. This document is a must read for those interested in current and future defence spending and for increased understanding of its importance to the government’s overall budget theme of providing increased certainty to Australians in an increasingly uncertain world.
Executive summary
Defence has long been seen as a necessary burden on the federal budget. However, it is assuming the status of an urgent priority in the wake of the AUKUS agreement and the far-reaching reform urged by this year’s Defence Strategic Review (DSR). Both are responding to a much more challenging geopolitical environment and the realisation that Australia doesn’t have the luxury of time to achieve readiness.
This year’s Defence budget reflects the urgency of the demands upon Defence to the extent that it includes the initial spending on the nuclear-powered submarines and the first response to the DSR, despite there being only very approximate estimates for how that spending is to be scheduled and for the savings that will pay for them.
However, the urgency of the demands upon Defence isn’t reflected in its short-term funding. The only increase in the Defence budget over the next three years is compensation for the increased cost of imported military equipment flowing from a fall in the value of the Australian dollar.
Excluding this, the core funding of Defence (not including the Australian Signals Directorate) has actually been reduced at a time when unprecedented demands are being placed upon it. Between 2023-4 and 2025-6, Defence funding, excluding compensation for adverse foreign exchange movements, drops from $154.0 billion to $152.5 billion.
Both the AUKUS submarines and the DSR conclusions highlight an approach in which capability will drive budget conversations – not vice versa. That is welcome. But there is clearly much more work to be done to clarify the capability implications of the DSR, and then reflect those accurately – and at the appropriate time – in the budget.
The difficulty in bringing the DSR reforms and the spending on submarines into the budget is understandable. The timing of the DSR meant it reached the staff compiling the Defence budget very late in the annual process, while the nuclear-powered submarine program is of historically unprecedented complexity for any government project. The broad outline of the submarine program was only announced in March 2023.
New programs responding to the DSR such as a long-range strike capability or the hardening of the northern Australian bases, are not the subject of budget measures, with Defence expected to provide the additional funds needed with savings obtained from other programs.
Funding in each year continues to move faster than the predicted annual rate of inflation, consistent with the recommendations of the 2016 Defence White Paper (DWP) and the 2020 Defence StrategicUpdate (DSU).
However, the Defence Department’s financial controllers have fewer real resources to work with over the next three years than they were expecting in March 2022, when the Budget still contained the French submarine program and the DSR hadn’t even been commissioned.
The surge of inflation over the past year has made the constraints of a reduced funding base even tighter. The Treasury now expects inflation to reach 6% this year, or double the level it predicted a year ago. Inflation is being powered, both in Australia and globally, in large part by an overheated economy that’s the result of record low interest rates and large government deficits and further exacerbated by the impact of the Russian invasion of Ukraine on food and energy markets.
With unemployment at near record lows, Defence has been unable to meet its recruitment targets, which has been further exacerbated by increasing separation rates among uniformed personnel.
Defence had planned for the ADF to raise its numbers this year (2022-23) by 2,201 but instead faced a contraction in size by 1,389 uniformed personnel.
The rigid constraints on Defence funding over the next four years reflect the Treasury’s judgement that total government spending must be curbed if inflation is to be brought under control. Treasury’s economic forecasts assume that the combined efforts of government and the Reserve Bank of Australia will succeed in taming inflation over the next 18 months, bringing inflation back into the Reserve Bank’s target band by 2024-25.
The government will start providing increased funding for defence from 2027-28 onwards. An amount of $30.5 billion has been set aside for defence spending out to 2032-33. It’s expected that this will increase the defence share of GDP from around 2.05% to more than 2.3%. The additional funding will lift Defence’s share of government spending from about 8.2% now, including both operational and capital spending, to about 9.7% by 2032-33.
However, the principal task for Defence over the year ahead is to decide how to reconfigure its force structure and capability acquisition programs in line with the DSR and the difficult budget constraint.
That work is to be completed ahead of the planned 2024 National Defence Strategy, which is expected to be released before next year’s budget. The uncertainty surrounding the existing Integrated Investment Program (IIP) will affect defence industry as the scope and schedules of major programs are reviewed. Although Defence has raised the share of its procurement sourced domestically from about 45% to 55% over the past five years, it’s possible that the pressure to acquire new capabilities quickly will result in more ‘off-the-shelf’ imports.
Given the intense re-ordering of the Defence capital program expected over the year ahead, this year’s ASPI defence budget brief isn’t a detailed examination of the major acquisition programs. Rather, it’s a guide for the government, industry, academia and citizens interested in Australian defence strategy, capability and budget.
The strategic context for the 2023-24 defence budget is complex and extremely challenging. There’s currently a gap, and quite a significant one, between the rhetoric of the 2023 DSR and the 2023-24 defence budget (and forward estimates). How Defence and the rest of government will work together to bridge the gap will become clearer over the coming year. This publication focuses on what ASPI can usefully contribute to that process, and where the key issues lie in the defence budget.
https://aspi.s3.ap-southeast-2.amazonaws.com/wp-content/uploads/2025/03/12141010/The-big-squeeze-ASPI-defence-budget-brief-banner.png515792markohttps://aspi.s3.ap-southeast-2.amazonaws.com/wp-content/uploads/2025/04/10130806/ASPI-Logo.pngmarko2023-05-30 14:07:452025-03-12 15:33:15The big squeeze
The Australian Government has stated that the ADF requires greater long-range strike capability. This was first stated by the previous government in its 2020 Defence Strategic Update (DSU), which emphasised the need for ‘self-reliant deterrent effects’. The present government has endorsed that assessment: Deputy Prime Minister and Defence Minister Richard Marles has stated that ‘the ADF must augment its self-reliance to deploy and deliver combat power through impactful materiel and enhanced strike capability—including over longer distances.’ He’s coined the term ‘impactful projection’ to describe the intended effect of this capability, which is to place ‘a very large question mark in the adversary’s mind.’
The term may be new, but the concept is not. To us, it’s a restating of the concept of deterrence by denial; that is, having sufficiently robust capabilities to convince an adversary that the cost of acting militarily against us isn’t worth any gains that might be made.
But the need for the ADF to have those kinds of capabilities has become much more urgent. As the 2020 DSU noted, we no longer have 10 years of warning time of conventional conflict involving Australia. Moreover, this is not just the prospect of conflict far from Australia’s shores. People’s Liberation Army (PLA) force-projection capabilities have grown dramatically in the past two decades and include long-range conventional ballistic missiles, bombers and advanced surface combatants that have already transited through Australian waters.
The ‘worst case’ scenario for Australia’s military strategy has always been the prospect of an adversary establishing a presence in our near region from which it can target Australia or isolate us from our partners and allies. PLA strike capabilities in the archipelago to our north or the Southwest Pacific, whether on ships and submarines or land-based missiles and aircraft, would be that worst case. That could occur as China sought to ‘horizontally escalate’ a conflict with the US to stretch its military resources. So, an enhanced ADF long-range strike capability is not primarily about a conflict off Taiwan or in the South China Sea.
Unfortunately, the ADF’s strike cupboard is rather bare. Defence is acquiring more modern maritime strike and land-attack missiles for its existing platforms. But, even if equipped with better weapons, strike systems built around fighter planes or surface combatants are unlikely to have the ‘affordable mass’ or range needed to deter or defeat a major power’s attempts to project force against Australia.
There’s no doubt that the Defence Strategic Review (DSR) commissioned by the Albanese government is considering new strike options. According to the review’s terms of reference, those capabilities need to be delivered by 2032–33. In this report, we consider options to increase the ADF’s strike power in that time frame.
We start with the US Air Force’s B-21 Raider bomber, which was recently rolled out in California. The B-21 has become a topical issue here but so far there’s been little reliable information to inform the public discussion. This report is a first step in investigating the public data that is currently available on the B-21, while also analysing the B-21’s suitability for Australia’s needs.
As an extremely stealthy bomber that can deliver large amounts of ordnance across our near region, the B-21 is the ‘gold standard’ in strike capability. It could potentially be delivered by 2032–33. But that capability comes at great cost. We estimate the total acquisition cost for a squadron of 12 aircraft to be in the order of $25–28 billion and have a sustainment cost that would put it among the ADF’s most expensive current capabilities (but be significantly less than nuclear-powered submarines).
But that cost is potentially offset by a number of factors. A single B-21 can deliver the same effect as many F-35As. Moreover, B-21s would not require the ‘overhead’ of supporting capabilities such as air-to-air refuellers when operating in our region. Moreover, the B-21 can prosecute targets from secure air bases in Australia’s south, where it has access to workforce, fuel and munitions.
Of course, there are other options for long-range strike. These have their own constellations of cost, capability and risk. Long-range missiles, including hypersonics, have also received much recent attention. But they may be deceptively expensive; the further we want a missile to fly, the more expensive it is, and none of its exquisite components are reusable. Moreover, history suggests that very large numbers of missiles will be needed to defeat an adversary—more than we’re ever likely to be able to afford or stockpile.
Any assessment of capability options needs to be informed by robust cost–benefit analysis. The B-21 certainly has a high sticker price, but if, by virtue of its stealth, it can employ cheaper, short-range weapons, then in the long run it may be more affordable and deliver greater effects than long-range missiles alone. It was analysis of this kind that persuaded the USAF to go down the path of a new bomber. Of course, such exercises are assumption-rich activities, and all assumptions need to be rigorously tested; what’s valid for the US might not be for Australia.
Then there are several options that fall under the heading of the ‘Goldilocks’ bomber: a strike system that doesn’t have the eye-watering cost of the B-21 but still delivers a meaningful capability enhancement. One option is provided by ‘palletised munitions’ dropped from military cargo aircraft. There are two attributes of this approach that have appeal in Australia’s circumstances. The first is that many of the components, such as the missiles and aircraft, are already in ADF inventory or are being acquired. The second is that airlifters can operate from the short and unprepared airfields found in our region. More strike aircraft operating from more locations enhances the survivability of our strike system and complicates the adversary’s operating picture.
Another Goldilocks approach is potentially provided by autonomous, uncrewed systems. They will still need to be large to provide the range needed for impactful projection. However, it’s possible to discern what the solution could look like; for example, a larger version of the Ghost Bat that can deliver ordnance across our near region. At some point, the future of strike will involve larger crewed and uncrewed systems supported by large numbers of ‘the small, the smart and the many’—cheap, disposable systems that Australian industry can responsively produce in mass. The key question is: can that be done within the DSR’s 2032–33 target time frame?
There is potentially a way for Australia to have its cake and eat it too: by hosting USAF B-21s. Under the Enhanced Air Cooperation stream of the US Force Posture Initiative, USAF B-1, B-2 and B-52 aircraft visit northern Australia. In future, having our major ally rotate B-21s through northern Australia could obviate the requirement for Australia to have this kind of long-range strike capability in its own order of battle. Ultimately, the issue comes down to how much independent, sovereign strike capability the Australian Government requires. And any sovereign Australian capability adds to the overall alliance pool, which is the core concept underpinning AUKUS.
This report also examines some of the main arguments against the B-21. While all of them need to be considered seriously, we would also note that the world has changed. The September 2021 AUKUS announcement under which Australia will acquire a nuclear-powered submarine capability demonstrates that. Things that were previously inconceivable are now happening, so we shouldn’t dismiss the B-21 out of hand. Our recommendation is that the Australian Government should engage with the US Government to gain access to the information on the B-21 program so they can make an informed decision on its viability for Australia.
This analysis will form part of wider ASPI program of work looking at the strategic and capability questions that Australia is grappling with, including deterrence and long-range strike.
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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).
The Albanese government’s first budget was not designed to focus on Australia’s security situation or defence spending. Tasked with sharing Australia’s difficult economic situation with the Australian public, the budget has more immediate fish to fry.
For those Australians who want to see increased defence spending, this was not going to be that budget as it would have directly undercut existing defence reviews due within months. Certainly, the Prime Minister has stated that the government will do whatever is necessary to ensure Australia has the defence force it needs in these strategically uncertain times.
But this budget gives no indication of how much the government is willing to spend to do that. With the Defence Strategic Review (DSR) under Stephen Smith and Angus Houston conducting its work and not due to report until March next year, the government has stuck with the existing funding line it inherited from its predecessor. That’s an artefact of the 2016 Defence White Paper—a document developed in a different era and quickly overtaken by events.
So Defence is in a holding pattern while the government keeps its powder dry and waits for Smith and Houston (noting their interim report has recently been handed to the government). No doubt it has had conversations with the DSR leads indicating its comfort zone for additional spending, but that hasn’t been made public.
What we can say from the information set out in this budget is that any increase to defence spending will require difficult reprioritisation. While the government received a revenue windfall this year due to high commodity prices, those are forecast to return to normal. And with the government committing to deliver the tax cuts agreed by its predecessor, its income is under further pressure. At the same time, it’s facing five growing spending pressures: interest on the growing debt, the National Disability Insurance Scheme, health care, aged care, and defence—and that’s before any increase to the existing defence funding line. The result is a forecast for deficit spending for the next 10 years.
That’s not a good situation for the DSR leads. They’re tasked with delivering new military acquisitions faster in the next decade, but the existing acquisition plan is probably already unaffordable (without increased spending), with many entirely new capabilities or expensive replacement projects. And with nuclear-powered submarines and frigates on the untouchable list, the challenge of delivering more sooner gets even harder, as those two programs will consume tens of billions of dollars over the coming decade even before they deliver their first vessels.
Moreover, inflation is rapidly eroding Defence’s buying power by billions of dollars every year. By the end of the forward estimates, Defence may have lost around $18 billion in buying power even if inflation rapidly returns to the Reserve Bank of Australia’s target rate. That’s the budget papers’ predictions, but those predictions haven’t been very accurate in recent years.
This year, despite nominal growth of over 7% in defence spending, real growth is under 1% once inflation is taken into account (although, with inflation difficult to predict, it’s also difficult to reliably quantify real growth). It’s hard to see Defence affording its ambitious acquisition program with a budget that’s essentially static in real terms.
Inflation is also driving nominal GDP growth at a predicted 8% this year. That means that defence spending is falling as a percentage of GDP for the second year in a row despite the government delivering the funding set out in the 2016 Defence White Paper and 2020 Defence Strategic Update. Predicted defence spending has also fallen significantly just since the March budget, from 2.11% to 1.96%, despite the funding line remaining fundamentally unchanged.
In summary, there is no pot of gold available to cover increased defence spending. That doesn’t mean the government can’t or won’t increase defence spending, but any increase will require either higher taxes (which appears unlikely, since the government is proceeding with its predecessor’s planned tax cuts), greater borrowing (accelerating the vicious cycle of debts and deficits), or cuts to other priorities that have constituencies of their own.
When we look at Defence’s big three areas of spending—capital acquisitions, people and sustainment—there have been no significant changes since the March budget. With the Australian dollar at a 20-year low against the US dollar, the Defence budget has received a large automatic top-up to maintain its purchasing, but there’s no adjustment to compensate for inflation.
There are a few changes to spending, but they’re broadly consistent with what we would see in a mid-year budget update. For those who follow capability, the top 30 acquisition projects and sustainment products hold some interesting information, but the lists are quite consistent with previous plans. We’ll have to wait for the outcomes of the DSR to see anything new.
Similarly there’s been no adjustment to Defence’s personnel allocation since March. But that still means the ADF needs to find roughly 13,000 more people this decade to operate the capabilities on its shopping list, even though it’s only managed to grow by an average of 300 per year since the 2016 White Paper. Smith and Houston may need to consider whether it makes sense to acquire capabilities that the ADF can’t crew, or at least how the ADF can maximise its combat power without many additional people. Of course, another HR strategy is one based on ‘if you build it, they will come.’
The situation is also difficult with Defence’s civilian and external workforce. To deliver its ambitious capability program, Defence has relied on growing numbers of contractors. They’ve helped Defence spend record amounts in its acquisition programs in recent years, despite the impact of Covid-19; however, they come at a cost. That growth may be over; in the October budget, the government is seeking $144.6 million in ‘savings from external labour and savings from advertising, travel and legal expenses’. That’s not a large percentage of Defence’s total budget but, if it means the organisation can’t hire the people it needs to manage the acquisition program, it’s hard to see how Defence will deliver more capability sooner.
Overall, while there were no surprises, the October budget hasn’t made the job any easier for Smith and Houston.
https://aspi.s3.ap-southeast-2.amazonaws.com/wp-content/uploads/2025/03/13104017/The-Cost-of-Defence-October-2022-2023-banner.png443704markohttps://aspi.s3.ap-southeast-2.amazonaws.com/wp-content/uploads/2025/04/10130806/ASPI-Logo.pngmarko2022-11-08 10:38:002025-03-13 10:43:59The cost of Defence ASPI defence budget brief October 2022-2023
The aim of this report is to inform government decision-makers and the public on the ability of Project LAND 400 Phase 3—the infantry fighting vehicle (IFV) acquisition—to meet the needs of Australia. I examine a number of factors that provide context for the government’s upcoming decision, whenever that may take place. Those include how IFVs fit into the Australian strategic environment, the ease with which the ADF can deploy them, their vulnerability to threats, and the ongoing utility of armour in the light of lessons unfolding from the ongoing Russian–Ukrainian War.
To set the information into a useful context, this report explains the nature of contemporary land warfare and speculates how the Australian Army is likely to fight in a future conflict. To further assist those making the IFV decision, this report offers a number of scenarios that outline potential operations that the government may direct the ADF to undertake. It also identifies current gaps in ADF capability that will need remediation if the IFV is to achieve its potential, as well as the other opportunities that might not be taken up because of the focus on this investment.
The report’s analysis results in some key questions for decision-makers to consider as they decide on the infantry fighting vehicle acquisition:
Does the government believe that its IFV investment will deliver an appropriate balance of protection, lethality and mobility (both tactical and operational)?
Does the government agree with the requirement for an infantry vehicle with STANAG 4569 Level 6 force protection and equipped with an active protection system?
Is the government confident that the number of the IFVs obtained will generate a deployable and sustainable force that represents a sufficient return on the investment?
Does the government accept that the IFV options under consideration will enable the ADF to offset existing gaps in capability and allow it to conduct operations in a contested maritime environment, including sea and airlift, long-range fires and logistics?
Is the government confident that the Army’s combined arms system is deployable in contested environments, particularly in a maritime scenario?
Does the government believe that the IFV will provide utility in the range of contingencies that the government envisages the ADF will need to meet?
Does the government agree that the IFV will contribute to the requirement that the ADF be able to shape, deter and respond to threats as mandated in the 2020 Defence Strategic Update (DSU)?
https://aspi.s3.ap-southeast-2.amazonaws.com/wp-content/uploads/2025/03/13110247/Deciding-the-future_-the-Australian-Army-and-the-infantry-fighting-vehicle-banner.png343675markohttps://aspi.s3.ap-southeast-2.amazonaws.com/wp-content/uploads/2025/04/10130806/ASPI-Logo.pngmarko2022-10-12 10:51:002025-03-13 11:06:33Deciding the future: the Australian Army and the infantry fighting vehicle
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.
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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.
https://aspi.s3.ap-southeast-2.amazonaws.com/wp-content/uploads/2024/12/13225818/SI173-Marles_banner.jpg4131350nathanhttps://aspi.s3.ap-southeast-2.amazonaws.com/wp-content/uploads/2025/04/10130806/ASPI-Logo.pngnathan2022-08-17 06:00:002024-12-13 23:01:41Marles’s Defence Strategic Review—an exploding suitcase of challenges to resolve by March 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.
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?
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.
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.
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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.
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 ↩︎
US Defense Department, ‘Contracts for May 13, 2020’, US Government↩︎
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Donald Trump’s new defense secretary, Pete Hegseth, has enormous challenges ahead of him—challenges that could seriously affect Australia by upsetting key elements of our ally’s defence position, including its ability to deliver the Virginia class submarines that are so crucial to our AUKUS plans.
At the heart of problem is Trump’s hallmark tax cuts and the space he needs to clear in the federal budget to enable the cuts without driving the deficit much deeper into the red. The Republicans are aiming to get their program through Congress by bundling everything together into one or two big omnibus bills. This should help them manage their narrow majorities in the Senate and the House of Representatives, but it creates potential problems among the deficit hawks on their own right flank who will be stripped of the ability to debate the cost of individual programs.
This group of Republicans insist that changes to taxes and spending must be at least budget neutral. They are deeply disturbed by the fact that, since the end of the Cold War, government debt has grown from about 40 percent of GDP to 123 percent today and is still rising at about 9 percent per annum. Unchecked, it could get to about 195 percent of GDP by 2050.
The principal threat to an ability to balance the budget is Trump’s desired tax cuts. The Committee for Responsible Federal Budget calculates that they would cost between US$5 trillion and US$11.2 trillion through to 2035, counting both the permanent extension of Trump’s first term tax cuts—which are due to expire at the end of this year—and new cuts he has promised. These have both been flagged as top administration priorities.
Although Trump seems intent on using tariffs to boost revenue—unlike in his first term, when he was motivated by protecting American industry—it is clear his tariff policy will not resolve his deficit problem should he press his tax changes.
The Tax Foundation, an independent non-profit organisation, estimates that a universal 10 percent tariff would raise $2 trillion through to 2034 and a 20 percent tariff $3.3 trillion—though it would be less if, as expected the tariffs shrink the US economy. This would ‘fall well short of what is needed’ to cover the permanent extension of Trump’s first term tax cuts, let alone the new cuts.
Meanwhile, Trump has outsourced the task of cutting spending to self-proclaimed ‘first buddy’ Elon Musk and his Department of Government Efficiency, or DOGE. It reportedly is staffed mostly by young men Musk has brought across from the tech sector who have the job of eliminating programs and public servants. Musk suggests that any serious problems arising from haste will be fixed later. Sometimes, as with the sacking of many of those assigned to the supervision of the nuclear weapons stockpile, they have had to be fixed sooner rather than later.
This is one part of the headache Hegseth will soon have to deal with. He is responsible for the most complex and expensive department outside those that handle social payments. Defence also has the deepest and strongest cultural disciplines—particularly in the armed services—and the most complex and expensive technologies in the world. Going into the November election, the approved outlays for defence were US$895 billion. Trump promised an increase but has since pointed the DOGE directly at defence.
In an interview on Super Bowl day, Trump said he expected to find ‘billions, hundreds of millions in fraud and abuse’ in defence. His national security advisor, Mike Waltz, suggested in a separate interview that ‘the Pentagon in general is full of unnecessary bloat’ and directed aim particularly at shipbuilding, which he said was ‘a mess’. Yet that program is at the heart of American power. It is also quantitively, and increasingly qualitatively, challenged by Chinese programs. The shipbuilding industry and the systems supporting the United States Navy are among the most sensitive that the US has.
They are also particularly vital for Australia. The rate at which the US can build submarines needs to improve if they are to deliver Virginia class boats to the Royal Australian Navy in the 2030s, as planned under AUKUS. Australian Defence Minister Richard Marles made a $500 million down payment to enhance the US submarine industrial base as part of the AUKUS package during his positive meeting with Hegseth in early February—the first Hegseth had with a foreign counterpart. Hegseth committed himself to the AUKUS programme including the sale of Virginias, which will be a formidable deterrent and a critical part of Australia’s defence.
Senior Pentagon official Robert Salesses said in a statement this week that Hegseth had launched a review to find 8 percent of the defence budget for the 2026 financial year—about $50 billion—in offsets that would realign spending towards priorities such as border security, an Iron Dome-style aerial defence system. Hegseth had also ordered an end to ‘diversity, equity and inclusion’ type programs. The Washington Post reported the existence of a memo indicating these offsets—which the news report called ‘cuts’—would continue for five years, though it noted that submarine acquisition was among the categories listed for exemption.
The US submarine output rate has been gradually coming up to the levels of production necessary for the AUKUS timetable. What will happen now?
The shipbuilding program, the assertive posture of DOGE and any cuts to the Pentagon overall, represent for Hegseth a massive difficulty. A defense secretary doesn’t have to be loved, but he or she does have to be respected. This includes respect for the values the armed services evince. The military is proud of its capacity to incorporate women and people of colour in all facets of command and recruitment. Above all is a requirement that its manifold security arrangements cannot be put in the hands of people not qualified and cleared. The youngsters of DOGE are not. The Pentagon will look to Hegseth for that protection—as indeed will we and all the military allies of the US.
If it is thought in the Pentagon that Hegseth can’t cope with the need to protect both secrecy and capability, he will be lost. For any defense secretary, such a failure would be intolerable. It will be particularly so for congressional Republicans who have had to swallow a great deal to approve the appointments of Trump’s choices in the national security area.
All this will be playing out in an environment in which one or two omnibus bills will be hotly contested in Congress.
It has to be remembered that the US is not at the peak of post-World War II spending. Were that to be the case, defence spending would not be at $895 billion; it would be closer to $2 trillion. Chinese and Russian expenditures are at least as great as they were during the Cold War.
The US is looking for a massive increase in allied spending. Trump has set targets of at least 3.5 percent of GDP, hopefully 5 percent. The allies are nowhere near these targets. Australia is increasing to 2.4 percent of GDP—far short of what Trump wants. We can expect the US administration to come at us. But our challenge is miniscule compared to that facing Hegseth.
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Plans for making 155mm artillery shells in Australia are inadequate. They’ll leave us still relying on imports for some parts, and production capacity for those parts that are made locally would not meet Australian Army demand in a major conflict.
Despite the costs, the Australian government should work to bring in-country the entire supply chain for 155mm shells, which are staple battlefield ammunition. It should also expand local production capacity beyond what is currently planned.
Shortages of 155mm shells, whether because factories lack capacity or because imported parts are unavailable, would severely diminish the army’s ability to fight. We must run no such risk.
The return of intense conflict in recent years has underscored the continuing importance of conventional artillery. A severe and enduring shortage of shells has forced Ukraine to ration fire support for army units. It and Western allies are scrambling to rebuild production lines that were dismantled after the Cold War.
As part of this, the Australian government said on 30 October it would contract Thales to install a forge for making bodies for M795 shells at the Benalla Munitions Facility in Victoria. The M795 is the standard 155mm high-explosive round and can be used by both of Australia’s artillery types: the M777A2 towed howitzer and the forthcoming AS9 Huntsman self-propelled howitzer. By 2028, the facility is expected to produce 15,000 shells a year, with a capacity for 100,000 a year.
The number is less impressive than it sounds. In 2023, Ukraine’s 300 artillery pieces of 155mm calibre fired about 7000 shells a day, an average of 23 per gun per day. If Australia’s 48 M777s and 30 Huntsmans were as busy in intense ground fighting, they’d together fire 1800 shells per day—around 650,000 a year, vastly beyond the current planned domestic production capacity. Indeed, the industrial set-up will be able to supply only 3.5 shells per artillery piece per day.
In the event of a major ground war, Australia would need to rapidly expand its production. However, even maintaining currently planned production levels at Benalla during or in the lead-up to a major conflict could be challenging.
In defence economics, there’s almost always a tension between the cost and timeliness of supply on one hand and self-sufficiency on the other. Under normal circumstances, a globalised supply chain is a good thing, with different countries able to create economies of scale or and exploit local advantages to reduce production costs. It can be fast and cheap to produce materials and components separately in several different countries before assembly.
However, during a conflict, or even in the period leading up to it, globalised supply chains can be a weakness. The most obvious risk is the physical disruption, such as by submarines attacking supply convoys. Another risk is that a sudden spike in demand can overwhelm global capacity. Countries put their own demand first and exports second.
In times of geopolitical tension, it makes sense for governments to establish complete domestic supply chains (or at least as complete as possible) of essential military consumables. 155-mm shells are one of those essentials.
This usually increases unit costs, and it takes time. This is why, in times of peace, governments often seek a middle ground by bringing part of a production process in-country but avoid the high costs of completely self-sufficient manufacturing processes. But this can end up being the worst of both worlds: time and resources are spent to achieve partial local production that still relies on global supply chains in the event of a conflict.
There is already an Australian example of how fragmented artillery production can be, with the NIOA munitions factory in Queensland. Steel is imported from Germany, then forged and machined into a shell at NIOA. The empty shells are then sent overseas to be filled with fuses, primers and a propellant. The NIOA facility could be a great asset to Australia in the event of a conflict, but it would need to immediately broaden its production processes or shut down if it could not source components from overseas.
The Australian government’s munitions production announcement also includes upgrading the Mulwala Propellant Facility, which will allow propellant suitable for M795 shells to be produced.
However, there is no sign of local production of two other significant 155mm shell components: fuses and primers. (The Department of Defence did not respond to a query on whether there were plans to produce fuses and primers locally.) Neither of those components is beyond the technical capabilities of Australian industry to produce. The government should move promptly to set up facilities for making them. Producing primers locally is particularly important, as they are a source of bottlenecks in munitions production globally.
Such additions to the production process are likely to be costly. However, given increasing tensions around the world and the demonstrated continued importance of conventional artillery in modern conflict, having a significant and completely indigenous 155mm production capability would improve the Australian Army’s prospects of staying in the fight in a major war when global supply chains were disrupted, demand outstripped allied supply, or both.
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The government has commissioned an audit of the Defence estate to look at whether it ‘reflects contemporary needs in light of the decision to prioritise investment in Australia’s northern network of bases, ports and barracks’.
Ostensibly this indicates that all bets are on regarding the future of the estate in the southern parts of Australia, apart from those sites where major infrastructure investments have been committed to under the defence strategic review, AUKUS and the Defence Department’s integrated investment program.
This assumption has arisen because of the absence of public transparency of the audit, but it is unlikely to be proved correct. It remains to be seen whether the audit will actively explore ways to free up capital (via divestment) for new capability projects, or whether its primary goal will be to reduce the cost of sustaining a large, dispersed and deteriorating estate.
The Defence estate is a fundamental input to capability, supporting the generation and sustainment of the Australian Defence Force. It is a complex portfolio with a diverse range of assets that has evolved incrementally in response to strategic circumstances rather being the result of a comprehensive, integrated plan.
The estate comprises 70 major bases, 100-plus training ranges, more than 700 owned and leased properties, and 30,000 built assets with a gross replacement value of around $68 billion. The estate’s diversity and specialised requirements make it challenging to provide direct comparisons with other government property portfolios in terms of value and sustainment costs. The assets include bases and barracks which are communities unto themselves; airfields and airbases (with runways, hangars, control towers and maintenance facilities); naval bases and ports (with docking facilities, piers, dry docks and maintenance facilities); training areas (land, sea and air); ammunition depots; communication centres; logistics and supply centres; research and development sites; medical facilities; training schools and academies; infrastructure for fuel and energy storage; testing and evaluation facilities; and housing.
Historically, defence reviews and white papers have played a pivotal role in shaping Australia’s defence policy and strategy. They’ve been instrumental in ensuring Australia maintains a strong and adaptable ADF in the evolving security landscape. Consequently, these documents have had a profound impact on the configuration of the Defence estate, with its footprint shaped to align with the prevailing force-posture approach.
As an illustration, the 2009 strategic reform program prompted a base consolidation review aimed at crafting a more contemporary Defence estate profile with a focus on achieving maintenance savings. The 2012 future estate review identified 17 sites for divestment, a recommendation further supported by the 2015 first principles review, which called for the ‘disposal of all unnecessary estate holdings starting with the 17 bases identified in the 2012 report’. The 2016 integrated investment program underscored the imperative to address the historical underinvestment in key enablers, including the estate.
It’s difficult to determine if recommendations from the reviews have been implemented. That’s not surprising given that divestments are fraught with contention and delays. There are 13 divestments underway, and two notable examples highlight the complexities. The first is the ongoing divestment of the 14.30-hectare Leeuwin Barracks, a former navy cadet training base on the Swan River in Fremantle approximately 19 kilometres from Perth’s CBD, which commenced in 2015. The second example is the ongoing divestment of the 127.8-hectare Maribyrnong site, a former heritage-listed munitions factory. Consultations began in 2010 and the stringent remediation requirements make it an extended endeavour.
The 2023 audit will likely shine a light on further divestments, in addition to the 17 nominated sites. Striking a balance between cost, performance and risk is crucial to maximise the value of the assets and deliver value for money for the government and taxpayers. It therefore makes sense to consider older, more dispersed and smaller sites. However, divesting bases that offer economies of scale, particularly in their whole-of-life sustainment costs, doesn’t make sense.
Divestment can prove to be an unsatisfactory way to achieve short-term cost-savings. These places, where people work and live, are important for retaining ADF personnel—and the civilian workforce responsible for maintaining and sustaining the sites and supply chains linked to the surrounding communities.
As documented in the DSR, Defence is facing significant workforce challenges, and the retention and growth of highly skilled ADF and civilian defence personnel is of paramount importance. Preserving bases and barracks in key metropolitan areas can not only enhance sustainment efficiencies but also mitigate attrition rates and the resultant capability gaps.
The final case against divesting key bases and barracks lies with the force-posture shift towards Australia’s north. Retaining these key bases and barracks allows the estate to remain resilient and preserves the flexibility to adapt to future requirements should the strategic focus shift once more.
Once land is divested, the government may not have the financial capacity to acquire comparable holdings in the future, especially given rising property values.
Let’s hope the 2023 audit yields a thoughtful response that prioritises the long-term resilience of the estate over short-term gains for capability projects and takes into consideration the advice provided in the DSR: ‘Government cannot afford to lose sight of the importance of foundational estates and infrastructure for Defence.’
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Rob Bourke’s new study, Defence projects and the economy, lets us draw important lessons for maximising the economic benefits of building military equipment in Australia.
As the study states, ‘domestic builds tend to be economically advantageous if characterised by high Australian content, significant spillovers, a workforce drawn from the ranks of the long term unemployed, opportunities for unassisted exports and, where applicable, low price premiums’.
The problem is that local build projects have not always demonstrated these characteristics. With $200 billion in investment in defence capability in the pipeline, we can’t simply assume that the megaprojects currently ramping up will either without careful management. Designing and delivering projects that do display those characteristics will be challenging, but it’s doable. Much of the groundwork for better outcomes has been laid by the government’s defence industry policy and its investment to date.
Let’s consider the elements Bourke’s study identifies. First, high Australian content. For projects where Defence is acquiring a foreign design, this will always be more complicated. But the industry policy’s requirement for prime contractors bidding for major projects to develop meaningful Australian industry content plans is already having an impact. With the Attack-class submarine program still in the early stages of design, there’s time to ensure that Australian content is maximised. Close engagement with the French design and build partner, Naval Group, will be required to ensure it doesn’t automatically default to its overseas supply chains.
Defence’s plan to build the future submarines, frigates and offshore patrol vessels in ‘flights’ of three or four vessels also offers the opportunity for more Australian content to be designed into later flights. The key will be balancing the risk of tinkering with the design with the benefit of increased Australian content.
Related to this is Bourke’s next characteristic, major spillovers—that is, new knowledge generated by the project that flows over into the broader economy. Previously, evidence of substantial spillovers has been patchy. The key, as Bourke notes, is to ensure that Australian industry is involved in designing, developing and producing the complex weapons, propulsion and operating systems and other technically advanced components and services this equipment embodies.
Can it be done? Yes, if two things happen. The first is that the partnerships between Defence, local industry and foreign prime contractors have to result in the transfer of key technologies to Australia.
The second, which is probably more important, reinforces the lesson on maximising Australian industry content, namely that the primes need to actively foster innovative Australian content rather than defaulting to their existing subsystems. The Australian defence industry has demonstrated that it can design and produce world-leading subsystems, such as CEA’s phased array radar and the EOS remote weapon system.
The challenge is to ensure that the tens of billions of dollars going into the major platform megaprojects is used to foster Australian innovations that enter production. In light of the major overlap between military and civilian technologies that characterises high-tech industries today (for example, in areas such as autonomous systems, AI and sensors), those innovations have great potential to flow into the broader economy.
Bourke’s point on workforce is salient. It’s no secret that developing the workforce for the megaprojects, especially shipbuilding, is a challenge. Simply poaching workers from other sectors of the economy isn’t the solution, and would undermine the overall economic benefit. Drawing new workers or unemployed workers into the economy is crucial. The establishment of the Naval Shipbuilding Industry Reference Committee and Naval Shipbuilding College will help ensure that educational institutions are aligned with the industry’s demand for workers and provides a strong foundation for workforce development in that sector. Similar efforts may well be needed in the armoured vehicle projects.
As Bourke notes, exports could be key, and again the government’s defence export strategy lays a strong foundation. Certainly, reaping the benefits of exports for the ADF isn’t necessarily straightforward. Ensuring that export demand balances the peaks and troughs in ADF demand rather than exacerbating them requires coordination. And ensuring that the benefits of the economies of scale identified by the export strategy flow through to the ADF through reduced prices will require careful scrutiny.
Perhaps the most important factor for increasing exports is a recognition that the real scope for exports lies not in major platforms but in advanced subsystems in which Australian academia and small to medium-sized enterprises have demonstrated expertise. But again, those SMEs, regardless of their ability to develop innovative solutions, won’t have products to export unless the prime contractors managing the megaprojects build them into their Australian industry content plans. All SMEs agree that the best way to win export deals is for their products to be in service with the ADF. Again, the lesson is clear: the primes can’t automatically default to their existing supply chains.
Bourke’s final characteristic is low price premiums. The evidence indicates that local builds have traditionally attracted high premiums. In large part that’s been due to Australia’s relatively high wage structures, particularly in areas where skilled workers are in short supply. This issue can be mitigated to some degree by making sure defence industry draws new or unemployed workers into productive jobs, as Bourke suggests.
It can also be mitigated by investment in new production facilities incorporating state-of-the-art manufacturing technologies. Again, this is happening already. The government is investing in new shipyards that feature high levels of automation in areas such a welding, which reduces rework and waste. And, again, the premium can be mitigated by ensuring Australian content draws heavily on advanced technologies—a sector in which Australian wage structures aren’t appreciably different from those of other developed countries that compete for the supply of subsystems.
Bourke’s study clearly identifies the potential pitfalls of local defence projects. His account of missed opportunities in the past, and the scale of the potential risk for further lost opportunities if the megaprojects are not designed and managed to maximise their economic benefits to Australia, makes for sobering reading. Economics is a dismal science after all. Perhaps his most important message is that history shows that beneficial outcomes won’t simply happen by themselves. Good intentions are not enough and constant attention from government and Defence is essential.
The government’s defence industry policy lays a strong foundation, but Defence and industry have to work together to deliver the economic outcomes.
Overall, there appears to be a golden thread running through the lessons learned. Australia underinvests in R&D, so even part of that $200 billion can make a difference. Defence needs to ensure that the megaprojects actively foster Australian innovation and maximise local industry involvement in areas of high economic value.
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My previous post looked at the greater value for money Australia will derive from the program of continuous warship design and construction it is commencing compared with the stop–start method of the past. This part examines the concept of critical mass in continuous shipbuilding.
Nations with large economies and large navies, such as the United States and China, have sufficient critical mass for continuous design and construction programs. By contrast, smaller nations such as Pacific island states or even New Zealand are too small (both as economies and as navies) to have sufficient critical mass to justify a continuous program. What, then, is the threshold, the critical mass, at which a continuous production program is likely to provide value for money and how can it be calculated?
One way to identify the critical mass is to look at the size of a nation’s economy and the size of the part of the navy it intends to support through continuous production. A larger economy and a larger fleet size would tend to support the conclusion that a continuous program is value for money. This methodology is both quantitative and qualitative because it acknowledges the agency of sovereign governments in making decisions according to differing strategic circumstances and doesn’t propose that there’s necessarily a direct relationship between economic and fleet size, on the one hand, and the viability of a continuous shipbuilding program on the other.
Why the choice of these two metrics? The size of the economy is an important consideration for two reasons. First, a country’s economy needs to be of a sufficient size for shipbuilding to be sustainable without unreasonably constraining other productive activities. Second, a country that meets this criterion is likely to have the diversity and depth of productive capacity to support the manufacture of a modern warship. The size of a country’s fleet is important because it gives an idea of its demand for warships. Production of a new ship every two years is about the minimum rate required to efficiently occupy a shipyard which could support a fleet of 10 vessels with a service life of 20 years.
The chart below lists the top 20 nations by gross domestic product on the x-axis and a measure of fleet size on the y-axis. The bars are coloured according to whether they have or are aspiring to a domestic continuous shipbuilding program (note that this includes commercial and not just naval shipbuilding)—blue for those with or aspiring to a continuous program and red without. The measure of fleet size is the sum of medium to large surface combatants (cruisers, destroyers, frigates or similar with a minimum displacement of 2,000 tonnes) and ballistic missile or attack submarines. Wikipedia entries as of July 2018 for each navy were used as the source for number and size of platforms. (Wikipedia was chosen because it is unclassified, is widely available and has a robust and well-understood methodology.)
The general trend of fleet size decreasing in line with the size of the economy is reasonably clear, as is the tendency for larger nations with larger fleets to be constantly engaged in some form of shipbuilding, even if that is spread across numerous types and classes of vessel. There are some clear outliers to the general trend:
Brazil, Mexico and Canada have smaller fleets than might be expected, which partly reflects their proximity to the United States and its approach to hemispheric defence and influence.
Germany, France, the UK and Spain also have slightly smaller fleets than might be expected, which is in part a consequence of the decreased maritime threats faced in post–Cold War Europe and, in the case of Germany, its continental geography.
The Russian fleet is larger than might be expected, which reflects a lower level of preparedness across the fleet than would be the case in Western navies (smaller fleets are likely to have higher levels of readiness), and also the higher proportion of GDP that Russia allocates todefence spending compared with many other countries.
As far as Australia is concerned, the number of vessels planned for production means the fleet size will trend towards something that might be more in line with fleet sizes of nations of similar economic size. Significantly for the program of continuous design and construction of warships, Australia’s economy and fleet are already similar in size to those of nations like Canada, Spain, South Korea and Turkey, which produce or aspire to produce their own warships.
From this perspective, the choice Australia has made for a national enterprise of continuous design and production for its future frigates, submarines and offshore patrol vessels looks like a logical one that’s consistent with the choices similar nations have made. It certainly provides a basis from which Australia can adapt the size and overall capability of its maritime force to suit its strategic circumstances.
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France has a deep and abiding relationship with nuclear technology. French policy-makers have based France’s energy and military independence around nuclear programs. However, as the French government attempts to justify its budget policies in the lead-up to the presidential election in April 2017, calls for a public debate on the cost of military nuclear deterrence are increasing.
This debate encompasses three main questions. Should France still base its global defence strategy on nuclear deterrence? If yes, how should nuclear deterrence be conducted? Finally, how should the state efficiently budget for this strategic investment?
Questions about the future of the nuclear program come from the growing cost of France’s nuclear deterrent. France’s nuclear arsenal is currently fully operational but will soon require a complete modernisation. Within the next 30 years, French forces will need new submarines, aircraft and missiles. To achieve this, France’s current military nuclear expenditure of €3.4 billion a year, which equals 10% of the French Ministry of Defence’s total budget, will need a significant increase. By 2025, nuclear deterrence will cost French taxpayers an estimated €6 billion a year or more. Where will future French governments find €120 billion over 20 years?
Even faced with budgetary constraints, it seems very unlikely that France will give up the modernisation of its nuclear program, which is key to its defence strategy. French public opinion and policy-makers are deeply attached to maintaining France’s strategy of sovereignty and independence, as explained in the most recent French Defence White Paper in 2013. However, some French policy makers have criticised Paris’ reliance on nuclear deterrence, asserting that a modernisation of the equipment constitutes vertical proliferation. By doing so, it’s argued, France would contradict its commitment to nuclear non-proliferation and send the wrong signal to Asian nuclear powers.
Nonetheless, if France chooses to maintain its nuclear arsenal, how should it be composed? President Hollande has explained that France plans to maintain the two elements of France’s nuclear strike: submarines and jet aircraft. That decision is contested by Major General Vincent Desportes, a French professor of strategy who believes that France should modernise its nuclear submarine program but should fully dedicate its airpower to conventional operations. That would reduce nuclear costs and provide more equipment to support the troops. The new French President will have to choose to either support modernisation studies of both nuclear armed submarines and aircraft, or to choose one.
If, as seems likely, the next government decides to renew its nuclear-armed submarines, DCNS should start building France’s third generation of deterrent submarines by 2019. The costs will be considerable, since Paris will have to modernise its nuclear missiles and communication capabilities for command and control. These new missiles would then be delivered by 2035 with the first new submarine. Moreover, if France were to decide in 2017 to renew its airborne nuclear delivery capability as well, the country would have to dedicate a significant part of its airpower to nuclear deterrence. After all this movement Paris would have two options to manage its defence budget.
The first option would be to reduce the budget dedicated to conventional forces. In a context of considerable terrorist threats and French involvement in several military operations in the Middle East and Africa, that option would deeply challenge France’s security policies. It seems difficult to imagine how the state could make more cuts to the defence budget, which has already been reduced by 20% between 1980 and 2014, with troop numbers recently reduced from 330,000 to 275,000. Moreover, in 2015, François Hollande increased the defence budget and put an end to troop cuts, arguing that France, faced with critical threats to its security, needed a stronger army. Further weakening French conventional forces would then seem dangerous.
The second option would be to substantially increase the defence budget as a whole in order to maintain funding to conventional forces while modernising the nuclear arsenal. France currently spends 1.78% of its GDP on military expenditure, but would need to increase spending to at least 2% in order to fully finance the modernisation of its nuclear arsenal. This option is politically difficult to implement because public opinion would criticise any government cutting €120 billion from education or other public services over the next two decades.
Discussions about the future of nuclear deterrence have been rare. ‘It has been 50 years that French people are not consulted on the matter. There is a sort of soft consensus,’ explains Major General Desportes. But that unquestioned acceptation of deterrence programs is beginning to be challenged. It will be interesting to see if French deputies and senators will be allowed by the next President to debate such a crucial issue, for the sake of France’s democracy.
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Every morning I’m quite sure that two people wake up thinking, ‘thank goodness Nic Stuart isn’t a theoretical physicist’. I’m one. The other is my science teacher.
The point of this revelation is that when theoretical physicists observe phenomena (they never simply ‘see things’), they draw plausible deductions by noting correlations between one occurrence and another. It’s the sort of people they are. That’s why Andrew Davies and Mark Thomson’s recent (detailed, and exhaustive) post provided an interesting exploration of whether there were any meaningful relationships between more than 250,000 defence contracts released between 2007 and 2014.
I, on the other hand, am a journalist. This means first, that I’m not nearly so well paid as my theoretical physicist friends and second (and quite possibly as a directly correlated result of the first difference) I’m naturally far more bitter and suspicious. I ‘know’ the card deck’s stacked against me and so yes, I’m naturally mistrustful. Particularly of government and big institutions.
I’m certainly, most definitely, absolutely not the sort of person who’s likely to rush into print and write a gushing blog post about the fact that the system seems to be working—even if that does, indeed, appear to be the case. Instead I’ll examine exactly the same data set to search for conspiracy, duplicity, and bungling. Because I know it’s there. It must be!
So that’s why my immediate reaction on reading the Davies/Thomson post was to assume something had to be wrong. Not with their information or workings, of course, but with their conclusions. Sure, I thought to myself, the physicists might possess the data and they may, indeed, have the numbers. But it’s journalists who own the questions and the nagging doubts. So let’s give scepticism full rein…
The dataset Davies and Thomson lay out is certainly smooth. So too is their conclusion. I suspect that (like me) they’d expected, maybe even hoped, to find anomalies: that the Army, Navy and Air Force would spend up big whenever they got the chance and, as a result, the dollars (and the spending) wouldn’t be predictable and would appear in random, spluttering bursts. It turned out that isn’t the case. It seemed to take them rather a lot of words, graphs and numbers to explain their point and come up with a null result, although that’s always part of the problem with scientists. They feel the need to explain things beyond doubt and then waste time ‘interrogating their findings’ to ensure they’re ‘robust’. That’s something that no journalist ever worries about.
That’s for a very good reason. We know that if the system seems to be working, then it’s been designed to answer the wrong question.
Let’s just take it as read that the scientists didn’t discover any glaring anomalies or evidence of anything beyond the mundane. The point is that Davies and Thomson were looking for unexplained deviations; the incongruous; inappropriate expenditure. They haven’t found it and are thus happy. Well, as happy as a couple of physicists can be when they’re given data-sets and x and y axes to play with.
And who can doubt the evidence? The ADF certainly looks today to be better prepared for potential challenges than possibly ever before in peacetime. In the late 90s we were lucky to be able to get away with carrying off the intervention in East Timor without disaster given the parlous state of the forces.
Today, however, it’s a very different story. No one can doubt that there’d now be a real capacity to intervene decisively in most plausible scenarios that would require the use, or threat, of force. Similarly when it comes to contributing to a multi-national force. The extended deployments in the Middle East have given all three services considerable operational experience and familiarity with the challenges of working with allies. Finally, the military has also demonstrated it has the capacity to keep the continent’s maritime border secure. These are certainly remarkable accomplishments and these achievements fit into the broader image drawn from the dataset.
Nevertheless, it’s with exactly that picture that the journalist in me wants to quibble. If we’re prepared for these challenges then it seems quite clear that these aren’t the ones we’re going to have to face in the future. And the danger is that, if we sit around and pat ourselves on the back about being prepared to face the predictable challenges, the big new ones are going to suddenly catch us unawares.
Now I’m certainly not suggesting any complacency exists, least of all amongst the physicists at ASPI. The gaps, however, are real and worrying. Our inability to effectively cope with a potential terrorist incident is being chronicled daily in the Sydney newspapers. There is dangerously little social resilience.
Excellent work has recently been published by retired Air Vice Marshal John Blackburn demonstrating Australia’s vulnerability because of dependence on oil stocks and other work by John Blaxland on the desperate lack of regional language skills and understanding that we exhibit as a society. And those two deficiencies are just ones detailed by people whose names begin with the letter ‘B’; imagine how many others we could list by the time we got to ‘S’.
We need to focus on addressing these issues urgently, before it’s too late.
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According to the newspapers, the government’s Competitive Evaluation Process (CEP) for the Collins replacement yielded bids of between $10 and $12 billion for eight boats, with the price for 12 boats below $15 billion. Delighted by the news, the South Australian government has renewed its call for (the originally planned) 12 submarines to be built in South Australia. Who cares if we need them or not, they’re cheaper by the dozen.
I like a bargain as much as the next guy, but something doesn’t seem quite right. The Collins project spent $9.3 billion in today’s dollars to deliver six boats*. But the vessels had a problem or two, and extensive work had to be done to rectify what the SEA1000 website calls ‘legacy defects’. That included $301 million to achieve an ‘interim minimum operating capability’, $361 million ‘to improve reliability, sustainability, safety and capability’ aboard the vessels, and $553 million to fit a combat system that actually worked. All up, the taxpayer was slugged $10.5 billion for six boats.
For the sake of comparison, let’s round the Collins price down to $10 billion—just in case some of the follow-on work included enhancements as well as remediation. Even then, $10–$12 billion for eight boats looks like a great deal compared with the $10 billion we paid for six. It means that the new boats will be cheaper than the old ones. And it’s not because we are seeking a less capable vessel; the Competitive Evaluation Process seeks a submarine with ‘range and endurance similar to the Collins’ and ‘sensor performance and stealth characteristics that are superior to the Collins’. Moreover, most observers anticipate that the new vessels will be larger than their predecessors. So why does it appear to be cheaper to build boats in the 2020s than it was in the 1990s?
Some of the apparent difference could come from the combat system being excluded from the future submarine cost estimate but included in the Collins cost. But we know from the Collins combat-system replacement program that an installed combat system costs only around $100 million per vessel, which is a small fraction of the overall picture.
Perhaps the foreign exchange rate has delivered savings on the import-dependent share of the project? Although figures of 70% local content are routinely bandied about, the import-dependent share will be much higher because many locally sourced components will depend on imported inputs and capital goods. A favourable shift in the exchange rate could, in theory at least, reduce the cost of the imported share. Alas no. The average AU$/US$ exchange rate over the life of the Collins program (weighted by annual spending) was 73.6 cents—better than today’s 72 cents. As things stand, we’re actually more than 2% worse off.
The changing price of labour further deepens the puzzle. There’s no estimate available for the labour share of the Collins or future submarine projects, but it will be substantial—especially if the labour input to locally sourced components is included. For example, an indicative labour-share figure for a major warship is 50% according to Defence. The ABS only began its present wage statistics series in late 1994 and the median spend on the Collins occurred in 1991-92, but extrapolating the average real annual growth (1.4%) in the reported data (1994 to 2015) yields a cumulative rise of just below 40% for the period 1992 to 2015. But the median spend on the new boats won’t occur until 2025 at the earliest, there’s another decade of wage growth to be added. Assuming (conservatively) that real wage growth moderates to 1% per annum, that still yields a 54% increase in unit labour costs between the Collins and future submarine projects.
In principle, it’s possible that the unit labour cost growth has been offset by productivity gains in manufacturing technology. Indeed, the automobile industry has managed to do so through mechanisation and supply chain refinement. But submarine yards don’t lend themselves to intensive mechanisation in the same way as automobiles; the production runs are too small to justify the investment. In any case, the government’s 2013 Future Submarine Industry Skills Plan envisaged a workforce of between 1,000 and 2,000 for the future submarine (excluding design, combat and platform system engineering staff), whereas the ASC workforce averaged only 821 between 1990 to 2000. So it appears that we’ll actually need additional rather than fewer people—so much for productivity gains.
Setting aside the details of labour demands and wages, the long-term historical trend in successive generations of military equipment has been for real unit costs to increase. To the extent there are productivity gains, they are invisible in the data. Indicative rates of growth for advanced defence platforms typically run at 3-4% or more above inflation.
We are left with a paradox. Australian-built submarines are falling in price at the same time as they improve in quality and grow in size—despite a greater than 50% real growth in unit labour costs and countervailing historical trends in the cost of defence platforms. A cynic might observe that a non-binding beauty contest such as the CEP allows bidders to promise low prices and ratchet up the figure when the competition has left the field. Oops, I guess I’m a cynic.
*Unless otherwise stated, all historical figures have been converted to 2015-16 dollars using the CPI.
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My first exposure to defence economics came from a wonderful book called The Cost of Sea Power by Phillip Pugh. Among its many insights was a clever way of displaying the relative defence efforts of countries—see the yellowed picture above. By graphing both GDP and defence spending on logarithmic axis, Pugh managed to compare the economies and defence spending of nations large and small. (Without logarithmic scales, the graph collapses into a jumble of points near the origin, with the United States pushed off in the upper right-hand corner.)
The lines at 45% to the axis represent constant ratios of defence spending to GDP. As you can see, most countries in the sample spent between 2% and 6% of GDP on defence back in 1982 when the data for the chart was collected.
I’ve produced a similar chart for the annual ASPI Budget Brief (see chapter 5) since 2006, including data on more than 140 countries. The pattern remains the same as it was in 1982, except that most of the data now fall between 1% and 4% of GDP. The downward shift presumably reflects the peace dividend following the end of the Cold War.
Like Pugh’s graph for 1982, my more recent versions are static snapshots. But as economies grow, you’d expect the data points to move upwards and to the right—defence spending grows as GDP grows, all other things being equal. In effect, the boundaries of 1% and 4% of GDP delineate a racetrack upon which most countries are moving. Some will move faster than others due to more rapid economic growth, and some will veer towards higher or lower GDP share as their strategic and financial circumstances change.
Using the SIPRI military expenditure database, I’ve captured the action on the track for the period since the end of the Cold War for selected countries. Here are the results.
Although shifts in exchange rates affect the results for most countries, I believe that the picture broadly captures a number of key strategic trends (with the caveat that the Russian data commences in 1993, well after the end of the Cold War). Three things are immediately clear.
First, the emerging economics of the BRICs (Brazil, Russia, India and China) and South Korea have all experienced strong economic growth which has allowed commensurate (i.e. at a constant proportion of GDP) growth in defence spending.
Second, non-US NATO countries have experienced relatively slower economic growth while substantially reducing their defence effort (as measured by GDP share) since the end of the Cold War.
Third, the US still spends a lot more on defence than any other nation, but its defence effort has lessened from Cold War levels—much like their European allies. Japan’s defence effort has strengthened from 0.9% to 1.0% of GDP, but in terms of US dollars its economy and defence expenditure has fallen (due to sluggish growth and depreciation of the yen).
Australia’s economy and defence spending have grown strongly compared with other Western countries. In part, this reflects an appreciation of the Australian dollar. More importantly, our defence effort towards the end of the Cold War was relatively modest (~2% of GDP) compared to our allies. That is, although we’ve more-or-less maintained our defence effort, it was and remains at a low level in terms of GDP share.
Returning to the racetrack analogy; emerging economies—and especially China—are flying down the track while our friends and allies are pulling into the pits. The race isn’t over, and the logarithmic scale distorts the gap between emerging economies and the established powers. In effect, ‘objects in the rear view mirror appear closer than they actually are’ on a logarithmic scale. Nonetheless, it still looks to be only a matter of time before the reigning champion is overtaken.
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At present, Defence is executing around 180 major capital investment projects with an aggregate value in excess of $123 billion. Consistent with what’s at stake, defence acquisition is subject to annual audit and periodic external review (including in 2003, 2008, 2012 and 2013). Most recently the 2015 First Principles Review, recommended sweeping changes to the planning and execution of defence projects.
With such intense scrutiny, you’d expect clear and unambiguous reporting on the financial aspects of defence projects. But while reporting has improved substantially over the past decade, clarity remains elusive. Extraordinarily, it’s often not possible to say with any confidence whether a project has been delivered within planned financial resources or not—even at the conclusion of the project. This includes the statutory annual reporting by Defence and the ANAO.
The central problem is that Defence’s indexation of project budgets conceals the true state of affairs. To make matters worse, the indexation regime switched from one type of systematic error to another in mid-2010. God help anyone who wants to understand what’s been going on in a project that straddles both. (Project budgets are also adjusted to take account of their exposure to foreign exchange variations, but this is easy to take into account and need not be considered further.)
Prior to July 2010, defence projects were approved in terms of the dollars of the year of approval. For example, the Collins project was approved with a budget of $3,892 million as at June 1986. Over subsequent years, the unspent budget was adjusted twice-yearly to take account of the changing price of labour and materials. This makes sense: projects are usually liable for the changing price of inputs used by suppliers in contracts. Over the life of the Collins project, the approved project budget grew by $1,229 million as a result of price and foreign exchange movements.
Provided a project ran to schedule all was well, but things got problematic when projects were delayed—a frequent occurrence then as now.
When project activity and payments were pushed into future years, indexation increased the amount of money available in recognition of the falling buying power of the dollar. But because the prices of labour and materials often grow more quickly than CPI inflation, indexation provided an unambiguous real boost (i.e. above inflation) to the project budget. However, no recognition of this fact arises in Defence’s reporting. The real cost of projects grew as the result of delays, and no one was the wiser.
The impact was often substantial. In 2010–11, the ANAO reported that across a mere eight delayed projects, $295 million in indexation (and counting) had been provided post-planned delivery dates. Even if two-thirds of the indexation was pure CPI inflation, there’s still an unacknowledged real cost increase of $100 million paid for by the taxpayer.
The 2009 White Paper moved overall Defence funding onto a fixed price indexation model. Soon after, Defence initiated an internal funding regime based on the one-off application of price indices recommended by the 2009 Pappas Review—including for DMO. Note, however, that there has never been, and still isn’t, any connection between project indexation and overall budget indexation.
In any case, after July 2010, defence projects were approved on the basis of out-turned nominal dollars anticipating price movements via a so-called Specialised Military Equipment (SME) Weighted Average. Already-approved projects were given a one-off out-turned adjustment at the same time. In effect, rather than wait and discover actual price movements using measured econometric indices, assumptions were made about where the indices would be year-by-year into the future. Clearly, guesses about the future are never going to be as good as waiting to see what happens. But setting that obvious point aside, there’s a greater problem; out-turning requires the spending schedule to be known ahead of time.
As before, provided a project runs to schedule things are not too bad. But if the project is delayed, things can get ugly very quickly. As activity and payments are pushed into the future, the project is left short because of the falling buying power of the dollar.
The magnitude of the problem is larger than in the old regime. Prior to 2010, delayed projects received unacknowledged real cost increases proportional to the difference between indexation and CPI inflation. After July 2010, delayed projects suffered a shortfall proportional to the full rate of the indexation. Under the new regime, it’s entirely possible for a project to run out of money even in the absence of a real increase to the cost of a project. Thus, we’ve gone from a regime that protects the guilty to one that punishes the innocent.
No indexation regime based on econometric indices will ever be able to precisely compensate for the actual movements in prices in a particular project. That said; some choices of indices are better than others. Case in point, the SME Weighted Average seems unrealistically optimistic about prices being constrained. But irrespective of the indices employed, if Defence persists in applying indexation in plainly fraught ways, we’ll never be able to tell what’s going on in the $7 billion a year capital equipment program.
It wouldn’t be hard to do properly—it’s a simple matter of arithmetic to track the impact of inflation and the additional costs arising from delays. The result can then be expressed in any chosen year’s dollars with the real cost variation isolated. That’s exactly the approach the Pentagon takes in its Selected Acquisition Reports to meet its statutory reporting obligations. The current Australian practice of expressing project budgets in out-turned dollars is nonsensical because it adds together dollars with different buying powers—the financial equivalent of adding apples and oranges.
It’s really worth getting this right. Consider the AWD project. With the future of ASC and naval shipbuilding hanging in the balance, we need to sort out how much of the cost pressures experienced by the project are real and how much are an artefact of the indexation regime. Moreover, we need the answer in terms of today’s dollars rather than a mishmash of out-turned dollars that gives equal weighting to dollars spent in 2007 and 2020, even though the buying power of the former is expected to be 38% higher than the latter.
If we are serious about improving the performance of defence acquisition projects, the first and essential step is to accurately measure project performance. The current approach fails to do so.
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This week on Stop the World, we bring you a special episode from the sidelines of the ASPI Defence Conference ‘JoiningFORCES’. In this first episode of a short series, ASPI’s Director of Defence Strategy and National Security, Bec Shrimpton, speaks to defence innovation and investment experts Heather Richman and Linda Lourie.
They discuss defence innovation and opportunities for the government to work with the private sector to achieve national security outcomes. They also consider how the investment landscape has changed in the United States, including increased willingness from entrepreneurs to invest in national security.
About the guests:
Heather Richman is founder of the Defense Investor Network in the US, and has held a wide array of roles at the intersection of national security, technology, and investment—including at Stanford University and on Capitol Hill.
Linda Lourie is a Principal with WestExec Advisors. She is also a Principal with the Washington Circle Advisory Group, LLC, and a Member of the U.S. Export-Import Bank’s Advisory Subcommittee on Strategic Competition with the People’s Republic of China. Linda has previously held senior roles in the White House Office of Science and Technology Policy and in the Defense Innovation Unit.
Bec is Director Defence Strategy and National Security at the Australian Strategic Policy Institute. Bec has over 20 years experience in policy, operational and corporate roles in the Australian Department of Defence and DFAT. She has served as senior adviser Major Powers to Australia’s Foreign Minister, and led trade and investment in the defence and space sectors in Austrade.
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Australia needs to spend more on defence – and it needs to do so immediately. The strategic imperative has been firmly established in the government’s own major defence documents.
The Albanese government and the Coalition opposition agree that we are in the gravest geopolitical period in generations and it is only going to intensify.
But the rhetorical urgency is not being matched by action in the form of defence investment.
The May budget is the latest demonstration of this mismatch, lacking spending for swift increases in capabilities that the Australian Defence Force would need if our region were to deteriorate quickly.
In particular, this year’s budget priorities are not directed towards strengthening the ADF’s ability to fight in the next decade.
This is not doom-mongering; the government has acknowledged that the warning time before any conflict, which had long been set at 10 years, has shrunk to effectively zero.
This year’s budget priorities are not directed towards strengthening the Australian Defence Force’s ability to fight in the next decade.
We have war in Ukraine and the Middle East, aggression and increasingly dangerous and unprofessional behaviour from China causing instability and confrontation in the South China Sea and across the Taiwan Strait, erosion of the rule of law and revisionist agendas from authoritarians.
Instability is heightened by foreign interference, economic coercion and artificial intelligence-enabled dangers such as cyberattacks and disinformation.
If war were to break out at any time in the next 10 years, our military would essentially fight with the force it has today. Based on current resourcing, nothing significant will change over the decade.
Most of the major new capabilities in the government’s defence investment blueprint are two decades away from being fully fielded. That blueprint does contain some shorter-term enhancements, but these will not be fielded until the 2030s.
The welcome $5.7 billion in new defence spending over the four-year forward estimates period is devoted to just three priorities: the AUKUS submarines; the next fleet of surface warships; and investment in long-range strike, targeting and autonomous systems.
But two-thirds of this funding doesn’t arrive until 2027-28.
The relatively impressive longer-term plan leaves us vulnerable in the immediate period ahead. More money immediately is not a silver bullet, and ambition must be balanced with how much Defence can actually spend each year.
But the nation’s security requires a two-pronged strategy of enhancing our existing force to meet threats within the decade while investing in long-term capabilities.
No credible pathway forward
Other countries are furiously pursuing new capabilities that can be put into action quickly – such as creating masses of small drones and prototyping and developing new technologies.
We talk about technology and asymmetric advantage – playing to your strengths and using them to overcome your adversaries’ strengths – yet lack a credible pathway to bring them into operation to bolster the force we have today.
Over the longer term, the picture starts gradually to improve.
The $50 billion in additional spending over the next decade is an important commitment, even if far away. The plan for a complete recapitalisation of the surface combatant fleet will eventually give us the biggest and most capable navy Australia has had since World War II.
But, so far, we are failing to grasp the opportunity to link our traditional large platforms such as submarines and warships to more modern developments in warfare: drones and various small uncrewed and smart capabilities.
AI, robotics, electronic warfare and space capabilities remain aspirational, without any pathway for inclusion and integration into a truly focused force capable of meaningful deterrence and war fighting.
That is why it is so important to realise AUKUS Pillar II, which is dealing with these capabilities.
It’s easy to criticise; harder to do. All governments are grappling with tight budgets amid competing demands and the unremitting expectations of voters and taxpayers.
As a nation, we need to accept the need for higher defence spending. Hoping conflict won’t come is not a viable strategy. If we are prepared for war, we have a better chance of deterring and hence averting it.
Europe is living that lesson now, having put all hope in the judgment that global trade and economic entanglement would bring security. Now it is clear that only military investment can deter war or best prepare nations for it.
The government has a vital responsibility to speak plainly to the nation about the geopolitical risks and the possibility of conflict.
We need to grasp the challenge that is in front of us today, not in three or five years’ time. Otherwise, we risk delivering on General Douglas MacArthur’s famous two-word warning. “The history of failure in war can almost always be summed up in two words, ‘Too late’.
“Too late in comprehending the deadly enemy. Too late in realising the mortal danger. Too late in preparedness. Too late in uniting all possible forces for resistance.”
Why take the risk of only acting after a crisis and saying better late than never? The world in turmoil demands we act in real time to deter crises and be best prepared for them.
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ASPI’s Jennifer Parker describes key findings of the latest ASPI Defence Budget Brief to the ABC News.
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The Hon Christopher Pyne, Minister for Defence Industry, today launched the new Defence Industrial Capability plan.
The plan outlines the opportunities for Australian industry to engage with the Government and strengthen Australia’s defence capabilities through the development of native industrial capability, infrastructure and innovation.
The general trend of fleet size decreasing in line with the size of the economy is reasonably clear, as is the tendency for larger nations with larger fleets to be constantly engaged in some form of shipbuilding, even if that is spread across numerous types and classes of vessel. There are some clear outliers to the general trend:
