Tag Archive for: Defence Economics

The Hunter frigate: An assessment

28 April 2022

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

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

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

Agenda for change 2022: Shaping a different future for our nation

2 February 2022

In line with previous Agenda for Change publications from 2016 and 2019, this piece is being released in anticipation of a federal election as a guide for the next government within its first months and over the full term. Our 2022 agenda acknowledges that an economically prosperous and socially cohesive Australia is a secure and resilient Australia.

ASPI’s Agenda for change 2019: strategic choices for the next government did, to a great extent, imagine a number of those challenges, including in Peter Jennings’ chapter on ‘The big strategic issues’. But a lot has changed since 2019. It was hard to imagine the dislocating impacts of the Black Summer fires, Covid-19 in 2020 and then the Delta and Omicron strains in 2021, trade coercion from an increasingly hostile China, or the increasingly uncertain security environment.

Fast forward to today and that also applies to the policies and programs we need to position us in a more uncertain and increasingly dangerous world.

Our Agenda for change 2022 acknowledges that what might have served us well in the past won’t serve us well in this world of disruption. In response, our authors propose a smaller number of big ideas to address the big challenges of today and the future. Under the themes of getting our house in order and Australia looking outward, Agenda for change 2022 focuses on addressing the strategic issues from 2021 and beyond.

Delivering a stronger Navy, faster

2 November 2021

Executive summary

Serious risks are being realised in the Royal Australian Navy’s twin transitions in its surface combatant and submarine fleets. As Australia’s strategic circumstances become more dangerous, Defence needs to adopt hedging measures to actively address the capability risks in its acquisition plans.

The government’s recent announcement regarding the acquisition of nuclear-powered attack submarines (SSNs) is about addressing capability risk in the long term, but with delivery of the first future submarine now delayed probably to the late 2030s, in the short to medium term the proposal exacerbates those risks.¹

To address those risks, this paper details an approach that will:

deliver valuable additional maritime capability to the Navy significantly earlier than the current plan;
sustain, and indeed grow, the workforce that will be essential to our long-term ship and submarine plans;
develop the industrial ecosystem needed for naval construction in Adelaide and nationally; and
provide a timely return on the funding that the Australian government has already planned to invest in naval capability this decade without requiring additional funding.

In order to deliver on the government’s ambitious plans for future shipbuilding capability, the urgent task today is to develop a bridging strategy that delivers short term capability wins and boosts vital industrial capability. This plan presented here does both by offering a viable way forward to an expanded defence capability and industrial base into the future.

Even before that announcement, the mounting delays in the Hunter-class frigate program prompted commentators to suggest building more Hobart-class air warfare destroyers to provide more maritime capability sooner. That concept makes even more sense now.

There’s an urgent need to deliver more maritime combat power before the Hunter and SSN programs deliver.

The first Hunter frigate is already delayed to around 2033 and, with the program facing complex integration challenges and vanishing design margins, there are no guarantees that it won’t slip further.

Even when the Hunter starts coming into service, it’s under-gunned for the threat environment of the 2030s: its missile capacity is the most glaring shortfall. With the lethality of anti-ship missiles increasing, its 32 missile cells mean it’s taking a knife to a gunfight. Plus, it’s going to have limited capacity to carry the Tomahawk strike missile, another of the government’s recent announcements. Meanwhile, the Navy’s Anzac frigates will have to serve into the 2040s, even though they only have eight missile cells.

The Navy needs combat power—and it needs it before the Hunters turn up on the lethargic two-year delivery drumbeat built into the current Naval Shipbuilding Plan.

To deliver that, we need to rebuild the shipbuilding plan. With the cancellation of the Attack-class submarine, the plan to build Australia’s industrial capability is in disarray. Thousands of skilled jobs that were to be created and sustained by that program are indefinitely deferred. However, we can grasp this as an opportunity to deliver military and industrial capability sooner.

We’ve created the foundations of a national naval shipbuilding machine by massive investments in modern, digital shipyards. But under the current plan this enterprise isn’t delivering anything before the mid-2030s besides very lightly armed offshore patrol vessels (OPVs), despite tens of billions of dollars flowing into it this decade. We need to take advantage of this industrial capacity and investment to give the Navy more offensive power well before then.

We need to refocus public debate around shipbuilding towards the original purpose of the shipbuilding enterprise: delivering the maritime capability the Navy needs when it needs it to defend Australia. That means adjusting the shipbuilding enterprise’s order book as strategic circumstances demand. The true value of a continuous naval shipbuilding capability is in its ability to switch production between classes and to accelerate builds as necessary.

Rather than locking in particular vessels on a slow and steady drumbeat to guarantee jobs for the grandchildren of current workers, the enterprise needs to protect the Australians currently paying for it. The government’s Defence Strategic Update from last year says we no longer have at least 10 years of warning time to prepare the ADF to participate in major conflict. We simply should not accept that the Navy can’t acquire major new combat capabilities over this next 10 years.

There are two parallel near-term shipbuilding approaches, both taking advantage of the production machine that the government has invested in.

ASPI has already discussed the first: building vessels based on the OPV hull but fitted with missile systems and smart autonomous systems—air, surface and undersea.² Not every maritime platform needs to be able to do every task and defeat every threat by itself. Breaking this mindset opens new possibilities. An armed version of the OPV that doesn’t pretend to be a multi-role platform but has useful offensive or sensor capabilities looks attractive as a near-term addition to the Navy’s lethality that complicates any adversary’s decisions. They won’t be multi-role vessels, which avoids the spiralling complexity and cost we see with the Hunter, but would operate in tailored taskforces with other vessels.

This approach would be part of a broader strategy of making greater investments in the ‘small, smart and cheap’—disaggregated uncrewed or minimally crewed systems that employ autonomous technologies to generate distributed mass and effect.

The second approach—the focus of this paper—is the option of building more Hobart-class air warfare destroyers.

We’ve already been through the pains and challenges of getting the design right and learning how to build them.

While they mightn’t have quite the same antisubmarine warfare capability as the Hunter is intended to have, they’re still very capable antisubmarine platforms. Moreover, their 48 missile cells offer advantages over the Hunter in air defence and strike—and for deploying missiles made in Australia through the emerging guided weapons enterprise.³

With the design mature and the build process well understood, there’s the realistic prospect of getting a second batch of three Hobarts into service before the Hunter program delivers, the first of them well before the end of the decade.

As with any complex undertaking, there will be challenges, such as managing facilities and workforce between the major shipbuilding programs at Osborne in South Australia and restarting supply chains, but the shipyard was designed to have more capacity than simply producing one frigate every two years. The reason the government retained ownership of the shipyard (and the taxpayers funded its development) was to retain the flexibility to produce different vessels from different designers as required.

Moreover, a new air warfare destroyer program will help generate the ecosystem of skilled tradespeople, designers, engineers, combat systems integrators, project managers and local suppliers that will be needed for the build and sustainment of the future SSNs. It would avoid a cold start to the SSN program and so help mitigate its schedule risks.

For those concerned about what this means for ultimate numbers of Hunter-class frigates, we can be agnostic for now on that issue. But there’s nothing carved in stone that says the magic numbers for the Navy’s major surface combatants are three destroyers and nine frigates for a total of 12. In fact, one of the fundamental problems with the current shipbuilding plan is that it locks us into 12 surface combatants until the 2050s—that’s despite the government’s assessment that we’re facing the most demanding strategic period for our country since World War II.

Building a second batch of Hobarts would allow us to grow the fleet faster, whatever the final goal may be.

Certainly, major warships such as the air warfare destroyers are expensive, but they’ll be substantially less so than Hunters, in part because they’re significantly smaller and in part because we already know how to build them.

Moreover, the $1–2 billion annual spend freed up by the cancellation of the Attack class can be put to good use building maritime and industrial capability. Most importantly, that spend can deliver capability much faster than the Hunter program.

If the National Naval Shipbuilding Enterprise can’t deliver meaningful capability well before 2030, then its entire purpose needs to be reconsidered. Ultimately, delivering actual capability in strategically relevant time frames will address risk as well as rebuild public confidence in the shipbuilding enterprise.

Dr Marcus Hellyer & Michael Shoebridge discuss the findings of the report.

Strategic risks are being realised in the Navy’s capability

The misalignment between strategy and schedule

Two major pieces of government policy have pulled the rug out from underneath its Naval Shipbuilding Plan.⁴ The first was the 2020 Defence Strategic Update (DSU). It assessed that we can no longer rely on having 10 years of warning time for inter-state conflict involving Australia—which simply can’t be reconciled with the schedules of the major planks of the shipbuilding plan. The second, the government’s announcement that Australia would acquire nuclear-powered attack submarines (SSNs) pushes the timelines of one of those planks even further into the future.

If the achievement of initial operating capability in the early 2030s seemed inadequate when the preferred designs for the future submarine and frigate projects and their schedules were announced several years ago, the revised dates of the mid-2030s for the future frigate and late 2030s for the SSNs are completely unacceptable in the light of the DSU’s strategic assessments.

We need to acknowledge that the Navy’s entire combat power is at risk.

It’s not just the delivery schedule of the first of class, but a lethargic two-year delivery drumbeat that’s designed to ensure jobs for the grandchildren of shipbuilders in the late 2040s and minimise the start-up costs of distant classes of ships whose requirements and design can only be in the realm of conjecture, rather than delivering capability now to ensure the security of the Australian taxpayers who are funding the program. Neither the schedule for initial operational capability nor the delivery drumbeat can be reconciled with the government’s own assessment of our strategic circumstances.

Moreover, the Navy’s short- to medium-term capability plans are difficult to reconcile with the DSU’s assessment that:

maintaining what is a capable, but largely defensive, force in the medium to long term will not best equip the ADF to deter attacks against Australia or its interests in the challenging environment this document sets out.

The DSU states that Defence requires:

… a different set of capabilities. These must be able to hold potential adversaries’ forces and infrastructure at risk from a greater distance, and therefore influence their calculus of costs involved in threatening Australian interests.

Those capabilities include long-range strike.⁵

Yet, due to Naval Shipbuilding Plan’s moribund schedule, the Anzac frigate will remain the backbone of the surface Navy well into the 2030s and be in service into the 2040s. But there’s little that can be done to enhance its strike capability. It only has eight vertical launching system (VLS) cells, and they’ll be required for its Evolved Sea Sparrow Missile (ESSM); there’s no capacity left for offensive weapons such as the Tomahawk missile that the government has announced it will acquire. And even when the Hunter eventually arrives, the situation won’t necessarily improve, as I discuss below.

Wishful thinking has reigned

Wishful thinking has reigned in the future frigate program. The result is that the predicted date for initial operational capability is now 2034—thirteen years away. Let’s review the history of the program and its schedule.

In August 2015, concerned about the prospects of a shipbuilding ‘valley of death’ between the close of the air warfare destroyer (AWD) project and the start of construction on the future frigates, the government announced that it was bringing forward the frigate program. Construction was now to start in 2020—that is, construction would start in five years, even though the government hadn’t yet selected a design, let alone funded any work on it.

Later that year, the government commenced a competitive evaluation process to identify a reference ship design that was mature, in the water and in service. However, it said that it also required five significant modifications to the successful design: integration of the Australian CEA radar, the Aegis combat system, US weapons that were already in Australian service, the MH-60R Seahawk maritime combat helicopter and any modifications necessary to meet Australian regulatory requirements. Reconciling what were essentially completely contradictory requirements— mature yet fundamentally redesigned—would prove difficult.⁶

The list of contenders was whittled down to three, who were funded to conduct activities such as assessing the risks of modifying their designs. Those risks forced the government to acknowledge that it wasn’t possible to meet the 2020 construction deadline’,⁷ so the 2020 milestone was redefined as the start of ‘prototyping’ (that is, demonstrating, as BAE has recently, that the new shipyard in South Australia worked by making ‘representative ship blocks’ that will not actually be used in a frigate⁸), while the start of construction of actual ships was moved to the end of 2022. The prototyping deadline can only be described as a face-saving measure that was completely unrelated to any meaningful design milestone in the frigate itself.

In June 2018, the government announced that it had chosen BAE Systems’ Global Combat Ship based on the Type 26 frigate being built in the UK. That was in some ways surprising, since the Type 26 was the only one of the three contenders that was not mature, not in the water and certainly not in service. The build and sustainment benefits offered by the digital technologies used to design the vessel and the flexible capability provided by the ship’s multi-role mission bay no doubt played a role in the decision. Nevertheless, we’ve continued to see instability in the reference ship’s design. Nor did the reference design incorporate the CEA radar, Aegis combat system, in-service weapons or MH-60R helicopter required by Australia. In essence, the government accepted Defence’s recommendation to choose the least mature design and then perform fundamental modifications to it.⁹ It’s impossible to reconcile this with the requirement to select a mature design to reduce risk and enable a rapid start to construction. Moreover, it piled more risk on top of the risk in the submarine program.

Figure 1: An artist’s impression of the Hunter-class frigate

Source: Defence image library.

In that light, the four and a half years available to achieve the start of construction by late 2022 seem quite inadequate.

The growth of the Hunter’s design from around 8,800 tonnes to over 10,000 tonnes confirms the immaturity of the initial design.

If we add into the mix the facts that the UK’s program still requires design resources, the Canadians have also selected the Type 26 and are also seeking to implement substantial design changes, and Covid-19 has disrupted everybody’s plans, it’s perhaps not surprising that Defence has revealed a further 18-month delay to the start of construction.¹⁰

However, Defence officials recently informed a Senate committee in August 2021 that, while construction has been delayed by 18 months, delivery of the first ship has been delayed by two years, to 2031.¹¹ Since Defence’s master schedule indicates a further two-year testing and evaluation phase before the first ship is deployable, that suggests that initial operational capability has now moved two years to the end of 2033. Or, put another way, even though the government’s 2020 DSU said we can no longer rely on 10 years of warning time, we’re looking at 12 years until the first of nine planned Hunter-class frigates provides useful capability (and around 18 years for the first SSN).

From the public information, it isn’t possible to determine how badly compromised the design is, or what further adjustments to capability or increases to cost and schedule will be required to finalise an acceptable design. A high-level schedule for the surface combatant transition based on the latest information from Defence is in Figure 2.

What does that delay mean? It would appear that the desperate attempt to bridge the valley of death by short-circuiting the selection and design processes for the future frigate has achieved little except to inject additional risk into the program. The 18-month delay to the start of construction—presumably to mid-2024—will create uncertainty for the ramp-up of BAE’s workforce and its suppliers and partners. The first two offshore patrol vessels are being built in Adelaide to ensure some continuity of workforce after the completion of the AWDs, but they’re due to be delivered in late 2021 and 2022 (noting that there are also signs of some delay there). It’s hard to see how ‘prototyping’ activities can serve as useful work for three and a half years.

Figure 2: Plan A—The current schedule for the surface combatant transition

Notes: Anzac- and Hobart-class lines provide age at retirement. Figure assumes Anzacs will be retired as Hunters enter service. Hunter delivery schedule incorporates Defence testimony to the Senate that delays to the start of construction will be recovered by the delivery of Ship 4. DDG replacement assumes no interruption to the two-year delivery drumbeat.

Sources: Defence testimony to Senate estimates hearings. Defence testimony to the Senate Economics Reference Committee inquiry into Australia’s sovereign naval shipbuilding capability, 6 August 2021. Australian National Audit Office, Major projects report 2019–20.

The maritime capability picture

A high-level summary is as follows. Under the current shipbuilding plan, despite the $575 billion that the government is spending on defence in the decade to 2029–30—of which $270 billion is going on new capability—Defence isn’t getting a single new warship to sea or even a single new VLS cell. Defence will have 12 new OPVs but, under the current plan, they’ll be equipped with nothing more lethal than a 40-mm gun. In short, the $270 billion isn’t delivering much additional maritime combat power. We’ll unpack that in more detail.

The Anzac-class frigates

That means under the current plan we’ll have to rely on the vessels we have already. The core of the surface fleet will remain the Anzac frigates for a long time to come. If we assume that an Anzac retires as a Hunter enters service, the last will retire around 2044, meaning that it will need to continue to serve for 23 years, and for 11 years after the Hunters start their dilatory delivery (that’s assuming the Hunter program can indeed make up the lost schedule as Defence officials have suggested¹²—historical experience suggests major projects delayed at this stage of development don’t recover schedule and often face additional delays). Their average age at retirement will be 36, well beyond their original design life. As a comparison, the Adelaide-class frigates averaged 28 at retirement.

The last two Anzacs will be 37 and 38. In fact, if the Anzacs are retired in the order they were commissioned, the last three aren’t even halfway through their service lives. And with HMAS Perth potentially serving until 2044, there are likely to be many members of its crew who have not yet been born.

Defence and its industry partners have done well to enhance the Anzacs’ capability over their life to date. They’re far from being the infamous ‘floating targets’ fitted for but not with capability that they once were.¹³

Figure 3: Anzac-class frigate HMAS Arunta, recently upgraded with the CEAFAR long-range air search radar

Source: Defence image library.

With the latest round of upgrades under the Anzac Midlife Capability Assurance Program well underway, Defence is commencing planning for a life-of-type extension to manage obsolescence issues and ensure the platform remains a relevant capability. But, considering that the last of the class will be in service for at least another 20 years, the wish list will be long. While some much-needed enhancements might be space and weight neutral, such as a new maritime strike missile to replace the venerable Harpoon, others will inevitably have additional space, weight and power requirements, such as a towed-array sonar, for which Defence recently issued a request for information to industry.

However, with the ‘industry standard’ for new classes of multirole frigates now in the 7,000+ tonne range, the Anzacs will necessarily be limited with only 3,600 tonnes. Perhaps the greatest limitation facing the Anzacs is magazine depth. While the class’s eight VLS cells can carry 32 quad-packed ESSMs, its radar and combat management systems are incompatible with the longer range SM-2 and SM-6. An Anzac might be able to shoot down a missile, but it won’t be able to shoot down the aircraft before it launches the missile. And with design margins largely consumed by capability enhancements over the past 20 years, it’s unlikely that the number of VLS cells can be increased. The Anzac’s ability to operate outside of the air defence umbrella provided by the Hobart class or a similar allied vessel will be increasingly limited in the face of a peer or near-peer adversary.¹⁴

The Hobart-class destroyers

The early travails of the AWD program have been well covered.¹⁵ Just as happened with the Collins-class submarines, early bad publicity has tainted their reputation, and the public perception is one of delays and cost blowouts. However, with the program now complete, it’s possible to take stock and offer a more complete assessment.

Since the restructuring of the program in 2014, it has delivered on the revised schedule. Also, while the program received a $1.2 billion budget increase, it’s likely that less than half that will be required.¹⁶ The class achieved final operational capability in August 2021, and the Chief of Navy has praised its capabilities.¹⁷ The class’s advanced air defence capabilities based on the Aegis combat management system, AN/SPY-1D radar and SM-2 air defence missile have been demonstrated, as has its cooperative engagement capability (CEC), which allows other platforms to provide targeting data—provided they also are equipped with CEC, which so far is a small number of platforms, such as other AWDs. Moreover, the class has performed well in trials of its antisubmarine warfare (ASW) capability, and its acoustic signature is reportedly better than that of the Anzacs, which was the previous benchmark for a good ASW platform. Ironically, the AWD is the Navy’s only vessel equipped with a towed-array sonar and is therefore its most capable ASW vessel.

Figure 4: The Hobart-class destroyers achieved final operational capability in August 2021

Source: Defence image library.

While the class is relatively new, Defence is already embarking on an upgrade to its combat management system, installing Aegis Baseline 9. In conjunction with CEC, this will allow it to employ the SM-6 missile’s long-range, over-the-horizon air defence capability, as well as its ballistic missile defence capability—which is increasingly urgent in the light of China’s development and deployment of anti-ship ballistic missiles.

Despite its strengths, the Hobart has weaknesses. As a class, it will have capacity constraints. Since the Navy only has three Hobart AWDs, its ability to consistently deploy more than one will be limited. Moreover, while the Hobarts’ 48 VLS cells are a huge improvement over the Anzacs’ eight, that’s still a limited number compared to other warships in the region, many of which have 96 or even 128. While the government has announced the acquisition of the Tomahawk land strike missile for the Hobart, it’s highly unlikely that will result in a credible strike capability with only three AWDs in the fleet.18 With the Anzacs’ limited magazine depth, the Hobarts are likely to have to load most of their VLS cells with air defence missiles, leaving little or no capacity for other weapons. Even then, in protracted operations against an adversary such as China, which can employ combinations of air-, sea-, land- and submarine-launched cruise missiles, anti-ship ballistic missiles and probably hypersonic missiles, the Hobarts’ air-defence arsenal could be depleted.

Also, the Hobart’s eight Harpoon maritime strike missiles provide no improvement over the Anzacs. The Harpoon is dated and, even if it’s replaced later this decade with a more advanced weapon, there’s little capacity to increase the number of weapons on the ship. In short, while the Hobarts have the ability to protect themselves and the vessels they’re escorting, they have limited lethality.

But, while noting the shortfalls, the Hobart Class is an impressive maritime combatant—and in Australia’s strategic environment, making the perfect the enemy of the good seems both dangerous and wrong.

Capability risk in the Hunter-class design

So, is the Hunter the answer for a more offensive ADF? The answer is no, as the shortcomings of the Hobart in offensive power are even greater in the Hunter.

Let’s review the Hunter’s capability. The Hunter class started off as a large ship for the capability it provided. It was around 8,800 tonnes full-load when it was selected—bigger than the Hobart-class destroyer—yet it will have fewer VLS cells, at 32. Over the past three years of design work to integrate the required modifications, the design has now reached 10,000 tonnes, according to Defence officials. It also has only eight maritime strike missiles, the same as the Anzac and Hobart. Overall, of all contemporary warships, it seems to be the most expensive for getting missiles to sea. That’s not good news in light of the DSU’s assessments about growing threats and the need for offensive capabilities.

Despite the large size, the design has minimal growth margins. Defence officials have stated that its target margins are around 270 tonnes, which equates to around 2.5%.¹⁹ That compares with the Hobart class’s roughly 600 tonnes at delivery for a smaller vessel. Defence officials have argued that the small margins are acceptable because the ship will be delivered with all the capabilities it requires. That’s a highly optimistic statement that isn’t supported by the life cycles of other vessels. The multi-mission bay seems to require design margin if it is to be used as originally conceived—to expand the ship’s capabilities over its life. It also presumes a reliable understanding of the future threat environment—something that’s inconsistent with the highly dynamic and rapidly evolving picture set out in the DSU and Defence’s demonstrated inability to predict the future.²⁰ Already, the margins seem incapable of addressing what’s the major capability shortfall in the Hunter: the small number of VLS cells.

While the substantial increase in weight has caused some commentators concern about the performance of the propulsion system, Defence officials have testified that the performance will meet requirements. It does, however, seem to defy the laws of physics that a 15% increase in weight will have no impact on speed, efficiency and endurance.

The cost of the future frigate has also grown from $30 billion in the 2016 Integrated Investment Program to $35 billion in the 2017 Naval Shipbuilding Plan to $45.6 billion in the 2020 Force Structure Plan, which stated that the increase was in part driven by the drawn-out schedule adopted by the current approach to continuous shipbuilding.²¹ It’s possible that underestimation of the complexity of the design modifications and the spiralling weight increases have also played a role in the 50% cost increase.²²

While the Attack-class submarine attracted the bulk of public criticism of the Naval Shipbuilding Program, concern is growing about the Hunter.²³ In the light of the schedule and inherent capability limitations of the class, some of that concern appears to be warranted.

Defence officials have repeatedly told Senate committees that they’re confident about stabilising the design and getting the spiralling weight issue under control. That would mean that the best-case scenario is that in 12 years’ time Australia gets the first ship of a design that will be significantly under-gunned for a major surface combatant in the age of missiles and has limited margin for improvement. The worst case is that the Hunter is caught in a design spiral that’s unrecoverable, resulting in a severely compromised design that falls well short of requirements, encounters further schedule delay and doesn’t deliver value for money.

Analogous programs

While it may be tempting to believe that the challenges facing the Hunter class are due to poor leadership and that a change of management or structure in the Naval Shipbuilding Program will solve all its problems, that’s probably just not true—the issues are deeper than that. Analogous programs overseas have similar problems.

The trajectory of the Canadian program is virtually identical, for much the same reasons. Canada also chose the Type 26 as the reference ship for its future 15-ship surface combatant class. It, too, is seeking significant modifications to the reference ship design to increase the vessel’s air warfare capabilities. Consequently, the Canadian vessel’s weight is growing. That’s also caused schedule delays. Both have resulted in an increase in cost, according to the independent Canadian parliamentary budget office.²⁴ The office also provided costs for different solutions, including mixes of high/low-capability ships that came at substantially lower cost.

So far, Canada has stuck to its original plan of 15 large frigates, but, in the face of its own budget pressures, the UK has adopted a high/low-capability mix. The Royal Navy aspires to an escort fleet of 24 ships—eight destroyers and 16 frigates. However, the UK found the Type 26 frigate to be unaffordable and is only acquiring eight for the Royal Navy instead of its originally planned 13 (only three have been ordered so far). Instead, it will achieve its numbers through the acquisition of five smaller, significantly less capable frigates: the Type 31.²⁵ In fact, the Type 31 has no maritime or land strike capability, no towed array and only local air defence, making it essentially a patrol vessel rather than a major surface combatant. A follow-on class (potentially called the Type 32) to reach the objective number of frigates looks like being Batch II of the Type 31 rather than having the size, capability and cost of a Type 26. Early analysis indicates that the Type 32 will rely heavily on automation and autonomous systems.²⁶

Another emerging issue with the UK’s Type 26 is that it looks like being delivered in a fitted-for-but-not-with configuration for key systems such as long-range air defence and anti-ship missiles. While that may have allowed construction to progress and keep costs within the contracted £3.7 billion for the first three ships, it will inevitably affect capability.²⁷ That in itself isn’t a problem for Australia’s Hunter program, but it confirms that there’s no way to square the circle—demanding capability aspirations drive cost and schedule.

The US Navy selected the FREMM, which was one of the unsuccessful contenders for Australia’s future frigate program. While early cost estimates made it appear to be a bargain, independent Congressional Budget Office estimates suggest that the US Navy estimates are extremely over-optimistic.²⁸ Moreover, despite describing the design as mature, the Navy is implementing design changes that are altering the hull, which will be likely to introduce cost and schedule risk.²⁹

These brief comparisons illustrate a number of points. There’s no magic solution to the cost–capability spiral— if you want highly capable, crewed, multi-role vessels, they will cost a lot. Modifying designs will only increase cost and schedule. Attempts to reduce cost by stripping out capability are likely to result in vessels that aren’t survivable (as we’ve also seen with the US Navy’s littoral combat ship and may be the case with the UK’s Type 31). However, selecting mature, proven designs can reduce cost and schedule risk, particularly if navies can resist the temptation to do major design modifications.

The submarine transition

We’ve seen that the surface combatant transition is facing major risks. When faced with risk, organisations can seek to hedge. In the RAN’s context, that would suggest relying on other capabilities to balance the risk in its surface combatant program. The strategic challenge for Defence is that the other half of the Navy’s combat power— its submarine capability—is facing even greater risk than its surface combatants.

The government’s recent announcement that it will acquire, with assistance from the US and the UK, a fleet of SSNs may mitigate capability risk in the longer term, but in the shorter term it only exacerbates it. According to the government, the delivery of the first SSN is a long way off in the late 2030s. That’s even further away that the Attack class was. Moreover, the number of new SSNs will grow only slowly after that, perhaps on a three-year drumbeat.

When we examine the submarine capability transition from the Collins fleet to the SSN fleet, it hard to avoid the conclusion that there will be significant risk of decline in capability during the transition—potentially one that will be very difficult to recover from.

As with the Anzacs, an extensive program of upgrades is planned for the Collins-class submarines under the life-of-type extension (LOTE) program. According to Defence, this will have an ambitious scope, involving a new main motor, new diesel generators and new electrical distribution systems. Since even minor design changes to submarines can have major implications for space, weight, power and trim across the whole boat, this extensive program brings substantial design risks. While Defence has expressed confidence in the progress of design work on the LOTE to date, the minimal expenditure so far and the lack of involvement by the original designer of the Collins (Saab Kockums, which also has substantial experience in upgrades of other Swedish-designed submarines) suggest that there are still outstanding design risks and much work to be done.

The government has finally signalled that it will put all six Collins through the LOTE, yet that provides little additional risk mitigation. Even with a LOTE, the Collins can’t bridge the gap to the new SSN fleet. If the LOTE encounters technical challenges, they will either result in schedule delays, resulting in fewer submarines being available, or the LOTE could be de-scoped, meaning that capability enhancements would not be delivered. And if both the SSNs and the LOTE are delayed, the capability shortfall compounds.

By the time Collins boats are replaced by SSNs, they’ll be well into their forties. That’s older than the KRI Nanggala, the ageing Indonesian submarine that sank with all hands earlier this year. It’s hard to imagine them still being the ‘regionally superior capability’ that Defence said it’s aiming for. Their ability to undergo a second LOTE and still be relevant, as the Chief of Navy recently suggested, strains credibility.³⁰

Moreover, operating small fleets of ageing boats is a receipt for disaster in terms of availability. Canada is attempting to do this with a fleet of four second-hand conventional British boats. Despite years of repairs and upgrades, the entire fleet still did not achieve a single sea day in 2019.³¹ The Chief of Navy has suggested that growth from the current 900 qualified submariners to around 2,300 will be required. Without boats that can regularly go to sea, it will be extremely challenging to maintain the Navy’s submariner numbers, let alone embark on a path to grow the much larger numbers that will be required for the future SSN fleet.³²

It’s impossible from outside Defence to fully understand the risks to both transitions or appreciate how Defence is mitigating them, but it’s clear that both fleets (submarines and surface combatants) are facing very similar sets of risks. What that means is that it’s dangerous to rely on one to cover capability risks in the other. There are no guarantees that risks won’t be realised (as indeed we’re seeing already) in both.

A table illustrating the submarine transition is shown in Figure 5.³³

Figure 5: The submarine transition plan

Notes: Collins line provides age at retirement. Figure assumes a Collins boat will be retired as an SSN enters service. SSN delivery drumbeat based on current Astute drumbeat which averages around three years.

Sources: SSN schedule based on the government’s announcement. Collins schedule based on Defence testimony to Senate estimates hearings.

Plain speaking about the National Naval Shipbuilding Enterprise

With the cancellation of the Attack-class submarine program, the naval shipbuilding enterprise is now in disarray. That has potentially disastrous consequences for the Navy’s capability. It’s time for some clear thinking about the purpose of the enterprise and what can be done to salvage it.

The purpose of continuous shipbuilding

The continuous shipbuilding enterprise exists for one purpose only—to deliver maritime capability to the ADF. Essentially, the enterprise is itself an industrial capability that’s been established to deliver the military capability the ADF needs when it needs it. Its purpose isn’t to deliver a particular number or kind of vessel per se. The order list is what’s set out in the Naval Shipbuilding Plan and Force Structure Plan, but that list will need to change as strategic circumstances require. Much discussion, however, conflates the overall enterprise with the current order list.

Moreover, ‘continuous’ has become the end in itself in order to preserve jobs in future decades. Continuous naval shipbuilding has potential benefits. That could include saving money, but the current approach to it drives higher costs for the following reasons:³⁴

Artificially stretching out a program through a two-year delivery drumbeat is extremely inefficient.
Artificially stretching out a program also increases costs by providing more time for inflation and other cost indices to take effect.
Basing a continuous build program on a fleet of 12 vessels (the number for each of the planned surface combatant and the Attack-class submarine fleets), even with a stretched out two-year drumbeat, means vessels are replaced after 24 years, well before their economic life of type.
Continuous build based on a fleet of eight SSNs would drive an even more lethargic delivery drumbeat of around four years.³⁵
Start-up costs are a small percentage of costs, particularly for large programs delivering nine or 12 vessels, and are outweighed by the overheads of slow delivery schedules.

The total investment in the shipbuilding program is frequently mentioned by the government and media. We should note that the $90 billion figure often cited was an understatement of Defence’s actual $130 billion estimate for the original build program of frigates, Attack-class submarines and OPVs. That’s even before the DSU added new classes to the future order book, such as logistics ships. And of course, that number will grow again, since the SSNs program will inevitably cost significantly more than the Attack class.

But a more relevant number is the annual cash flow the enterprise is absorbing. Before the cancellation, the shipbuilding enterprise planned to spend $2.5 billion in 2021–22, several years before the Attack and Hunter classes were to start construction. Once they started construction, the enterprise would likely have been spending $4 billion per year. Consequently, by the end of the decade, the Attack and Hunter programs would have spent over $20 billion— years before they deliver a single vessel. The number could have reached close to $35 billion by the time the first of each class has entered service—but it’s likely to be more by the time we get to the first SSN. Of course, the cancellation of the Attack class means less money will be spent this decade (more on that later), but the pursuit of SSNs simply makes most numbers even larger.

We need to ensure that those huge sums are delivering a timely capability return on investment. Otherwise, we’re at risk of establishing, at vast expense, a naval shipbuilding enterprise that’s designed to deliver jobs in Adelaide in the 2040s and 2050s, rather than using our newly established industrial capability to deliver maritime war-fighting capability in the most strategically uncertain period of the past 75 years.

If the naval shipbuilding enterprise can’t deliver strategically relevant capability well before 2030, then its entire purpose needs to be reconsidered. If it can’t deliver real capability when we need it—despite the government’s investment of $270 billion in new capability over the decade to 2030 (and $575 billion in total defence spending over that period)—it has failed its purpose.³⁶

Rebuilding shipbuilding

While the delays to the Hunter’s schedule have affected the ramp-up of Australia’s shipbuilding capability, that is small compared to the impact of the cancellation of the Attack class. If the government achieves its goal of starting construction on SSNs by the end of the 2020s, that means that the start of construction for the Future Submarine Program will have been deferred by at least five years.

It’s hard to quantify what impact that has for small- to medium-sized enterprises that had planned and invested to prepare themselves to contribute to the Attack program. Around a month after the cancellation was announced, the Australian Industry Group told a Senate inquiry that the cancellation had profound implications for Australia’s industrial base. The Australian Industry and Defence Network informed the same inquiry that Naval Group had planned on having 2,000 local suppliers; 600 local companies had already qualified for Naval Group’s supply chain, and 200 had received actual contracts. Those that had qualified had spent an average of $200,000 to do so—a substantial investment for small enterprises. The Australian Industry and Defence Network also stated that local companies were already laying off employees in the wake of the cancellation.³⁷

We can quantify the longer term disruption to the workforce by looking at Defence’s own estimates of the numbers that were to be employed on the Attack class. Defence’s estimate of the growth of the shipbuilding workforce over the decade is given in Table 1. We should note that these are only direct jobs; the government and Defence have stated that, once the workforce involved in supply chains is included, the total number is around three times greater.³⁸ We can see that the cancellation of the Attack class has eliminated or put at risk over a quarter of current Australian shipbuilding jobs. By the middle of the decade that grows to over a third of planned jobs and to 42% by the end of the decade.

Table 1: Expected direct Australian jobs in the Attack-class submarine program

Source: Senator the Hon Linda Reynolds CSC, Minister for Defence, ‘Correspondence regarding naval shipbuilding workforce figures,’ 22 October 2020, online.

If those companies and workers—and the industrial capability they embodied—were simply no longer needed in Australia’s shipbuilding plans, that would be unfortunate for the individuals, but it wouldn’t be strategic loss. However, since the government is intending to build the future SSNs here, the abrupt interruption does indeed have strategic consequences. A cold start to the SSN program is likely to push its delivery schedule even further into the future. And with an expected tonnage substantially greater than the Attack class—potentially twice as great— even more workers will be required. A larger, healthier, and more capable shipbuilding ecosystem is absolutely essential to mitigating risk in the SSN program. The only way to develop that ecosystem is to build ships.

The government has announced a program to move companies and workers from the Attack program. While every effort should be made to retain these capabilities in the ecosystem, the intent is to redirect them to existing programs. Since those programs were already in the shipbuilding plan, they aren’t a net increase. New programs are needed to build additional industrial capability and prepare for the SSN program.³⁹

The cancellation also has financial implications. $2.3 billion has been spent on the Attack program to date. More is to come as we settle with Naval Group, Lockheed Martin and their subcontractors. Defence will also need to negotiate outcomes with companies that invested in becoming certified suppliers but didn’t receive contracts.⁴⁰ That’s extremely regrettable.

But looking forward we can see a similar effect to the workforce picture in the loss of cash flow that was to generate industrial and consequently military capability (Table 2). Well over one-third of spending on domestic shipbuilding projects has evaporated, with a billion-dollar annual spend cancelled. That amount was likely to grow to around to around $2 billion per year and 50% of the total once construction of the Attack class ramped up.

Table 2: Attack-class as a percentage of total shipbuilding cash flow (A$m)

Source: Defence Portfolio Budget Statements, Defence annual report.

That means that billions of dollars in capability is not being built. It also means that thousands of jobs related to maritime capability aren’t being generated along with the skill sets needed to fill them. Those skills, however, will still be needed when the SSN program commences. The amount that would have been spent on the Attack class over the coming decade could have been over $12 billion. That cash flow has now been freed up, presenting Defence with a range of opportunities that it can grasp.

Changing the plan

Despite being announced by the government in 2016, the continuous shipbuilding enterprise won’t deliver war-fighting capability until 2033, when the first Hunter-class frigate achieves initial operational capability. Changing the plan is necessary. With its SSN announcement, the government has indicated that it’s willing to change the plan, but more is needed to meet capability risks and develop shipbuilding capability.

The true value of a continuous naval shipbuilding capability is in its ability to switch production between classes and to accelerate builds as necessary. That means reconsidering whether the projects currently planned to be delivered as the first tranche of the continuous naval shipbuilding enterprise will deliver the capability the ADF needs when it needs it and to adjust the enterprise if necessary. Modifying the plan as necessary is built into the concept of continuous naval shipbuilding, which is why the frigate program has adopted a batch or tranche approach.

Those adjustments could take a range of forms—including changes in the near term as well as in the distant future. One is to accelerate the delivery drumbeat, but that can only be done once the designs are mature and in production. At the moment, the key challenge in the surface combatant program is that the design for the Hunter class is not mature, and there are worrying signs that it might not ever be without compromise to capability and the premature consumption of capability growth margins.

Large enterprises are inherently difficult, and if we walked away from them as soon as any challenges arose we would never achieve anything. But we also need to be clear-sighted about the need to adjust the enterprise when necessary and not be excessively wedded to the original plan if it isn’t meeting the purpose of the enterprise. The government changed the plan in the submarine program. We need to consider whether that time has come in the surface combatant stream. That doesn’t mean cancelling the Hunter-class program, but it does require considering other approaches to delivering the capability we need until the Hunter program delivers.

Having created an industrial machine for building maritime capability, we can now decide how to use it effectively to meet our changing strategic circumstances.

Hobart Block II

We need to adjust the plan for the surface combatant fleet. But if we’re trying to address the compounding risks in the shipbuilding program and maritime capability, we must at all costs avoid the path taken with our submarine capability. Starting from scratch with a new frigate design never produced in Australia simply increases risk.

Suggestions such as reorganising the management of the shipbuilding enterprise to get things back on track is another idea that sounds attractive but is likely to deliver only marginal changes to timelines—you can’t simply short-circuit the design work needed in the frigate and submarine programs.

The concept

But there is one option that we could consider: building more Hobart-class destroyers.

The idea of building more than the original three Hobart-class vessels isn’t a new one. We’ve known at least since the publication of the 2009 Defence White Paper and its underpinning investment plan that there would be a shipbuilding gap between the close of the AWD program and the start of the replacement for the Anzac class, resulting in a ‘valley of death’ for continuity of workforce and skills.⁴¹ Many commentators have proposed the construction of one or more AWDs to bridge the gap.⁴²

Why we haven’t is one of the most perplexing questions in Defence’s very mixed history of capability decisions. Quite frankly, why we didn’t start our continuous shipbuilding enterprise with some actual continuous shipbuilding by extending an existing program, which was achieving substantially greater efficiency with each vessel, is mystifying. Regardless of the reason, no government adopted this path, resulting in the rushed process to accelerate the construction of the OPV and future frigate to bridge the impending valley of death. As we’ve seen, that process was permeated with wishful thinking, particularly about the time frames needed to perform the design changes necessary for the Hunter class, with the result that even desperate measures such as the construction of the first two OPVs in Adelaide haven’t been able to bridge the valley.

A standard argument deployed against the acquisition of additional AWDs has been the hoary old chestnut of ‘balance’—the argument that having more than three AWDs would ‘unbalance’ the Navy. Balance is one of the pieces of theology that thrive in Defence. It’s theology because it has the status of revealed truth handed down from on high, it’s not based on any rigorous evidence, and it’s used to shut down debate or the airing of alternative viewpoints. The theology of balance relies on certain magic numbers that are themselves, of course, part of the theology. For example, a balanced surface combatant fleet supposedly consists of three destroyers and nine smaller, less capable ships for a total of 12. Where those numbers come from isn’t clear, other than historical precedent—the Navy previously had three Perth-class destroyers for air defence, for example, and before that three Daring-class destroyers.

Three air defence vessels are in fact a strange number, since there’s another number three that has more rigour to it and that’s the rule of thumb that, for every three platforms you have, you can reliably get one to sea. So the Navy can reliably get one air defence vessel to sea, which is a rather inadequate number in the light of Australia’s vast area of strategic interest.

At the heart of the ‘balanced force’ case for rejecting further AWDs was the assumption that the AWDs are too big and too expensive for a fleet of 12 surface combatants. For the ASW role, the Navy could manage with smaller, more affordable ships. Those arguments have evaporated: the size and cost of the Hunter exceed those of the Hobart. In fact, the Hobart and the Hunter are very similar vessels despite one being called a destroyer and the other a frigate. The Hobart has 16 more VLS cells, which gives it an advantage in the air defence role, while the Hunter will be likely to have somewhat better ASW performance by virtue of its quieter propulsion system. However, with the same combat management system, very capable radar and CEC, they’re likely to be largely interchangeable in many roles.

While the Navy once thought that more than three AWDs would unbalance the force, it’s essentially acquiring 12 destroyer-sized vessels.

The big advantage that the Hobart has over the Hunter is that it’s an existing design that’s been successfully delivered and entered service. With the operational test and evaluation process for the Hobart successfully completed on the way to the declaration of full operational capability in August 2021, the vessels are a known quantity. That doesn’t just include advanced air warfare but also very good ASW capabilities by virtue of its integrated sonar suite, which includes a medium-frequency hull-mounted array, low-frequency active towed array, and Seahawk Romeo with an active dipping sonar. In short, the ship exists and it works. Moreover, any additional vessels will immediately be able to leverage an existing support system.

Figure 6: A Seahawk MH-60R ‘Romeo’ maritime combat helicopter with a dipping sonar

Source: Defence image library.

This then raises the question of whether the construction of a further number of Hobart-class vessels, essentially a Hobart Block II, can provide a hedge against the risk in the Navy’s capability transitions and a faster boost to the ADF’s offensive capability than is likely to be possible through the Hunter program alone. I’ll look at the advantages before I consider the challenges.

Figure 7 shows a transition that includes the build of three Hobart Block II vessels before the first Hunter.

Figure 7: A possible Plan B involving the build of three Hobart Block II DDGs

Notes: Figure assumes a three-ship build of a Hobart Block II, with the build taking six years and a two-year drumbeat. Hunter-class schedule is delayed by an additional year to allow design to stabilise and be de-risked. First two Anzacs are retired one-year earlier than under Plan A, but the remainder follow the same retirement date as Plan A. Overall, this allows the fleet to achieve 15 vessels. Figures in the final box of each row indicate the ship’s age at retirement.

The final Hobart-class destroyer required four and a half years from being laid down to commissioning. Of course, with the interruption to the program, it would be unreasonable to assume that the first of a second batch could be built as quickly. Let’s assume a rapid approval process and a build taking around six or seven years. The first could enter service around 2028. With the second following in 2030 and the third in 2032 (or sooner), the Navy could have three additional, highly capable combatants before the first Hunter is scheduled to achieve initial operational capability.⁴³ While it would be important to limit modifications to avoid replicating the problems encountered by the Hunter, Navantia has done early design work to integrate the Australian CEA radar, improve its noise signature and install a second hangar, allowing the operation of two helicopters. The last two measures would provide a significant boost to the vessel’s ASW capability.

The capability advantages of this proposal are clear. It would get a large number of VLS cells to sea this decade, unlike the current shipbuilding plan that does not get any more to sea until 2033. It would also double the number of towed sonar arrays in the surface fleet. It would provide three more vessels that could provide area air defence to amphibious and support vessels and to less capable combatants, whether they’re Anzacs, modified OPVs or new classes of uncrewed or minimally crewed vessels.

This proposal is agnostic on the final size of surface fleet and on the issue of how many Hunters should be acquired. If, despite all the changes over previous decades in our strategic circumstances and the clear-headed assessments of the DSU, the magic number for surface combatants is still 12, the revised plan would achieve that number of surface combatants by around 2028. Moreover, it would allow two Anzacs to retire several years earlier. If readers are concerned that having six Hobarts obviates the need for the final three Hunters, one might respond that it’s strange reasoning that prioritises ships that won’t be delivered until the 2040s ahead of our current pressing capability requirements. Moreover, with Hunter 7 not due to start construction until the late 2030s, we still have around 16 years to work out how we’ll ensure continuity of naval shipbuilding.

If, however, we accept that our circumstances have changed and a larger fleet is needed, it would grow the fleet to 13 vessels by around 2030 and 14 by 2038 with the arrival of the fourth Hunter.⁴⁴ In contrast, the current plan does not reach 12 until 2053 and never gets beyond that number (refer to the schedules in figures 2 and 6). With a larger fleet of 15 surface combatants, the serene clockwork of the shipbuilding plan need not be disturbed: all nine Hunters would be built, and the first Hobart replaced as currently scheduled.

Unlike the current plan, this approach would provide a return on the expenditure on shipbuilding this decade. It would also demonstrate to an increasingly sceptical Australian public that the continuous Naval Shipbuilding Plan that they’re paying for is about building ADF capability, not merely jobs in Adelaide.

Implementation

After the troubled early stages of the AWD build, the subsequent reform program established a very successful management and implementation model. The key was bringing in Navantia, the original designer, to manage construction. ASC remained as the builder but essentially worked under Navantia’s instruction. Raytheon remained as the combat systems integrator.⁴⁵ The reformed management arrangements delivered all three ships to the revised schedule, and most of the budget increase won’t be required. The key to the successful delivery of a Hobart Block II would be to retain the management structure adopted under the reform program.

The only viable shipyard in Australia for the project is the surface shipyard at Osborne South in Adelaide. It’s important to remember that the Australian Government paid for the $535 million upgrade to the facility and retained ownership of it. The government-owned enterprise Australian Naval Infrastructure owns and manages the shipyard and is responsible for meeting the requirements of its tenants. The government implemented this arrangement precisely so that it could choose whichever designs and shipbuilders met its requirements. Defence has confirmed that, in accordance with the Naval Shipbuilding Plan, the Osborne Naval Shipyard was ‘flexibly designed to accommodate the potentially varying needs of future shipbuilders’.⁴⁶ In short, the shipyard wasn’t designed to build only Hunter-class frigates.

There may be some concerns that the original build strategy, which relied on the construction of blocks in various yards before finally assembly at Osborne, can’t be replicated. It’s true that the industrial landscape has changed— BAE’s Melbourne shipyard, which built blocks for the original project, no longer exists—but such fears are probably exaggerated, for two reasons. The first is that the redesigned and now functioning Osborne shipyard has the capacity to build blocks itself. The second is that, despite concerns about the valley of death, the Australian naval shipbuilding ecosystem has developed significant capacity. Forgacs, which built blocks for the AWD project at Tomago, near Newcastle, was acquired by the highly capable engineering company Civmec as it built its shipbuilding credentials to compete for the OPV project. Civmec has demonstrated those credentials in the build of the OPV.

It’s entirely possible that Civmec could build blocks for a second tranche of Hobarts. In fact, the concept of a South Australian and a Western Australian shipyard feeding into the one production line is the model envisaged in the RAND Corporation’s 2015 report on the future of Australian naval shipbuilding.⁴⁷

Implementation challenges

There are of course implementation challenges that would need to be resolved. We’ll look at three key ones.

Radar selection and integration

The first is that some systems used on the Block I Hobart are no longer available in the same configuration. A key one is the radar. Under Defence’s current investment plan, the Hobart class is to undergo an upgrade to its combat management system, moving to the latest version of Aegis, which is Baseline 9. It’s also going to have its tactical interface (the system that runs all the other parts of the combat system and integrates them with Aegis) replaced.

Currently, it uses the Australian Tactical Interface (ATI) produced by Kongsberg. As part the Navy’s programmatic approach to combat management systems, which mandates Saab’s combat management system for all classes in the surface fleet, the ATI will be replaced by Saab’s Australian Interface (AI). This will ensure commonality with the Hunter, which will also use Aegis in combination with Saab’s interface.

So, the choice of combat management system is straightforward (noting that the combination of Aegis and Saab’s AI isn’t yet in service), but the choice of radar is not. The AN/SPY-1D radar used on the Block I Hobart is no longer the current version being installed by the US Navy, which has moved to the AN/SPY-6 radar for its Flight III Arleigh Burke-class destroyers. The Australian Government has mandated that the Hunter use CEA Technologies’ CEAFAR radar. Consequently, a Hobart Block II would need to use either the AN/SPY-6 or the CEAFAR.

Both approaches would have issues. Defence apparently has no plans to replace the AN/SPY-1D radar on the Hobart class with either the AN/SPY-6 or the CEAFAR radar. Therefore, if the Hobart Block II installed the AN/SPY-6, the Navy would have three different configurations on its major surface combatants, which is not desirable. Installing the CEAFAR radar on the Hobart Block II would provide commonality with the Hunter class but would require design work. Fortunately, some of that has been done already for the competitive evaluation process for the future frigate.

Integration work already done for the Hunter could also be leveraged.

Making an informed decision on this issue will require robust technical analysis, including a frank assessment of schedule risk arising from any integration risks, but an initial review of the public information suggests that the integration of CEAFAR is achievable and, overall, the better path to take.

Shipyard capacity at Osborne

The only viable shipyard in Australia for the Hobart Block II is the redesigned surface shipyard at Osborne in Adelaide. Construction of the Hobart Block II and the early Hunters would overlap at some point. However, Defence officials have stated that the new shipyard was designed with the capacity to produce vessels significantly faster than the currently planned two-year drumbeat for the Hunter program. Moreover, the whole idea of the national shipbuilding enterprise was to be able to construct different designs in the same facilities, and that’s what drove the huge investment in the modern, digitally enabled shipyards. Also, if there are capacity issues at Osborne, there are other ways to address them, for example by drawing on Civmec’s developing shipbuilding expertise and having it build blocks in Western Australia.

Funding

The cost of a Hobart Block II vessel will no doubt be substantially less than that of a Hunter, if for no other reason than that the Hobart is substantially smaller. The fact that Australia has already built three would be likely to have cost benefits, even though the original program has been completed and the management and workforce dispersed. While Defence doesn’t publish the unit sail-away cost of its vessels, it’s likely that the cost of the final AWD was under $2 billion in current dollars.⁴⁸ If we take the $45 billion out-turned budget for the Hunter program, remove program-level costs (design, project management, intellectual property and so on) and convert it to current dollars, it’s hard to see its unit cost being much less than $3 billion and certainly more than $2.5 billion in current dollars.

Nevertheless, as a new entry into Defence’s investment program, a Block II Hobart build would require a funding line. The issue isn’t just about the total funding required, but about managing annual cash flow. To date, the Hunter program has failed to spend as planned. With the program delayed by a further two years, that will inevitably continue, and some funding currently programmed for the Hunter will become available, at least in the short term. But, at some point, when both the Hunter and a Block II Hobart program are in construction, the cash-flow requirement will be substantially greater than Defence currently plans for the major surface combatant stream.

But the problem facing Defence is not a shortage of cash, but a massive surplus. First, the rapid ramp-up of Defence’s acquisition funding line set out in the 2020 DSU, combined with the impact of Covid-19 on global supply chains and defence industry’s ability to operate, has meant that Defence has underspent its acquisition budget. In 2020–21, the shortfall was around $1 billion.⁴⁹ With another large increase in acquisition funding planned for 2021–22 and the effects of the pandemic still not resolved, it’s likely that there will be another shortfall.

The second source of funding is the huge amount of cash freed up by the cancellation of the Attack-class program, as discussed above. Defence planned to spend around $1 billion in 2021–22, and it’s likely that would grow to around $2 billion per year in the second half of the decade. The total over the decade could have been more than $12 billion. Certainly, the ramp-up of the SSN program will require funding, but that’s still years away and there’s simply no way it can absorb all that cash flow. Investing part of it in a Block II Hobart build ensures that funding will deliver military and industrial capability.

Developing the shipbuilding ecosystem

We discussed earlier the need to rebuild the shipbuilding ecosystem. Spending those funds on a Block II Hobart build also means that we’ll start developing the ecosystem needed to support the SSN program. While it may appear that a Block II Hobart program in Adelaide will compete with the Hunter for resources, in particular workforce, it’s more useful to regard it as the only way to grow the workforce, skills and supply chains so that the shipbuilding enterprise is ready for the challenge of the SSN program.

Virtually all observers have noted that the biggest risk to the Naval Shipbuilding Program is the availability of workforce, particularly in Adelaide. Defence’s own workforce analysis predicted that the direct workforce in Adelaide would grow to around 5,000 by the end of the decade, or over 80% of the total nationally (Table 3).

Table 3: Percentage of total direct shipbuilding workforce in Adelaide before cancellation of the Attack class

Source: Linda Reynolds, ‘Correspondence regarding naval shipbuilding workforce figures,’ 22 October 2020, online.

With the fundamental revision of the future submarine plan, the nature of the workforce challenge has changed— the requirement will ramp up more slowly, but the workforce will likely need to be bigger. And even more of that will need to be generated in Adelaide. We need to start growing that workforce now, and the growth needs to be in addition to projects that were already in the shipbuilding plan and the Force Structure Plan.

Certainly, there are differences between building surface ships and submarines, but it’s easier to retrain an experienced maritime tradesperson to transition from one from the other than it is to train them from scratch. And the complex project management skills that will be needed in the SSN program take years, even decades, to develop. We need to retain what we’ve generated already and build on that though a second Hobart build.

We can make similar argument about the small- to medium-sized enterprises that will form the supply chain for an SSN program.

Hedging against a range of futures

We can’t know the future. That’s why we adopt hedging strategies. The best ones hedge against a range of possible futures. A Hobart Block II does that. As I’ve discussed, one future is the currently planned transition from Anzac to Hunter. But there are in fact many possible future force structures. Another one involves growing the surface combatant fleet beyond 11 or 12 vessels.

Another potential force structure element that hedges against risk involves enhancing the OPV so that it can contribute to combat missions. That could include installing anti-ship missiles or towed-array sonars. The OPV could also contribute to ASW by being the mothership for uncrewed aerial vehicles that can drop sonar buoys or deliver ASW weapons such as the very lightweight torpedo currently under development. Once we free ourselves from the mental shackles of the idea that every maritime platform has to be able to do every task and defeat every threat by itself, vast possibilities are opened up.⁵⁰ An armed version of the OPV that doesn’t pretend to be a multi-role platform but has useful offensive or sensor capabilities looks attractive as a near-term addition to the Navy’s lethality that complicates any adversary’s decisions.

Some OPVs could be equipped with a limited air defence capability. That could include Mk-29 or Mk-41 launchers for small numbers of ESSMs, or the RIM-116 Rolling Airframe Missile (SeaRAM), but those have relatively short ranges. They could be supplemented by new active self-protection technologies as they become available, such as versions of systems made by Australian companies Droneshield and EOS. Nevertheless, the vessel itself is likely not to have the space, weight and power margins for a large air defence radar array or deep missile magazines. That means that, in higher threat environments, it would need to operate under the air defence umbrella of a major surface combatant such as a Hobart-class destroyer.

Acquisition of a Hobart Block II would also de-risk the transition to what may well be our eventual future, which is a disaggregated mix of crewed and largely uncrewed naval platforms enabled by maturing autonomous systems. While ‘the small, the smart and the cheap’ have much to offer in terms of disaggregating expensive capabilities and providing greater mass and ‘attritability’, they’ll be likely to operate in teams with crewed vessels for at least their first several generations. Moreover, they’ll also require air defence from a platform such as the Hobart, although they could also contribute to it by providing greater magazine depth in the form of uncrewed or minimally crewed arsenal ships, for example.

With no new submarines coming until the late 2030s at the earliest, surface action groups consisting of Hobarts and OPVs equipped with offensive weapons and serving as the motherships for swarms of uncrewed systems can provide some of the effects the ADF seeks from its future submarines, such as land strike, maritime strike and antisubmarine warfare. Certainly, those combinations of systems would perform those roles differently from submarines, but what choice do we have if we want more capability? Our obsessive search for the perfect submarine capability has resulted in us being further away than ever from having new submarines.

In sum, investment in a Hobart Block II is consistent with and de-risks a range of futures. They’ll be part of a future in which the ADF continues to rely on large, crewed systems such as the Hunter, but they’ll also be consistent with a future in which the ADF moves to a force structure based on crewed–uncrewed teaming. Even as it becomes more disaggregated, that latter force is going to be built around large, multi-role platforms for a considerable time to come.

Conclusion

Defence’s decision-making processes have placed the Navy in an extremely precarious position and can only be described as a failure of strategic planning. The current approach makes strategic sense only if one can assume that Australia won’t be involved in major conflict for the next 20 years and that, if we ever are, we can rely on the US for whatever assistance we need. Both of those propositions should not have been held as articles of faith when the shipbuilding plan was formulated in the second half of last decade; they’re even more untenable today in the wake of the 2020 DSU.

Having embarked on a highly risky path with its submarine fleet, Defence didn’t hedge strategic risk in the path it chose for the other half of its combat fleet. Unconstrained capability ambitions in both programs have resulted in unbounded cost, the need for time-consuming design work, and schedules extended far beyond what was envisaged when the programs were established. Despite the risks, Defence’s main mitigation strategy is simply to extend the lives of current platforms and incrementally improve their capability at a time when threats, particularly to surface vessels, are rapidly growing. Even if the Hunter-class and the SSN programs deliver, the risks involved in the current plan mean that it can’t continue without serious adjustments.

A Hobart Block II is potentially part of the solution. As a mature design that Australia has already successfully built and brought into service, it can provide real capability before the Hunter and SSN programs. But there’s no one silver bullet. A broad range of mitigation measures are needed across the ADF’s force structure to distribute capability and hedge risk.

Just as importantly, we must recognise that Defence’s traditional decision-making processes brought us to this unacceptable position. A fundamental reconsideration of how Defence assesses its requirements and develops solutions for them is just as important as identifying remedies for the looming capability shortfalls that Defence has created for itself.

About the author

Dr Marcus Hellyer is a Senior Analyst focusing on defence economics and military capability. Previously he was a senior public servant in the Department of Defence, responsible for ensuring that the government was provided with the best possible advice and recommendations on major capital investments. He also developed and administered Defence’s capital investment program. Marcus has also worked in Australia’s intelligence community as a terrorism analyst. Before joining the public service, Marcus had a career as an academic historian in the United States.

Acknowledgement

I would like to acknowledge the contributions of my colleague at ASPI, Mr Michael Shoebridge. In addition to the detailed comments he made on drafts of this paper, our constant engagement and exchanges on defence capability shape all of my work. I would also like to thank several external reviewers who made insightful contributions to this paper.

About ASPI

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

ASPI’s publications—including this paper—are not intended in any way to express or reflect the views of the Australian Government. The opinions and recommendations in this paper are published by ASPI to promote public debate and understanding of strategic and defence issues. They reflect the personal views of the author(s) and should not be seen as representing the formal position of ASPI on any particular issue.

Important disclaimer

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

© The Australian Strategic Policy Institute Limited 2021

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

First published November 2021

Published in Australia by the Australian Strategic Policy Institute

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

Scott Morrison, ‘Australia to pursue nuclear-powered submarines through new trilateral enhanced security partnership,’ media statement,
16 September 2021, online. ↩︎
Marcus Hellyer, From concentrated vulnerability to distributed lethality—or how to get more maritime bang for the buck with our offshore patrol vessels, ASPI, Canberra, 2019, online. ↩︎
Department of Defence (DoD), ‘Sovereign Guided Weapons and Explosive Ordnance Enterprise’, Australian Government, Canberra, 2021, online. ↩︎
DoD, Naval Shipbuilding Plan, Australian Government, Canberra, 2017, online. ↩︎
DoD, 2020 Defence Strategic Update, Australian Government, Canberra, 2020, 27, online. ↩︎
It became much more difficult once Defence did not recommend Navantia’s candidate—the one vessel that already met most of the core requirements, including Aegis, US weapons, the Romeo helicopter and Australian design and regulatory standards. ↩︎
Although it’s been claimed that Navantia could have started construction by 2020 on blocks not affected by design changes. Without Defence releasing Navantia’s response to the competitive evaluation process, it’s not possible to confirm this. ↩︎
BAE Systems, ‘Hunter Class Frigate Program rolls out first steel unit’, media release, 13 October 2021, online. ↩︎
None of the three contenders used all of the systems mandated by the government (CEA radar, Aegis combat system, US weapons suite and Seahawk MH-60R helicopter); however, Navantia’s offering based on the Hobart class had already successfully integrated them all, except the radar. ↩︎
Cameron Stewart, ‘Frigate hell: this could dwarf our submarine drama’, The Australian, 31 August 2021, online. ↩︎
Senate Economics References Committee (SERC), Inquiry into Australia’s Sovereign Naval Shipbuilding Capability, public hearing, Australian Parliament, 6 August 2021, 21–22, online. ↩︎
SERC, Inquiry into Australia’s Sovereign Naval Shipbuilding Capability. ↩︎
Note that these enhancements have come at significant cost and have taken a substantial part of the fleet out of the water for extended periods. ↩︎
While 32 ESSMs may sound like a lot, in reality that number of missiles will run short quite quickly (assuming the vessel isn’t sunk or damaged first). Effective missile defence needs to operate in depth. If we define three layers of defence as outer defence, area defence and self-defence, the ESSM is a self-defence weapon with some ability to provide limited area defence to a closely escorted high-value unit (such as an LHD). An Australian maritime taskforce doesn’t have an outer defence layer because it doesn’t have an organic fast jet capability. That means it has limited ability to complicate an adversary’s targeting and overall attack plan, meaning that the adversary can optimise the size, direction and frequency of its salvos to best effect. An AWD can provide area air defence but will be forced to respond to salvos that have been optimised to overwhelm it.
A key factor in how many missiles are needed to defeat a threat is the number of opportunities the defender has to engage. An AWD will have multiple opportunities to shoot, assess the effect and then if necessary shoot again, potentially moving from SM-6 to SM-2 to ESSM. An Anzac, particularly if operating by itself, will have only the final layer. That means it may have only one opportunity to shoot, particularly against very fast threats. Consequently, it may need to fire many weapons to ensure a high probability of kill. That means its missile holdings could fall below a safe level even after a small number of engagements, each involving only a small number of threat missiles. Put another way, a small number of ‘nuisance raids’ involving relatively unsophisticated weapons could result in a mission kill, as the frigate would need to return to southern Australia to reload.
For a classic overview of this issue, see Ronald S Farris, Richard J Hunt, ‘Battle group air defence analysis’, Johns Hopkins APL Technical Digest, 1981, 2(4):302–307, online. ↩︎
For example, Australian National Audit Office, Air Warfare Destroyer Program, Australian Government, Canberra, 2014, online. For a very accessible history of the program, see Robert Macklin, Air warfare destroyer: the game-changer, ASPI, Canberra, 2018, online. ↩︎
In 2015, the government approved a $1.2 billion budget increase (a real cost increase, in Defence’s terminology). According to the 2021–22 Defence Portfolio Budget Statements, the project is planned to close this year. With $8,147 million of its $9,094 million budget spent at 30 June 2021 and $238 million in further expenditure planned for 2021–22, the project should close with around $700 million remaining. ↩︎
DoD, ‘Navy’s most advanced warships ready for operations’, news release, Australian Government, 13 August 2021, online. ↩︎

Cracking the missile matrix

22 April 2021

Acknowledgements

I’d like to thank my ASPI colleagues for the stimulating conversations I’ve had over the past three years on the challenges facing the Australian Defence Force and on options to address them. The issue of strike capabilities and weapons has figured prominently among those discussions. Those colleagues include Michael Shoebridge, Peter Jennings, Malcolm Davis, Andrew Davies, Tony McCormack, David Millar, Todd Hanks, Ned Holt and Tom Uren. I’ve also benefited from many conversations with current and former members of the ADF and Department of Defence.

I’m particularly grateful to Michael Shoebridge for his comments, questions and suggestions on numerous drafts of this report. They played an important role in shaping its structure and assessments.

EXECUTIVE SUMMARY

Last year’s war between Azerbaijan and Armenia was short, sharp and decisive. By effectively employing precision guided weapons, the former rapidly forced the latter to capitulate and accede to its political demands. The conflict confirmed the centrality of guided weapons to modern war fighting and showed how small states can now master the technologies and techniques needed to use them.

Last year also witnessed the onset of the Covid-19 pandemic and the supply-chain crisis it triggered. That provoked much soul-searching from governments and companies about how to manage the risks presented by modern just-in-time supply chains that span the globe.

When we take those two events together, it’s clear that the ADF will not only need many kinds of guided weapons across the spectrum of conflict, but also need to guarantee their availability in times of crisis when supply chains will be under pressure and threat. That will be difficult, since Australia currently manufactures virtually no guided weapons.

The Australian Government is also aware of both needs. Its 2020 Defence Strategic Update plans on investing tens of billions of dollars in guided weapons over the next two decades. It also directs Defence to explore the potential for new sovereign guided weapons production capability to mitigate supply risks. It appears that exploration has determined that the potential can be turned into reality: on 31 March, the government announced that it was ‘accelerating’ the development of a sovereign guided weapon manufacturing capability.

This report examines two fundamental questions. First, would the manufacture of guided weapons in Australia enhance ADF capability and provide greater self-reliance? Second, is it viable to manufacture guided weapons in Australia? The answer to both questions is ‘yes’. The report also presents some key considerations about how the industry should be established.

No single measure is a panacea for supply-chain risks, but domestic guided weapons production, combined with greater stockpiling and cooperative development and production arrangements, would greatly reduce those risks.

Australia has the industrial capability to produce guided weapons here. In fact, we have a long and successful living history of doing that. We can also draw upon ‘missile-adjacent’ sectors such as space and autonomous systems as well as leverage the power of the fourth industrial revolution to accelerate the design and manufacture of weapons. We can also leverage our alliance with the US to establish production lines for US weapons here, to the benefit of both partners.

A multibillion-dollar investment in the local manufacture of guided weapons is also consistent with broader government policy; for example, it supports the government’s modern manufacturing initiative, which is a key element in the effort to wean the Australian economy away from a dangerous over-reliance on the export of commodities and build on some other national strengths.

The government has announced that it’s establishing a guided weapons ‘enterprise’, although it has released few details. What should that enterprise look like? To maximise the prospects for success, Defence needs to adopt a programmatic approach to its selection of guided weapons and actively manage the ‘missile matrix’. That is, rather than allowing the number of types of weapons that it uses multiply by letting individual projects choose different weapons for different platforms, it needs to make decisions that take all relevant factors into account and choose weapons or families of weapons that will be used across multiple platforms.

That approach will have multiple benefits. Acquiring more weapons of fewer types will increase the economies of scale of local production. It will also help to contain the overheads of ownership, such as sustainment costs, the logistics chain and integration costs.

A programmatic approach will necessarily involve ‘backing winners’ up front. While some may have concerns about the potential loss of commercial leverage, Defence is already using such an approach with success, for example in the Navy’s combat management system, for which the government has decided that all classes of ships must use Saab’s combat system. This will involve seeing industry as long-term partners, rather than simply as suppliers— but that’s already a fundamental tenet of the government’s defence industry policy. Moreover, losing commercial leverage is a manageable issue, as Defence would be a more powerful, larger customer if it procured missiles using domestic co-production and the ‘family of weapons’ approach outlined in this report. And reduced commercial leverage is a different order of risk compared to losing a conflict owing to a lack of missile supplies.

A national guided weapons enterprise could adopt many of the measures in Australia’s Naval Shipbuilding Plan, including enhanced funding for R&D, support for the establishment of precincts for the design and production of guided weapons, and coordinated training and education programs to develop the workforce. Making guided weapons one of Defence’s ‘sovereign industrial capability priorities’, supported by an implementation plan, also makes sense as part of this broader plan.

But we can’t wait until the perfect plan is developed. The urgency of our strategic circumstances means we need to start now. There are many mature weapons that the ADF is already using or has decided to buy that we can start producing here now with minimal risk. But the government should also make some ‘big bets’, investing in the development of emergent technologies such as hypersonic weapons that can be put into production here once mature, rather than waiting to see that maturity demonstrated elsewhere and then trying to retrofit Australia with a production capacity for these powerful new weapons.

The government has established a national enterprise to build ships, submarines and armoured vehicles in Australia, but, without guided weapons, those platforms will have limited utility. Put simply: a small number of military platforms without a large supply of advanced missiles is a force fitted for but not with combat power. The government’s decision to establish a guided weapons enterprise, if implemented well, will be a key step in providing the ADF’s platforms with the advanced missiles in the types and quantities they need to deliver lethal and survivable capability.

RECOMMENDATIONS

Recommendation 1

The Department of Defence should adopt an enterprise-level approach to guided weapons that:

considers all relevant capability and industry factors in the selection of weapons
minimises as far as possible the number of new weapon types
seeks to maximise economies of scale
identifies weapon types that should be manufactured in Australia
makes guided weapons a sovereign industrial capability priority
supports industry to establish local weapon production
does not limit local production to one company’s offerings.

Recommendation 2

Defence should seek the government’s agreement to an initial portfolio of guided weapons that will be manufactured in Australia.

Production of those weapons should commence as soon as possible.

An indicative initial portfolio of high-priority weapons for local production would include:

Spike LR2 missiles
a family of tactical loitering drones
air-delivered laser-guided bombs, JDAM-class weapons, or both
the Evolved Sea Sparrow Missile
hypersonics.

GUIDED WEAPONS: AN ESSENTIAL REQUIREMENT FOR THE ADF

In July 2020, the Australian Government released its Defence Strategic Update (DSU).¹ The document was refreshing for the frankness with which it assessed Australia’s security environment, but its telling strategic assessments painted a very worrying picture. Faced with a more assertive and coercive rising great power, it concluded that the ADF’s largely defensive capabilities didn’t equip it to deter attacks on Australia or its interests.

The government stated that the ADF needs to grow its ‘self-reliant ability to deliver deterrent effects’. This ADF requires a different set of capabilities to hold adversaries at risk further from Australia, such as longer range strike weapons. In short, the best defence is a good offence. The ADF also requires greater self-reliant ability ‘to deploy and deliver combat power and reduce its dependencies on partners for critical capability’. Coming in the wake of the onset of the Covid-19 pandemic, the update also highlighted the vulnerabilities in global supply chains, including those critical for defence capability.

The DSU painted an alarming picture of the systemic capability gap between the ADF’s current capabilities and those needed to meet Australia’s strategic circumstances. Moreover, we don’t have unlimited time to address that gap; the update also concluded that a 10-year strategic warning time for an attack on Australia or its interests ‘is no longer an appropriate basis for defence planning’. In short, Australia needs more self-reliant military capability, and it needs to be delivered quickly.

The update and its supporting Force Structure Plan (FSP) present an acquisition plan to bridge that gap, but many of the lines of effort in that program will take many years to deliver—a factor that doesn’t sit well with the update’s conclusions about warning time.

In the light of the extremely long delivery times for manned platforms such as ships, submarines and aircraft, greater deterrent effects and self-reliant capability are likely to be delivered faster through investment in weapons, rather than new platform projects. Encouragingly, a key element of Defence’s acquisition plan is a very substantial investment in guided weapons in the order of tens of billions of dollars. That includes acquiring new kinds of weapons as well as holding larger stocks of weapons.

But, to address supply-chain risks in guided weapons, the plan also raises the prospect of fundamental changes to the way Defence has done business by considering ‘the potential for a new sovereign guided weapons and explosive ordnance production capability to mitigate supply risks, especially for those munitions with long lead-times’—which includes most advanced missiles.

More recently, on 31 March, the government announced that it was ‘accelerating’ the development of a sovereign guided weapon manufacturing capability and was establishing a guided weapons ‘enterprise’.²

This report examines two broad questions. First, would the manufacture of guided weapons in Australia enhance ADF capability and provide greater self-reliance? Second, is it viable to manufacture guided weapons in Australia? The answer to both questions is ‘yes’. The report also suggests ways to enhance the prospects for the success of a local guided weapons industry.

Our accelerating reliance on guided weapons

There are likely to be many facets to any future war beyond kinetic effects, such as cyber disruption and political warfare. Nevertheless, any examination of the history of the past 30 years of armed conflict and of contemporary military forces’ current and planned capabilities would have to conclude that guided weapons are now central to modern military operations. Modern militaries’ reliance on precision guided weapons has grown to the point where they would be largely ineffective in combat without those weapons. And they need them in large quantities, not just boutique numbers for exquisitely crafted precision strikes against small numbers of targets in discretionary deployments.

Their reliance on guided weapons continues to grow. In Operation Desert Storm in 1991, ‘the proportion of PGMs delivered by US forces compared to nonprecision munitions was less than 10 percent.’³ Eight years later, in 1999, during NATO’s air campaign intended to persuade Yugoslavia to remove its forces from Kosovo, that proportion had risen to 29% (and that percentage had been pushed downwards by the old-fashioned use of carpet bombing by heavy bombers late in the conflict).⁴ Four years later, in Operation Iraqi Freedom in 2003, the US and its allies expended 29,199 munitions, of which two-thirds were guided.⁵ In Operation Okra (the campaign against ISIS in Iraq and Syria), the RAAF used only precision guided munitions. The F-35 uses only guided munitions, other than its 25-mm canon.

If that reliance on guided weapons was the case in conflicts in which the US and its allies had overwhelming air supremacy and technological superiority, it’s likely to be even more so in fights with peer or near-peer adversaries. And, in a fight with a peer adversary, both offensive and defensive guided weapons will be necessary. For example, to have any chance of surviving China’s lethal mix of supersonic anti-ship cruise missiles, anti-ship ballistic missiles (such as its DF-21D ‘carrier killer’) and emerging hypersonic missiles with ranges in the hundreds or even thousands of kilometres, Australian warships will require multiple advanced air-defence missiles. They’ll also need offensive strike missiles of their own with hundreds or even thousands of kilometres range to shoot back. It’s highly unlikely that an RAN frigate will ever engage an enemy ship with its 5-inch gun firing traditional ‘dumb’ rounds.

Much of the public discussion about defence acquisitions and defence industry in Australia and other nations focuses on the platforms that carry and launch those weapons, rather than on the weapons themselves, but, without them, the platforms are useless. In one sense, the $89 billion submarines, $45 billion frigates and $17 billion F-35s that the Department of Defence is buying are just delivery systems for the guided weapons they carry. And, since modern military operations consume large numbers of those weapons, we run the risk of having useless platforms if we don’t properly plan to be able to maintain the flow of those weapons to frontline forces.

And it’s not just large platforms exchanging guided missiles at long ranges. With the merging of guided weapons and drones and the miniaturisation of both, even infantrymen can now launch small, loitering precise munitions simply by throwing them into the air.

The ‘democratisation’ of guided weapons

At the time of the 1991 Gulf War, the US’s precision strike capabilities, the result of massive investment under its Second Offset Strategy, were virtually unique. That’s no longer the case. As noted above, China has developed a vast range of long-range precision guided weapons that have already forced the US to reconsider its force structure and approach to operations in the Western Pacific.⁶

But it’s not just great powers that can produce these capabilities. A range of middle and smaller powers have developed precision guided weapons, including Israel, Turkey, Sweden and Iran. Some of those producers have also made them available for export. This means that the number of states that qualify as peer or near-peer adversaries by being equipped with precision guided weapons is growing.

Even small states with limited defence budgets can acquire such systems on the global market and develop a level of proficiency that only two decades ago was the province solely of a very small number of advanced militaries. The recent conflict between Azerbaijan and Armenia was telling. The latter rapidly capitulated as its army collapsed in the face of precise air strikes delivered by drones employing guided weapons provided by Turkey and Israel (Figure 1). The same capabilities used by Azerbaijan are being exported to our region.⁷ The boundary between the haves and the have nots is evaporating.

Figure 1: Azerbaijani drone footage of a strike on Armenian forces; a country with a GDP that’s only 3.1% of Australia’s and a defence budget that’s only 7.2% of Australia’s successfully employed drones and guided weapons, causing its adversary to collapse militarily and capitulate politically

_{Source: Azerbaijani Ministry of Defence, online.}

And it’s not only states that are employing guided weapons. Quasi-state and non-state actors do, too. Hezbollah has long had access to anti-tank guided missiles provided by Iran, using them to destroy Israeli armoured vehicles, significantly raising the cost and risk of Israel deploying ‘boots on the ground’.⁸ Hezbollah has also severely damaged an Israeli warship with a land-based anti-ship cruise missile, most likely a Chinese C-802. The Yemeni Houthis have also used anti-ship cruise missiles to destroy a United Arab Emirates vessel and forced US Navy ships to deploy sophisticated countermeasures to protect themselves.

Even terrorist groups with a limited technological support base have been able to use off-the-shelf consumer goods to produce weapons that can deliver effects similar to guided weapons. ISIS used commercial drones to drop grenades down the hatches of Iraqi army tanks.

The merging of weapons and drones

Another development is that the roles of guided weapons and drones are becoming increasingly merged. There are well-established synergies between drones and guided weapons; drones can themselves launch weapons, and they can provide targeting for weapons launched by manned aircraft, as well as providing targeting for weapons launched by other drones.

However, drones and weapons have also essentially merged in the form of loitering munitions, commonly known as suicide drones. Such systems have long endurance, allowing them to loiter over the battlefield and giving them the ability to prosecute targets of opportunity. One well-known example is the Israeli Harpy, which was probably used operationally by Azerbaijan in its recent conflict with Armenia. It’s also being exported to our region.

Such weapons are relatively small. That reduces the infrastructure needed to support the employment of precision guided weapons. While armed drones are generally smaller than manned aircraft, they still need a runway, ground crew, refuelling and rearming support, and so on. Loitering munitions don’t. They can essentially be launched from containers on the backs of trucks or ship decks.

The outcome of the ongoing processes of democratisation, miniaturisation and merging of unmanned aerial vehicles (UAVs), weapons and sensors are systems such as the Australian-designed Defendtex Drone 40 (Figure 2). This is a hovering UAV in the format of a 40-mm grenade that can be launched from a soldier’s underslung grenade launcher, or just thrown into the air. Individual rounds can be fitted with a range of payloads, including kinetic warheads as well as sensors. This step in the democratisation of guided weapons means that even an infantry section will have the organic capability to deploy smart, persistent swarms of guided weapons. British soldiers are already employing them on operations.⁹ But democratisation also means that Australia’s adversaries will have them, too.

Figure 2: UK troops trained with the Defendtex Drone 40 before their deployment to Mali in October 2020

_{Source: UK Ministry of Defence, online.}

Numbers matter

In sum, in any likely future conflict, the ADF will both face and itself employ a full spectrum of guided weapons, from long-range strike weapons down to individual soldier systems. The ADF will need a full range of countermeasures that disrupt the adversary’s kill chain—but some of the most effective are themselves sophisticated weapons that can, for example, either destroy hostile platforms before they launch their weapons, destroy the weapon in flight or, like the Nulka, act as decoys.¹⁰

The outcome of a conflict between the ADF and adversaries operating these weapons will be determined by many factors, including the technical capabilities of the individual guided weapons used and the enabling systems, such as targeting and intelligence, that make them effective. But victory may also go to the side that can replenish these new ‘consumables’ of conflict fastest. Whichever side is unable to sustain the supply of them to its frontline forces will be at a severe disadvantage. This means success will come to those who recognise that advanced missiles and loitering munitions need to be thought of and procured as flows, not stocks.

The ADF has traditionally relied on small numbers of technologically superior systems in both platforms and weapons. It has historically done ‘one-off’ buys of relatively small numbers of guided weapons that are meant to last for decades from international suppliers. However, the democratisation of these technologies means that mass is increasingly important. In this regard, the Australian Defence organisation has a long way to go to ensure that it can sustain the flow of consumable weapons. A fundamental shift is required in its approach to acquiring guided weapons.

AUSTRALIA’S INVESTMENT IN GUIDED WEAPONS

Previous investment

Guided weapons are nothing new for the ADF. Australia has been in the fortunate position of being able to pick the best systems available on the global market. While Australia has a long history of guided weapons design and production (which we review later), nearly all of them have been acquired overseas. According to data published by the Stockholm International Peace Research Institute, Australia has been the fourth largest importer of arms over the previous decade; one major driver of this has been our acquisitions of guided weapons.¹¹

Over that period, according to reporting on the AusTender database, Defence has signed contracts worth $3,302 million in the general category of ‘missiles’. AusTender provides few details; most of the entries are payments to the US Foreign Military Sales program for unspecified missiles, including a $610 million payment in 2016. In some cases, AusTender states what the missiles were, such as a $216.1 million contribution to the Evolved Sea Sparrow Missile (ESSM) program in 2014 and another for $153 million in 2017.

Australia’s weapons acquisitions have been primarily, but not exclusively, from the US (a table of Defence’s guided weapons projects and purchases is in Appendix 1). We’ve also bought European weapons that have been successfully integrated (such as the ASRAAM missile on the Hornet) and not so successfully integrated (such as the MU90 lightweight torpedo onto any ADF aircraft).

The fundamental question is whether it makes sense to continue to be so reliant on imported weapons.

Planned investment

Defence’s investment in guided weapons is set to increase dramatically. The government’s defence planning documents make it clear that the ADF has entered the ‘age of missiles’.¹² Broadly speaking, the 2020 FSP outlines around $100 billion in investment in guided weapons over the coming two decades (Figure 3).

Figure 3: Planned investments in missiles and other guided weapon systems (median point of FSP bands, $ billion)

_{Source: 2020 Force Structure Plan, online.}

New capabilities, both offensive and defensive

Several factors are driving this. The first is that the government is seeking new kinds of capabilities. Second, larger
stocks of the types of weapons already in service will be required. And, finally, guided weapons will increasingly
permeate the ADF so that more platforms will employ them.

The first reason arises from a fundamental change of direction in the government’s understanding of the kinds of military capability Australia needs. The DSU assessed that ‘Australia has a highly effective, deployable and integrated military force. But maintaining what is a capable, but largely defensive, force in the medium to long term will not best equip the ADF to deter attacks against Australia or its interests in the challenging environment this document sets out.’ Therefore, the government is seeking to acquire ‘more potent capabilities to hold adversary forces and infrastructure at risk further from Australia, including longer range strike weapons, cyber capabilities and area-denial systems.’

The FSP that accompanied the DSU broadly described the new capabilities. Ones that can be described as longer range strike weapons or area-denial systems that employ guided weapons include hypersonic missiles and long-range land-based rocket and missile systems.¹³ Indeed, in some regards, the nature of the Army will fundamentally change as it moves to become a missile force with new, long-range missile capabilities. The ADF will also acquire new kinds of defensive capabilities. For the first time, the investment plan includes funds to acquire a ballistic missile defence capability. While the FSP provides little detail on what type of system is required, the funding envelope suggests something like the US Patriot or even the THAAD system. There are also substantial funds for a medium-range ground-based air defence system. Again, this is a new kind of capability for the ADF.

Defence will need a lot of missiles

The second reason for the steeply growing investment in guided weapons is that the ADF is going to need a lot more missiles, even of the ones it already has in its inventory. This is in part because platforms are increasingly reliant on missiles, but another key driver for the growth in missile numbers is that the ADF’s platforms are getting bigger.

Take the Navy’s surface fleet. Each of the RAN’s eight Anzac-class frigates has eight vertical launch cells, each capable of holding a quad pack of four ESSM short-range air-defence missiles. That’s a maximum load-out of 32 per vessel (Figure 4). The Anzacs can’t operate the longer-range SM-2 missile currently in the ADF inventory, let alone the even more capable SM-6 that’s in Defence’s acquisition plans. So that’s a total of 256 for a full load-out for the class. At around $2.4 million per missile, that’s a cost of $614.4 million, even before we get to replenishing weapons expended in combat.

Figure 4: HMAS Ballarat conducts an Evolved Sea Sparrow Missile firing at sea, as part of the Anzac-class frigate’s sea qualification trials

_{Source: Defence image library, online.}

But the fleet is going to require even more missiles at greater cost. The nine Hunter-class frigates that will replace the Anzacs each have 32 vertical launch system cells. Theoretically, that could mean 128 ESSMs per ship, but it’s likely that some of their cells will hold the SM-2 and potentially even the SM-6, both of which require one cell per missile. The SM-2 and SM-6 missiles cost around $3.2 million and $6 million, respectively. A full load-out for the Hunters could require more than 600 missiles at a cost of over $1.6 billion.¹⁴ And those numbers will need to be replenished.

When we add in the three Hobart-class destroyers, which have 48 cells each, a single load-out for the surface fleet could require more than 850 missiles at a cost of nearly $2.5 billion. That’s before we consider war stocks, other guided weapons that don’t require vertical launch cells, such as some anti-ship missiles or lightweight torpedos, or expendable passive defensive systems, such as the Nulka hovering decoy.

Guided weapons will increasingly permeate the force

More ADF platforms and units will incorporate guided weapons. They’ll have to, if they’re to have any chance of surviving on the modern battlefield. No current Army vehicle mounts a missile. However, both types of vehicles being acquired by Project LAND 400 (the Boxer combat reconnaissance vehicle and the yet-to-be-chosen infantry fighting vehicle) will have launchers for the Israeli Spike missile in addition to their main guns. That’s potentially around 500 missile-equipped vehicles.¹⁵ In future, missiles may also be mounted on protected vehicles, such as the Hawkei.

The ADF currently uses unarmed surveillance UAVs but doesn’t have armed drones. Defence is planning to acquire the Sky Guardian, a variant of the Reaper, which is likely to be armed with laser- and GPS-guided bombs and Hellfire missiles. But, with the miniaturisation of both drones and weapons, the use of weaponised drones is likely to saturate downwards so that even infantry units will have organic air-launched guided weapon capabilities. As we’ve seen, the Drone 40 is already a blend of drone, sensor and guided weapon. Australia’s adversaries will acquire them even if the ADF doesn’t.

Maintaining the flow of increasing numbers of increasing types of weapon mounted on increasing types of platforms in conflict will be a challenge that Defence isn’t currently equipped to meet.

MANAGING THE OVERHEADS OF THE MISSILE MATRIX

The missile matrix

The ADF’s rapidly growing reliance on guided weapons presents risks. The first major risk is that, as the number of guided weapons in ADF service grows, the challenge of acquiring, integrating, sustaining and operating them all will become less and less manageable. Guided weapons require many supporting elements in order to function effectively. It’s not simply a matter of buying them and storing them in a warehouse until it’s time to use them. The more different weapons Defence acquires, the more those overheads multiply, and a deployed ADF will be burdened with more and more complex logistical challenges to support multiple different missile types.

We can illustrate the potential proliferation of weapon types in a matrix (see Appendix 2). ADF platforms are listed on the vertical axis: fast jets, patrol aircraft, armoured vehicles, infantry, helicopters, surface vessels, submarines and so on. Across the top there are types of targets: aircraft, armoured vehicles, bunkers, warships, speedboats and so on. The matrix shows the weapons that the platform could use to prosecute the target.

Over the coming decade, it’s very likely, and indeed unavoidable, that Defence will acquire many more kinds of guided weapons. The risk is that each of Defence’s platform projects selects a different weapon to prosecute each target, resulting in each box in the matrix having a different weapon. That would massively multiply the number of different kinds of weapons in the inventory, increasing the overheads while potentially decreasing the war stock of each kind.

We’ve seen that occur already; the Army’s infantry use the Javelin against vehicles and bunkers, its Tiger armed reconnaissance helicopter uses the Hellfire against those targets, and the Spike has been selected for the Boxer combat reconnaissance vehicle for that role. The Navy’s frigates and destroyers carry two types of antisubmarine torpedo—a European one launched by the ships themselves and an American one that the ships’ helicopters carry. There’s a long back story to that involving the failed Super Seasprite project and Defence’s tendency to underestimate the cost and risk involved in integrating new weapons into old platforms.

There are potentially other areas in which the number of weapons could proliferate in the ADF. One is anti-ship missiles. The ADF’s surface ships, submarines, fast jets (both Super Hornets and F-35As) and maritime patrol aircraft all require a new long-range anti-ship missile, plus there’s a new land-based anti-ship missile capability in Defence’s investment plan. The AGM-158C long-range anti-ship missile (LRASM) has been selected for the Super Hornet and P-8A maritime patrol aircraft to replace the Harpoon, but there are other possible options still open for other platforms.

As hypersonic weapons mature, it’s also possible that the number of hypersonic weapon types in the ADF’s inventory could rapidly multiply, should the Army, Navy and Air Force all choose different weapons.

Defence will need to balance the capability benefits of narrowly choosing the optimal missile for each platform and application against broader benefits offered by choosing missiles that can be used across a range of platforms and applications—and produced at volume, partly because of the economies of scale from an approach to weapon selection that thinks of families of weapons, and that selects the same missile for closely related tasks.

Costs and risks of fundamental inputs to capability

The sustainment cost of Defence’s weapons is substantial. In 2020–21, it’s $215 million for the Army and $134 million for the Navy.16 Additional weapon types come with additional overheads. Defence refers to the enablers necessary to employ a capability effectively as ‘fundamental inputs to capability’ (FICs). There are nine.¹⁷ In essence, these are the overheads of effective ownership. With every new weapon in inventory, the FICs increase.

This is most obvious in the case of the ‘support’ FIC. Every new weapon introduces additional support requirements: its sustainment supply chain, new support and test equipment, new training for maintenance personnel, and new technical data. While modern guided weapons have long shelf lives, they still need skilled maintenance staff to ensure that software is up to date, to check that batteries and energetic components such as warheads and propellants haven’t degraded and to replace them if they have.

Those sustainment supply chains can be fragile; currently, some components need to be returned to the original manufacturer overseas for repairs or upgrades, with lengthy turnaround times. The cost of transporting ‘energetic’ components such as warheads and motors with propellant fuels can be extreme due to the need to use military or other certified aircraft. The more sustainment that can be done locally, the better.

But there are other, less visible requirements. New weapons need to be integrated into platform simulators to support training. As weapons become increasingly software reliant, they’ll require frequent software upgrades. They may require intelligence mission data, tailored to a specific threat set or environment, that requires threat libraries and updates.

All businesses seek to minimise overheads through standardisation as much as possible. Defence, too, will need to minimise overheads by minimising the number of different guided weapons it employs.

Managing integration costs and risks

As the number of weapons increases, so too do the cost and risk associated with integrating them onto our platforms. Integrating weapons is a non-trivial task taking several years of effort and tens of millions of dollars to address both software and physical integration. Defence has a very mixed record of success in its efforts to integrate new weapons into old platforms. Project JP 2070 was to acquire the MU90 torpedo and integrate it into the Adelaide-and Anzac-class frigates as well as three aircraft: the Super Seasprite and S-70B-2 Seahawk helicopters and the AP-3C maritime patrol aircraft. Defence eventually abandoned efforts to integrate the torpedo into any of the aircraft.¹⁸

Australia did successfully integrate the AGM-158 joint air-to-surface standoff missile onto the F/A-18 A/B ‘classic’ Hornet fleet (Figure 5), but even there the planned integration on the AP-3C was not completed. Moreover, integration onto the classic Hornets doesn’t mean that the weapon is also integrated onto the Super Hornet. That means that, as the classic Hornets are progressively withdrawn from service, the ADF doesn’t have a platform that can carry its longest range strike weapon.

Figure 5: Australia successfully integrated the AGM-158 joint air-to-surface standoff missile onto the classic Hornet; with the impending retirement of that fleet, the weapons’ future employment in the ADF is unclear

_{Source: Defence image library, online.}

Even when Defence has successfully integrated weapons, as in the integration of the US Hellfire missile onto its European Tiger armed reconnaissance helicopter, it’s had to bear the entire cost and risk itself to deliver a unique, orphan solution.¹⁹

Because of experiences such as those, Defence has turned to off-the-shelf solutions, particularly for its air systems. The RAAF acquired the same version of the Super Hornet as the US Navy along with the weapons suite already integrated into it. The RAN did the same with the Seahawk Romeo maritime combat helicopter that replaced the Seahawk S-70B-2.

But relying on others to manage all weapons integration comes with risks, too. Australia is still waiting for the Joint Strike Fighter (JSF) consortium to integrate a long-range maritime strike weapon onto the F-35, despite Australia being a JSF partner nation and long-range maritime strike being Australia’s highest priority for the program—that’s one reason Defence had to resort to the fallback option of acquiring the LRASM for its Super Hornets.²⁰ So, being able to leverage off friends’ and allies’ integration efforts is an important factor—it’s just not always possible for a force that uses a mix of Australian, US, European and Israeli systems. Retaining the ability to integrate our choice of weapon onto our choice of platform is a key element of sovereign capability.

How does this support the case for domestic manufacture?

We can draw some conclusions from these observations. Most importantly, Defence needs to actively manage the missile matrix to rationalise the number of kinds of weapons or families of weapons. This will generate the following benefits:

It will reduce the overheads of sustainment.
It’s likely to result in the ADF being able to acquire larger numbers of each kind of weapon.
Generating scale will also make local production more economically viable.
If Australia can design and build components for missiles and assemble them, it’s likely that we can also sustain them in country, eliminating the need to return them to overseas manufacturers.
Creating commonality reduces integration risk, as lessons learned from integrating a weapon onto one platform can be applied when that same weapon is integrated onto other platforms.
Local manufacture will also reduce integration risks if it’s accompanied by the transfer of technology and access to software, allowing Defence and Australian industry to develop a deeper understanding of the weapons.

ADDRESSING SUPPLYCHAIN SECURITY

The supply-chain risk

Another major risk associated with the ADF’s increasing reliance on guided weapons is one that Covid-19 has brought into sharp relief: supply-chain security. The Covid-19 crisis, combined with a more overtly economically coercive China, exposed the fragility of global supply chains, even in peacetime. Guided weapons have all the hallmarks of a supply-chain crisis waiting to happen. They’re highly complex systems built overseas consisting of numerous subsystems supplied by diverse manufacturers around the world. They take a long time to manufacture. And, in wartime, an adversary will be actively seeking to interdict those supply chains.

Moreover, in a contingency when we might want a lot of them in a hurry, the countries that manufacture them probably will too and will prioritise their own militaries’ requirements. We’ve seen this phenomenon already in the health sector with ‘vaccine nationalism’, even between close political and economic partners.

The 2020 FSP clearly articulates the supply-chain risk:

One of the most consistent and important lessons from previous conflicts around the world has been how quickly supplies of precision munitions can come under stress, especially for those nations that possess little domestic capacity to manufacture them. In a world that is becoming more contested and where supply chains have been shown to be fragile in moments of crisis, it is important for Defence to re-evaluate its capacity to sustain the ADF on operations.²¹

To address this, the DSU states that the government’s plans include ‘more durable supply chain arrangements and strengthened sovereign industrial capabilities to enhance the ADF’s self-reliance, including in the context of high-intensity operations’.²²

What are the options to address supply-chain risks? Broadly speaking, there are four main approaches: diversifying suppliers, holding larger stockpiles, burden sharing, and domestic manufacture. All of those are non-trivial tasks in the case of guided weapons. None will be sufficient alone, and all of them are likely play a role in addressing the challenges Defence faces.

Diversifying suppliers

Diversifying suppliers makes sense, particularly if a key or indeed monopoly supplier is someone you can’t rely upon in a crisis, but it’s hard to diversify suppliers once the shooting starts. If it’s hard to do with something like medical ventilators, it’s even harder with even more complex systems such as guided weapons. We’ve seen already that the integration of new weapons is difficult and takes time and lots of money. New weapons aren’t simply ‘plug and play’, so it’s not just a matter of placing an order for weapons with a new supplier.

There are other challenges to diversification. As the number of players in the Western arms industry has consolidated in the past few decades, there are fewer options for weapons. For example, in the US, there’s no direct competitor for the ESSM maritime air defence missile. If the ESSM were unavailable, Australia could try to get a less capable missile such as the SeaRAM or a more capable missile such as the SM-2, but all three are Raytheon products, so if the supply chain for the ESSM were interrupted, it’s likely that it would be too for Raytheon’s other products. Moreover, the SeaRAM hasn’t been integrated into the Navy’s combat system, and the SM-2 can’t be used by the Navy’s Anzac frigates.

Australia could seek a European alternative to the ESSM, but integrating European weapons into the largely American combat systems used by Australia’s platforms has historically been challenging. It’s not impossible, but it’s not something that can be done on the spur of the moment. So, while drawing on non-US weapons could help mitigate some risks in some types of weapons, it would have to be done well before a conflict starts.

Stockpiling

Stockpiling is Defence’s traditional approach to managing the guided weapons supply chain. It generally buys a stock of a particular type of weapon it can afford within the given project budget (sometimes deeply constrained by how much money a project that procures platforms has left once it gets around to weapons to go on them) and stores them, occasionally topping up its holdings as small numbers are consumed in practice firings or certification activities.

The challenge has always been knowing how many weapons to hold. Because many weapons cost millions of dollars each, stockpiling is expensive, so there’s always pressure to hold the absolute minimum. In the post–Cold War era of US unipolar hegemony, the risk of holding only small war stocks of high-end weapons was probably acceptable. That’s no longer the case in an era in which the government has acknowledged the possibility of conflict with a major power. In high-end war fighting against a major power, even if we fight alongside the US, war stocks will be consumed very rapidly. As noted above, the US coalition used around 20,000 guided weapons of all kinds against Iraq in 2003—a state that was far from being a major power and indeed had virtually no air force or navy to speak of.

It’s clear that the government has recognised this risk. The 2020 FSP states that the government has directed Defence to develop options for ‘an increase in weapon inventory across the ADF to ensure weapons stock holdings are adequate to sustain combat operations if global supply chains are at risk or disrupted’.²³ It’s devoting $20.3–30.4 billion over the next two decades to ‘weapons inventory surety’. That suggests it’s going to spend a lot to maintain larger war stocks as well as to allow the ADF to expend more munitions in realistic training.

Larger stockpiles go a long way to making the ADF’s war-fighting capability more robust, but it’s a limited form of sovereign capability costing a lot of money. Stockpiling by itself has disadvantages:

It gives the ADF some self-reliance in wartime, but only if it were able to accurately gauge in advance how many weapons it needs to have on hand for all potential contingencies—which is essentially impossible to do.
It doesn’t solve supply-chain problems if Defence is still reliant on long supply chains for the repair or replacement of components, particularly if the weapon needs to be returned to the original manufacturer overseas.
As a consumer of off-the-shelf weapons acquired overseas, Defence will have very limited ability to enhance or modify those weapons as the nature of conflict evolves.
It assumes that weapons with the attributes that Defence needs are available to be acquired and stockpiled in the first place.

Burden sharing

Defence has historically sought to meet some of its guided weapons needs through a form of burden sharing in the form of cooperative weapons programs. In those programs, usually with the US, it contributes to the cost of developing the weapons. They have included the Mk-48 heavyweight torpedo and the ESSM (the latter with several international partners). The government recently decided to enter into similar programs to evolve the SM-6 long-range air-defence missile and the Mk-54 lightweight torpedo.

Such programs can have advantages. The cost of development is shared, and theoretically Australia has a voice in setting the requirements for the program. Australian industry generally has opportunities to introduce components into the program’s global supply chain.²⁴ This has resulted in the development of greater industrial capability here. Australia also gets more assured access to production slots under these arrangements—at least in peacetime.

But such programs also have disadvantages as they are now structured. The development schedule is driven by the major partner. And, as the JSF program’s delayed integration of a maritime strike weapon has shown, being a member of a cooperative program doesn’t guarantee that Australia’s requirements are met when we need them. The more partners, arguably the greater the supply-chain risk. This was graphically illustrated when Turkey was ejected from the JSF program, forcing the consortium to find alternative suppliers for key components.

But perhaps the biggest risk from a supply-chain perspective is that there’s still only one production line and that’s in the major partner’s country. Even in peacetime, it can take several years for orders of weapons to be delivered. While it’s unlikely the US would turn off the supply to punish Australia, in time of crisis both countries (and any other additional partners) will all be clamouring for weapons from the single production line. That exposes all the partners to strategic risk. That can be mitigated by establishing multiple production lines in several partner countries, ideally with duplication of the production of components providing redundancy in time of crisis.

Growing the workshare of Australian small and medium-sized enterprises that contribute items to existing offshore missile production chains—as in the JSF industry approach—has brought export success and developed local industry capability, but it won’t meet the strategic need to have a reliable flow of missiles available during conflict. Only production—or co-production with existing international suppliers—here in Australia can achieve that. So far, this hasn’t been done with weapons that Australia has acquired through cooperative arrangements with the US, but there are precedents for companies establishing production lines in other countries, such as the Israeli company Rafael’s production of the Spike missile overseas. So, in principle, it can be done.

That brings us to the fourth approach to mitigating supply-chain risk: local manufacture.

THE VIABILITY OF LOCAL PRODUCTION

The government’s 31 March media release announcing the acceleration of the guided weapons enterprise states that ‘Australia’s defence industry already has tremendous capability in the area of weapons technology … The Government is confident that this represents the necessary industry capability that will be transferrable to areas like guided weapons.’ Is that an accurate assessment? It most likely is, particularly when we take into consideration ‘missile-adjacent’ industry sectors that the enterprise can draw upon.

Australia’s heritage of missile design and production

The local manufacture of guided weapons is a possibility raised in the DSU. In addition to increasing the weapons inventory, it states that the government has directed Defence to develop options to ‘Explore the potential for a new sovereign guided weapons and explosive ordnance production capability to mitigate supply risks, especially for those munitions with long lead-times.’ The FSP also contains a funding line of $0.8–1.1 billion titled ‘Sovereign weapons manufacturing’.

The fundamental question is whether local production of guided weapons is viable. There’s a perception that Australia hasn’t produced guided weapons and has limited ability to do so. That’s not the case. Australia has a long history of developing guided weapons, which have entered production and service. They’ve included:

the Malkara anti-tank missile
the Ikara anti-submarine missile, which carried a torpedo (Figure 6)
JDAM-ER, an extended-range version of the JDAM GPS-guided glide bomb.²⁵

Figure 6: HMAS Perth firing an Ikara antisubmarine missile

_{Source: Defence image library, online.}

In addition, Australia has produced key missile-adjacent technologies such as air vehicles and sensors, including the Jindivik, which is a subsonic unmanned jet-propelled target plane.

Many of those weapons and systems were the result of extended research programs; the development of the JDAM-ER drew on glide bomb research stretching back to the 1970s, for example. Also, work in one program fed into subsequent programs. For example, the development of the Malkara informed that of the Ikara. Many of those technologies were exported and entered into service with other militaries.

Australia’s current industrial capability

During the development of this report, several industry experts assessed that Australia currently has the ability to design and produce all components of missiles, with the exception of some kinds of seeker heads (i.e., the sensor in the tip of the missile that tracks the target).

Perhaps the most successful program is the ongoing Nulka project. This revolutionary decoy that protects ships against anti-ship missiles is essentially a hovering missile with an electronic warfare payload rather than a kinetic warhead (Figure 7). It’s used extensively on Australian, US and Canadian warships.

Figure 7: The Nulka decoy

_{Source: BAE Systems, online.}

The Nulka was developed by the Defence Science and Technology Group in cooperation with the US; Australia focused on the vehicle, while the US largely developed the payload.²⁶ The industry prime on Nulka is BAE Systems, although much of the early development was conducted in house by the Defence Science and Technology Organisation. The Nulka round is assembled and maintained at BAE’s facility at Orchard Hills.

According to BAE Systems, ‘Nulka is now Australia’s largest defence export, having generated more than $1 billion in export revenue for our economy.’ Its medium-term future has been secured through the government’s recent announcement of a further five-year contract for production and in-service support.²⁷

Another significant illustration of Australian industry capability is the ESSM program, which is being delivered through an international consortium. Australia participated in the first stage, Block 1, which is in service, and is also a key contributor to Block 2, which is nearing production. According to Defence:

The ESSM Block 1 program commenced production in 2000 and has delivered more than 3000 missiles to the NATO SEASPARROW Consortium and third-party nations. The program has injected more than $400 million into Australia’s Defence industry, with BAE Systems Australia leading the Australian industry contribution. The thrust vector controller, aerodynamic control fins, dorsal fins, guidance section units, as well as guidance and control algorithms were all delivered by Australian industry.

The ESSM Block 2 program commenced initial production in 2019, and has already resulted in contracts valuing more than $100 million for Australian suppliers in development and early production work. Australian industry’s contribution is expected to increase as the program progresses through full-rate production and support phases, and Defence will continue to negotiate to maximise Australian industry’s involvement. Australian suppliers to the ESSM Block 2 program include BAE Systems Australia (thrust vector controller, missile fuselage, guidance section internal structure, and telemetry transmitter), L3Harris Micreo (Intermediate Frequency Receiver), Varley (complete missile and missile section containers), and Raytheon Australia (supplier management).²⁸

While Australia didn’t design or build the complete missile, many of the components listed above were designed by Australian companies and not simply manufactured under licence.

BAE has also designed a passive radio frequency (RF) sensor that’s being integrated into the Norwegian Joint Strike Missile manufactured by Kongsberg. The sensor guides the missile onto an RF signature being emitted by the target. The sensor has entered full rate production for export.²⁹

In August 2018, the government announced that it had selected the Rafael Spike LR2 missile for the LAND 400 armoured vehicles, and that the missiles would be assembled in Australia by Varley Rafael Australia (Figure 8).³⁰ In February 2020, Defence confirmed that the missile would also be acquired for dismounted troops under Project LAND 159.³¹ Rafael, an Israeli company, has considerable experience in establishing the production of its weapons in other countries, such as Germany and India, involving the transfer of technology. Despite Defence’s enthusiasm for the weapon, Varley Rafael Australia hasn’t yet received a contract to produce missiles, so it’s been unable to establish a local production line.

Figure 8: Rafael has established production lines for the Spike family of missiles overseas

_{Source: Euro Spike, online.}

Other areas of Australian defence industry have latent capabilities to support the production of guided weapons in Australia. For example, Thales, which manages the Australian Government’s munition facilities at Mulwala and Benalla through its Australian Munitions business, has considerable ability to manage energetics for missiles (that is, explosives and propellants).

The fourth industrial revolution and ‘missile adjacent’ technologies

Overall, Australia can produce most of the components for guided weapons, but that isn’t the sum of our industrial capability. There are many other sectors that are relevant for missiles. I’ve noted that we’re seeing a merging of guided weapons and drones. This means there are also clear synergies in the design and production of guided weapons and autonomous systems such as drones—the subsystems needed for drones are the same as those needed for guided weapons. They include guidance, autonomy and artificial intelligence, propulsion, sensors, and so on. An industrial ecosystem that can manufacture drones has many of the capabilities needed for guided weapons.

But there are synergies with other sectors beyond autonomous systems. The space sector uses the term ‘space-adjacent’ to refer to areas of technology that might not have been developed specifically for space applications but are relevant to and can be applied in the sector.³² This is one of major enabling factors in Space 2.0 (that is, the sharply decreasing cost of space technologies), which is allowing new players to develop and market space capabilities.³³

According to the Australian Space Agency, ‘the 10 most common capabilities of space-adjacent firms are: precision machining and design; remote operation and automation; machinery and component manufacturing; R&D and manufacturing; advanced manufacturing and design; systems design and engineering; electronics manufacturing; network operation; engineering design, manufacturing and support; and major infrastructure delivery.’³⁴ The agency further notes that ‘overlapping or transferable capabilities can lower barriers for organisations using their existing workforce to pivot into new opportunities in adjacent industries as they arise.’

The capabilities listed above are fundamental elements of the ‘fourth industrial revolution’.³⁵ They provide Australia with an emerging ‘ecosystem’ of advanced modern manufacturing capability that provides not just ‘space adjacent’ but also many ‘missile adjacent’ technologies. Those technologies can be found in sectors that at first sight seem to have little in common with missiles. An example is the advanced technology used in the mining sector and provided by Australian companies—the requirement for robust, remote operations in difficult conditions is a key driver, along with the mining sector’s rapid adoption of autonomy- and data-led operations.

The potential of these ‘adjacent’ sectors and the broader fourth industrial revolution for Australian industry is highlighted by Boeing Australia and its industry partners’ success in the rapid design and test flight of Boeing’s Airpower Teaming System (ATS), aka Loyal Wingman. While the development of manned combat aircraft has taken decades, the ATS has gone from the start of detailed design to successful flight in three years. The rapid progress of the ATS shows how the ecosystem of technologies that make up the fourth industrial revolution is bringing its transformative potential to the defence sector. Key elements of this are advanced digital design technologies that make use of ‘digital twins’ to test and fly a virtual version of the aircraft thousands of times, allowing problems to be identified and addressed well before it takes physical flight.

When we consider Australia’s living history of guided weapons design and production and combine it with the broad ecosystem of missile-adjacent technologies, it’s clear that we have many of the preconditions in place to embark upon a more robust, sovereign missile enterprise.

GUIDED WEAPONS AND THE GOVERNMENT’S DEFENCE INDUSTRY POLICY

There’s significant local industry capability for the design and production of the systems necessary for guided weapons. However, that’s not necessarily the result of deliberate government policy. In contrast to many areas of government where there are policy aspirations but a lack of resources to implement them, in the case of guided weapons we have the opposite problem: the government is willing to spend tens of billions on weapons, but there’s been a lack of policy on whether it should be done in Australia and how to do it here most effectively.

The fundamental issue is that, while the government’s broader industry policy theoretically supports the manufacture of guided weapons, it hasn’t been an explicit policy. That’s looking like it’s changing, between the statements in the 2020 DSU and the government’s recent announcement about accelerating the establishment of a sovereign guided weapons enterprise. So far, details are few, but the right explicit, directed policy and leadership from the government can orchestrate the tens of billions of dollars in Defence’s current investment plan for weapons in ways that result in Australian production and co-production of at least some of the advanced missiles that the ADF requires. This would reduce strategic risk for Australia in a darkening regional environment, as well as being a positive contributor to our alliance with the US by providing alternative and more dispersed supply sources for our partners in times of crisis.

Supportive industry policy

Developing Australia’s advanced manufacturing capability has taken on renewed urgency in government policy since the onset of the Covid-19 pandemic. On 1 October 2020, the government released Make it happen: the Australian Government’s modern manufacturing strategy.³⁶ The strategy’s vision is for Australia to be recognised as a high-quality and sustainable manufacturing nation that helps to deliver a strong, modern and resilient economy for all Australians. It has six priorities; one is defence and another is the adjacent sector of space.³⁷ One of the goals of the strategy is to develop greater resilience through:

making supply chains more resilient to external shocks, including through a ‘supply chain resilience initiative’
supporting global market diversification.

As we’ve seen, domestic manufacture of guided weapons would support both of those measures. In addition to its media release about accelerating a guided weapons enterprise, the government also released on 31 March the road map for the modern manufacturing strategy’s defence sector. The simultaneous release suggests the two initiatives are closely related. While guided weapons aren’t a priority per se, the road map highlights the range of existing cross-sector technologies that can be applied to defence manufacturing. It also highlights the need to ‘scale up’ defence manufacturing, which is something that the government’s multidecade, multibillion-dollar acquisition plans for guided weapons have the potential to achieve, if properly implemented.³⁸

While defence is one of the six priority areas in the modern manufacturing strategy, the defence sector effectively has a five-year head start due to the release of the government’s Defence Industry Policy Statement as part of the 2016 Defence White Paper. Its policies and measures have been further articulated and developed in subsequent policy documents, including the 2018 Defence Export Strategy and the 2018 Defence Industry Capability Plan.³⁹

Those later documents have reinforced the fundamental objective of the government’s defence industry policy, which ‘is to deliver the Defence capability necessary to achieve the strategy set out in the Defence White Paper, supported by an internationally competitive and innovative Australian defence industrial base’. Again, domestic manufacture of guided weapons would directly support that objective.

We’ve noted that the 2020 DSU and FSP direct Defence to remediate supply-chain risks for guided weapons, including by ‘exploring the potential for a new sovereign guided weapons and explosive ordnance production capability to mitigate supply risks, especially for those munitions with long lead-times’.

There’s further in-principle policy support for the domestic manufacture of guided weapons. In late 2020, the government made an important amendment to the value-for-money guidelines that govern public-sector purchasing. The guidelines, published by the Department of Finance, state that domestic economic benefit should be taken into account when assessing value for money. This includes ‘developing Australian industry capabilities or industrial capacity’. One example of this provided in the guidelines is ‘enhancing key industry sectors through the Department of Defence’s Sovereign Industrial Capability Priorities’.⁴⁰

The policy gap

There’s certainly industry policy ‘top cover’ to support the production of guided weapons in Australia, but so far that hasn’t translated into a more focused public policy describing how it will be done.

More details on the government’s guided weapons enterprise will no doubt be forthcoming, but one policy gap should be remediated as soon as possible: despite the key role a flow of guided weapons plays in modern war fighting, domestic manufacture of guided weapons isn’t one of 10 sovereign industrial capability priorities (SICPs), even the munitions and small arms SICP (Figure 9).⁴¹ That SICP states that ‘Australian industry must be able to manufacture propellants, munitions, ammunition and small arms.’ Those aren’t the kinds of guided weapons we’ve been discussing, and they’re far from the new kinds of longer range strike weapons required by the government’s 2020 DSU.⁴²

Figure 9: The then Minister for Defence Industry, Christopher Pyne, launching the Defence Industrial Capability Plan at ASPI in April 2018; the plan’s 10 SICPs didn’t include guided weapons—a policy omission that should be rectified

_{Source: Defence image library, online.}

Defence has been progressively releasing industry and implementation plans for the 10 SICPs. These are detailed, robust pieces of work that state what industry capabilities are required, set timelines to achieve them, and provide measures to realise those goals. An implementation plan for guided weapons could mobilise and direct tens of billions of dollars to grow Australia’s advanced manufacturing capacity as well as to deliver essential military capability.

During the development of this report, Defence informed ASPI that it’s ‘reassessing the Sovereign Industrial Capability Priorities and considering additional Priorities with regard to capabilities identified in the 2020 FSP, including guided weapons’.⁴³ That would be a good thing.

THE NEED FOR AN ENTERPRISE-LEVEL APPROACH TO GUIDED WEAPONS

Good outcomes won’t happen by themselves

The government has announced that it will establish a guided weapons enterprise. It’s not yet clear what that will look like, but it does need to be fundamentally different from what has come before in Defence’s approach to guided weapons.

Despite the unprecedented scale of the government’s planned investment in guided weapons, Australia’s substantial industrial capability in guided weapons and adjacent sectors, and the willingness of overseas partners to develop and build missiles and components here, the prospects for an Australian guided weapons industry are dim if Defence continues to do business the way it has. To fully realise the opportunities that the government’s investment plan and its defence industry policy present, Defence needs to adopt an enterprise approach to guided weapons.

Let’s use a fictional case study to illustrate this. As the threat posed by unidentified flying objects (UFOs) rises dramatically, the ADF’s platforms will require anti-UFO missiles. As an outcome of its force design process, Defence has programmed several new projects across the 2020s and 2030s to acquire anti-UFO capabilities for the ADF. That includes weapons for fast jets, maritime patrol aircraft, the Loyal Wingman UAV, large surface combatants, an enhanced, up-gunned offshore patrol vessel fleet, and short- and medium-range ground-based UFO defences. Since so many different kinds of platforms across the ADF will require anti-UFO missiles, Defence could eventually acquire several thousand weapons.

Despite the economies of scale that demand generates and the strategic need for the weapons, Defence’s traditional process won’t necessarily lead to domestic manufacture and greater sovereign military and industrial capability. Generally, weapons have been selected by platform projects to suit their own requirements, schedules, risk appetites and budgets. Commonality across the services has generally not been a consideration, in large part because the services have sought to deliver different effects and faced different threats.⁴⁴ Moreover, Defence is loath to make decisions about weapons in advance of acquiring the platforms that the weapons are to be integrated into.

There are several reasons for this. One is that Defence has historically liked to conduct competitions for individual weapons in the belief that such competitions preserve its commercial leverage. Another is that weapons are generally seen as secondary to the platform itself; getting the decision right on the platform is the higher priority, and it’s assumed that weapons will fall into place once that’s done. And, finally, there’s a view that Defence will be able to find what it needs whenever it goes to the market.

While there’s some validity to each of those arguments, overall they’re inconsistent with the government’s defence industry policy, the importance of guided weapons in modern warfare and the inability of the international weapons market to respond rapidly in times of crisis.⁴⁵ That approach exposes us to the risks that were so brutally realised at the onset of the Covid-19 crisis.

In our hypothetical example, an established missile producer might have a suitable anti-UFO weapon for maritime platforms. With sufficient R&D investment, that weapon also has the potential for land and air launch. It could also be developed into a family of weapons for short- and long-range uses. Australian industry could not only be involved in the assembly of the missiles and the production of their components, but also in the R&D effort to develop them for multiple platforms and to evolve their performance over time.

However, establishing a production facility and R&D partnerships with Australian companies and universities takes time and money. The potential manufacturer needs an early commitment that it can invest in developing those facilities and relationships. If it doesn’t get that signal, it won’t invest, even though those start-up costs could be a relatively small part of the overall acquisition cost. Without that early investment, a locally produced weapon won’t be ready when the platform is. Consequently, it will be tempting for a platform project to simply buy off the shelf from overseas, particularly if the project itself is responsible for absorbing the cost and risk of establishing domestic production.

This process will be repeated by subsequent projects, with the result that:

each platform will acquire a different missile
each missile type will be bought off the shelf overseas
Australian industry won’t develop the capability to design and manufacture missiles and their components
FIC overheads, such as sustainment pipelines, will multiply
in the event of a UFO invasion of Australia, we’ll be dependent on the supply of anti-UFO missiles from allies who are likely to also be combating a UFO invasion.

Precedents for enterprise-level approaches

An alternative strategy would be to adopt a more strategic enterprise-level approach. Defence has several successful precedents for enterprise approaches to industry capability. For example, in October 2017, the government announced that all RAN vessels would use Saab’s combat management system where Aegis was not required. The announcement highlighted the weaknesses of previous, disjointed approaches:

In the past, Defence has taken the tendered combat management systems individually, which has meant that the Navy has operated numerous systems at the same time. This has not allowed defence industry to strategically invest for the long-term and has also increased the cost of training, maintenance and repair.⁴⁶

If the ‘in the past’ approach sounds like the hypothetical case study above, that’s because it’s often been the reality of Defence’s acquisition philosophy. In contrast, the new, enterprise-level approach ‘guarantees the development of a long-term sustainable Australian Combat Management System industry, which is integral to the implementation of the Government’s Naval Shipbuilding Plan’.

Similarly, the government’s decision that the Hunter-class future frigate would use the weapons already in service with the RAN provides certainty about the natures of weapons that will be acquired and used. The choice of CEA Technologies’ phased-array radar on the Hunter class is another enterprise-level approach. This has been supported by R&D agreements between CEA and Defence Science and Technology as well as a $90 million loan agreement awarded under the Defence Export Facility to finance a new manufacturing facility to supply both export and ADF demand.⁴⁷

The Navy’s approach to guided weapons has also adopted elements of an enterprise approach. After the success of the ESSM Block 1 program, it entered into the Block 2 program without conducting a competition, even though there were other, mature short-range air-defence missiles on the market such as Sea Ceptor, which other Western navies had selected. That, however, hasn’t led to local production.

In fact, the government’s Naval Shipbuilding Program is itself described as an enterprise. There, the government has made decisions that represent in-principle commitments that will last for decades and will govern the kinds of ships that will be produced, the designs that will be used, the number of ships and the rate of production. While many key details will only be worked out and agreed over time, the enterprise approach provides Defence’s industry partners with confidence to invest, train, recruit and build.

A guided weapons enterprise

Due to the scale of investment in guided weapons, involving potentially tens of billions being spent in Australia, an enterprise-level approach similar to that used in shipbuilding is warranted. The Australian Government has announced it will adopt an enterprise approach to guided weapons but given few details of what that will look like. Elements of that approach could include the following:

Appoint an SES Band 2 public servant or a two-star ADF officer to coordinate the selection of guided weapons, including developing recommendations about which ones should be produced locally, to ensure that all factors are considered, not just individual project or service priorities (the Australian Government’s recent announcement has made a start in this direction by nominating Defence’s Chief of Joint Capabilities as the capability manager for the guided weapons enterprise).
Manage the missile matrix to identify weapons or families of weapons that can be used on multiple platforms to reduce the proliferation of new types of weapon.
Actively seek co-production partnerships with existing weapon suppliers to the ADF to produce high-priority weapons in country.
Set ambitious targets to commence local production within two years in order to meet the urgency of our strategic environment.
Support guided weapons precincts, located to take advantage of synergies with existing industry capability and missile-adjacent capability to create hotspots for innovation.
Organise loans to establish production facilities.
Establish a guided weapons ‘college’ modelled on the Naval Shipbuilding College.⁴⁸ It would begin as a virtual college that analyses workforce demand, identifies skills gaps, assesses current educational offerings and gaps, develops solutions with partners in the training and education sector to fill those gaps, and matches workers with employers.
Increase and prioritise R&D funding for guided weapons technologies through Defence’s two innovation funds: the Next Generation Technologies Fund and the Innovation Hub.⁴⁹

Backing winners

Whatever criteria Defence uses for selecting guided weapons, it will consciously need to reduce as far as possible the number of different types of weapons it uses. This will generate many benefits: economies of scale in production; reduced duplication in sustainment systems and logistics trains; reduced duplication of test and evaluation requirements; the ability to share weapons across platforms; the ability to share tactics, techniques and procedures across platforms; and so on. The bottom line is that discipline in weapons selection will mean Defence can acquire more weapons of fewer types.

But to achieve those benefits Defence must take a top-down, programmatic approach to the selection of weapons in which the broader business case is weighed up. That may require picking winners in advance and declaring that, if we already have a weapon in our inventory that’s good at prosecuting particular categories of target, all platforms will have to use it.

Defence has already taken steps in that direction, for example by choosing a solution to the Army’s short-range air-defence requirement that uses missiles already in the Air Force’s inventory, but this needs to be applied rigorously as a guiding principle.

Embarking on this course will be uncomfortable for some in Defence (not to mention the Treasury and the Department of Finance) because it involves picking winners up front, rather than competing every weapon on every platform, which could present commercial risks. But, in the light of the enterprise-level benefits it will deliver, backing proven winners up front makes sense.

What’s the role of the strategic industry partner?

One detail that the government has released about its guided weapons enterprise is that it will ‘select an experienced strategic industry partner to build a sovereign capability to manufacture a suite of precision weapons that will meet Australia’s growing needs and provide export opportunities as a second source of supply’. The government further noted that ‘we will work closely with the United States on this important initiative to ensure that we understand how our enterprise can best support both Australia’s needs and the growing needs of our most important military partner.’⁵⁰

Working with a strategic industry partner is consistent with the recommendations of the First Principles Review of Defence, which were accepted by the government and which Defence has implemented. What can we deduce from that about the role of the partner in the guided weapons enterprise? First, it appears that the partner will produce weapons used by both Australia and the US. That’s pretty reasonable—most of the guided weapons used by Australia are designed and manufactured in the US and used by the US armed forces.

But is the role of the strategic partner to coordinate the production of other companies’ weapons here in Australia? Or is the government planning to build only that partner’s weapons here? Both approaches raise potential concerns.

If it’s the former, it’s not necessarily the case that another company would let the strategic partner produce its missiles here under licence. Missile companies are very protective of their intellectual property. That other company might produce its weapons in Australia only if it could do so itself, so that approach runs the risk of artificially limiting the weapons Australia could produce.

If the role operates under the latter concept (that is, the ‘suite’ of weapons that the government will build here would consist only of its strategic partner’s weapons), then that too will run the (almost inevitable) risk of limiting the weapons Australia could produce. In fact, the only company with a portfolio of weapons that comes close to meeting the ADF’s requirements is Raytheon Missile Systems.⁵¹ But producing only Raytheon’s weapons means that some weapons that the ADF currently has or is acquiring wouldn’t be produced here.⁵²

As this study has argued, long-term partnerships with industry are essential to a successful enterprise-level approach, but the government should avoid approaches that exclude the possibility of local production of some high-priority weapons. Such approaches would undermine the ability of the guided weapons enterprise to reduce supply-chain risks.

Recommendation 1

The Department of Defence should adopt an enterprise-level approach to guided weapons that:

considers all relevant capability and industry factors in the selection of weapons
minimises as far as possible the number of new weapon types
seeks to maximise economies of scale
identifies weapon types that should be manufactured in Australia
makes guided weapons a sovereign industrial capability priority
supports industry to establish local weapon production
does not limit local production to one company’s offerings.

WHICH WINNERS SHOULD WE PICK?

The selection of weapons should be driven by an enterprise-level approach to guided weapons regardless of where they’re made, but that approach also needs to present recommendations to the government on which weapons we need to build in Australia. As with all elements of defence spending, prioritisation is essential. We can’t do everything here and shouldn’t try, but Defence can determine what its highest priorities for domestic manufacture are.

So, which weapons should we build in Australia? There will certainly be a wide range of views on this. Here are some selection criteria to consider and an indicative, initial portfolio of weapons.

Seek economies of scale

Cottage production of boutique numbers of weapons is likely to come with large cost overheads. It will be more sustainable and economically viable to produce domestically where we can achieve economies of scale. As I’ve discussed, this can be supported by an enterprise-level approach to managing the missile matrix, in particular by selecting weapons that will be used by multiple platforms and families of weapons with significant commonalities.

Scale will also be achieved by producing the kinds of weapons that are likely to be used in large numbers in any future conflict. It’s hard to predict how many weapons will be used in such a conflict (that’s the key risk that we’re seeking to mitigate through domestic production). History isn’t necessarily the best way to assess this, since recent conflicts have involved adversaries without capable air defence systems. Western militaries have been able to use low-cost, direct-attack munitions; they haven’t been forced to stand off and use more expensive weapons from long ranges. It’s likely that larger numbers of the latter category will be required in conflicts with near-peer adversaries.

Nevertheless, low-cost—but still precise—weapons are likely to be used in any conflict because they can be used against a wide range of targets and adversaries using a wide range of platforms. Bolt-on kits such as the Joint Direct Attack Munition (JDAM; Figure 10) that affordably transform ‘dumb’ bombs into precision munitions fall into this category, as does the GBU-39 small diameter bomb.

That also appears to be Defence’s view, as indicated by the RAAF’s recent purchases, which suggest that it still assesses that it will continue to use large numbers of lower cost munitions. For example, in 2016, the US Defence Security Cooperation Agency notified Congress that Australia sought to acquire up to 2,950 small diameter bombs at a total cost of US$386 million.⁵³ That was followed in 2017 by the acquisition of up to 3,900 small diameter bombs at a total cost of $815 million.⁵⁴

Figure 10: An RAAF armament technician with the Air Task Unit Strike Element loads a 500-lb JDAM bomb at Australia’s main operating air base in the Middle East in 2016

_{Source: Defence image library, online.}

Start with lower risk weapons

The government’s 2020 DSU clearly articulates that we can no longer rely on lengthy warning times for future conflicts. Therefore, it’s important that domestic manufacture produces capability quickly. It’s likely that Australia will have to take a staged approach, starting with weapons that can be produced with lower risk. That would include:

weapons that are mature and the production of which can be quickly established here under licence
weapons that are relatively simple
weapons for which Australia already participates in co-development programs and manufactures components
weapons that are already integrated into ADF platforms.

Those weapons would involve working with an overseas partner with established products, but starting with lower risk weapons will help Australia develop industrial capability that can be used later to develop and produce indigenous weapons.

Seek greater sovereignty within the alliance

Australian production of US weapons offers value to our alliance partner while providing greater sovereign capability to Australia. There’s strategic benefit to the US in having Australia as a capable, reliable source of advanced weapons in times of crisis and conflict. A single US-based production line poses risks to all customers, including the US; a second production line in Australia would increase capacity and redundancy. From the limited information available, it appears that the intent of the government guided weapons enterprise is to establish a second production line to meet both Australia’s and the US’s supply requirements.

The establishment of local production of US weapons is facilitated by US legislation that considers Australia to be part of the US national technology and industrial base (NTIB). It’s true that Australia’s inclusion in the NTIB hasn’t yet realised the full potential either for Australia or the US that’s inherent in the concept. Adherence to US International Traffic in Arms Regulations has acted as a form of inertia, hindering the greater industrial cooperation sought by the NTIB legislation.⁵⁵ That inertia has also been reinforced by members of Congress, who are anxious to avoid the appearance of American jobs going overseas. Overcoming that is likely to need political engagement at the highest level, but there are benefits for both the US and Australia, and greater practical cooperation is entirely consistent with the reinvigoration of US alliances that we’re seeing under the Biden administration.

Make some big bets

We shouldn’t just take the safe path. We’ve seen that Australia has a long history of technological innovation, including developing revolutionary and world-leading defence capability. Australia should continue to place some big bets on emergent technologies that will have a disproportionate impact on war fighting. A big bet might not necessarily involve a lot of money, but rather a lot of imagination and faith in what Australian industry can achieve when working with the right international partners. That approach looks like it could pay off in the case of the Airpower Teaming System. Defence should be looking for similar possibilities with guided weapons.

Given the gap between where the ADF is now and where it needs to be, there’s a need for rapid innovation. Hypersonic weapons are certainly one bet that the government is pursuing, but it needs to ensure that success involves local production. Another is in antisubmarine warfare (ASW). In the light of the glaring risk of both of the Navy’s main ASW platforms (the Collins-class submarine and the Anzac-class frigate) ageing out or becoming obsolete before they’re replaced, Defence needs to get more ASW capability to sea quickly. Options include the development of an ASW weapon launched from ships’ vertical launch system cells (a son of the Ikara) or even an unmanned loitering UAV delivering the Mk-54 torpedo responsively and at range.

A potential portfolio

Applying the principles listed in this report produces a portfolio of local weapons that looks something like the following:

Spike LR2 missiles. The Spike LR2 has already been selected by the government for mounted and dismounted use, and Rafael Advanced Defense Systems has offered to build it in Australia. What’s needed in the short term is a contract giving Rafael the certainty to invest in establishing local production. Mandating that it also be used on other ADF platforms, such as helicopters, UAVs and potential future small autonomous land and maritime platforms, would boost economies of scale, as would the selection of other variants of the Spike family of missiles for longer range applications.
A family of tactical loitering drones. One example would be Defendtex’s Drone 40. It’s indigenously developed, well advanced and likely to be buoyed by export opportunities.
Air-delivered laser-guided bombs or JDAM class weapons. Kits that can turn iron bombs into precision weapons are likely to be used extensively across the spectrum of combat operations. They’ll be employed by current manned aircraft as well as future unmanned systems and are relatively simple to produce. Defence has a good understanding of the technology, having used such weapons extensively in Middle East operations. Moreover, Defence Science and Technology and its industry partners have been involved in the development and production of an extended-range variant of the JDAM.
Evolved Sea Sparrow Missile. The ESSM is a higher value weapon, costing around $2.4 million, but in a high-end conflict it’s also likely to be required in high volume. Australia is likely to require well over 500 missiles to fit out a surface combatant fleet based on the air warfare destroyers and the Hunter class. In a protracted conflict against a peer or near-peer adversary, the RAN will consume even larger numbers in protecting its surface combatants and their crews. Those numbers generate economies of scale. Furthermore, Australian industry has been deeply involved in the development and manufacture of key components of the weapon.
Hypersonics. In contrast to the other weapons in this portfolio, hypersonic weapons are not mature and would be a big bet. However, Australia has already acknowledged the key role hypersonics will play in future conflict and entered into a cooperative agreement with the US to develop deployable hypersonic weapons (Figure 11). Due to their likely significance and consumption rate in future war fighting, we should also seek to manufacture them here. The business case to do that would be bolstered if we develop and manufacture a weapon or family of weapons that could be used across multiple platforms to prosecute a range of targets.

Figure 11: Test launch of a hypersonic missile at Woomera test range, May 2016

_{Source: Defence image library, online.}

This portfolio (or one developed using the same criteria) would provide a balanced, low-risk path to guided weapons production, but it would not be the final step. There are other potential paths that Australia could explore, whether they involve the co-production of existing complex weapons under licence (such as the LRASM, SM-2, SM-6 or long-range ground-based missiles and rockets) or the indigenous development of new weapons. However, the successful establishment of an initial portfolio would help to build the local industrial capability necessary for those following steps.

If the government’s strategic industry partner is going to manufacture only its own weapons here, then a portfolio such as this is incompatible with that concept. The government should ensure that the role it envisages for its partner doesn’t limit the range of weapons it can produce here.

Don’t wait for perfection

The key is to start soon. It’s important to develop a SICP implementation plan for guided weapons, but we shouldn’t wait until the perfect plan has been developed. Indeed, we don’t need to. There are mature weapons for which the ADF has an identified requirement, and we don’t need to build shipyards costing half a billion dollars before we can start.

Recommendation 2

Defence should seek the government’s agreement to an initial portfolio of guided weapons that will be manufactured in Australia.

Production of these weapons should commence as soon as possible.

An indicative initial portfolio of high-priority weapons for local production would include:

Spike LR2 missiles
a family of tactical loitering drones
air-delivered laser-guided bombs, JDAM-class weapons, or both
the Evolved Sea Sparrow Missiles
hypersonics.

APPENDIX 1: PREVIOUS AND CURRENT ADF GUIDED WEAPONS ACQUISITIONS

Previous and current ADF guided weapons acquisitions

Sources for all previous and current ADF guided weapons acquisitions can be found in Table 1 of the accompanying report

APPENDIX 2: THE MISSILE MATRIX

The Missile Matrix can be found in Appendix 2 of the accompanying report

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

Cover image: HMAS Ballarat conducts an Evolved Sea Sparrow Missile firing at sea, as part of the Anzac class frigate’s sea qualification trials. Source: Defence image library, online.

First published April 2021

Published in Australia by the Australian Strategic Policy Institute

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

The Cost of Defence. ASPI Defence Budget Brief 2019-2020

5 June 2019

One hundred & five million, eight hundred & fifty-three thousand, five hundred & seventy-three dollars & seventy-seven cents per day.

Executive Summary

Little has changed in the defence funding picture since last year. This year’s budget continues to follow the trajectory of solid real annual increases set out in the 2016 Defence White Paper. The consolidated defence budget (that is, the budget for the Department of Defence and the Australian Signals Directorate) reaches $38.7 billion in 2019–20. Real growth is only 1.3%—the smallest increase under the Coalition government—and the budget has actually decreased slightly as a percentage of GDP (from 1.94% to 1.93%) because GDP has grown faster than the defence budget.

But those figures are a little misleading. Late in the previous financial year, $620 million was moved forward into 2018–19 from 2019–20, making the former a little bigger and the latter a little smaller than planned. If that hadn’t occurred, real growth would have been 4.6% and the budget would have been 1.96% of GDP. Ultimately, it makes no real difference to Defence which year it gets the money—it got it and has already spent it.

The real story is that the government so far has delivered on its White Paper funding commitments. The White Paper presented a 10-year fixed funding line that would not vary as GDP fluctuated up and down. We’re now four years into that decade. Once we take all variations into account (such as adjustments due to foreign exchange rates and supplementation for operations), the $143.2 billion in funding Defence has received over those four years is within 1% of the White Paper funding line. Granted, Defence has had to fit more things into that envelope; it doesn’t seem to have received additional funding to cover its contribution to the Pacific Step-up announced by the government last year, for example. But it’s rare that Defence has had such funding certainty.

The other key issue to note is that the defence budget, at least for planning purposes, has already moved well beyond 2% of GDP. According to the Portfolio Budget Statements (PBS), the budget will hit that milestone in 2020–21, meeting the government’s White Paper commitment. But after that the budget continues to grow, hitting almost 2.2% by the end of the forward estimates. In essence, the White Paper funding line and a 2% of GDP funding line diverge significantly. The difference is substantial, reaching $5 billion a year and totalling over $22 billion for the remainder of the decade after 2020–21. That gap is even bigger if GDP fails to grow at 2¾% or at 3% from 2021-22 as forecast in the budget papers.

During the 2019 election campaign, the government reaffirmed its commitment to restoring the budget to 2% of GDP, but it was silent on whether it was committed to the White Paper funding line. The forward estimates figures in the PBS suggest it is. But if it isn’t, Defence will have a major headache, as any move back towards 2% will entail large reductions and deferrals to planned capability.

Much of the increased funding is planned to flow into capital acquisitions. Indeed, for Defence to have any chance of delivering the significantly larger and more capable—and therefore significantly more expensive—future force outlined in the White Paper, that must happen. On paper, the capital budget grows very strongly, hitting 39% of the total budget by the end of the forward estimates. According to the White Paper’s funding model, it stays there for the rest of the White Paper decade. That would deliver a massive increase in which the capital budget alone reaches $19 billion by the end of the forward estimates and nearly $23 billion by the end of the decade. Since 2013–14, when the Coalition came to power, that’s real growth of 155% and 185%.

Will it happen? Prognostication is a risky art, but there are a few reasons to be cautious about counting chickens. There are some heroic annual leaps built into the capital budget in the forward estimates, for example, of 19% in real terms in 2020-21 and 15.5% 2021-22. Yet it can be hard to spend money. We noted last year that Defence was underspending against the White Paper’s capital predictions, and that trend has continued. The shortfall now totals over $5 billion since the White Paper, and probably only a third of that at most is due to foreign exchange adjustments.

Despite a rapid increase in capital as a percentage of the total defence budget early in the Coalition’s term, since the White Paper it’s hovered stubbornly around 30%. It is, however, difficult to assess the precise situation as neither the Defence PBS nor the annual report give data on actual achievement in the capital and sustainment programs. Rectifying this information gap should be straightforward and would strengthen transparency.

Moreover, as Defence increases capital spending, it is likely to need to increase sustainment spending in order to use the new equipment as well as personnel spending in order to crew it. We also noted last year that sustainment spending was exceeding predictions by roughly the same amount that capital was underspending. That trend has continued this year.

The rise in operating costs can been seen in the increase in the Chief Information Officer Group’s suppliers budget. This covers much of the cost of running the ICT backbone that allows the networked force to function. It’s an enabler that’s absolutely vital to capability. Since 2008–09, it’s grown by 148% in real terms while the Defence budget has only grown by 36%. It’s not just the cost of capital acquisitions that’s rising much faster than inflation.

The personnel picture also suggests there are some deep challenges in the plan. The White Paper put the ADF on a trajectory from 58,000 personnel to 62,400. That’s only an 8% increase to cover the constantly increasing complexity of the Defence organisation and its component parts. Nevertheless, the ADF hasn’t been able to achieve even the modest White Paper increases. Overall, it’s only increased by 600 actual people against a target of around 1,730 over the period since the White Paper. If increasing capital spending quickly is hard, increasing ADF numbers seems even harder. It looks like that is starting to hurt—HMAS Perth will be up on blocks for two years after its latest upgrade for want of a crew.

In short, there may well be structural factors that will hinder Defence in achieving the capital spending predicted in the PBS and White Paper. Sustaining capital spending at around 40% of the total budget might just not be achievable.

It’s possible that the lack of any updates to the Integrated Investment Plan (IIP) since the White Paper was released in early 2016 is due to Defence and the government grappling with the eternal problem of how to make everything fit the funding envelope. Rather than silence, there needs to be a better conversation between government, Defence, industry and the public. Rather than depicting the IIP as carved in stone, all stakeholders need to regard it as a living organism that evolves in response to and in anticipation of new circumstances and requirements. If there are now major pressures on and in the IIP, then the government has to make some big decisions on how to manage them.

And in our strategic environment, with our system of government, some transparency and informed public debate would be in order.

The substantial investment the government is making is delivering greatly enhanced capability across all of Defence’s capability streams. Underneath the headlines about heavy investment in locally assembled protected and armoured vehicles, the digitisation of the Army (often referred to as its highest priority) continues, as do enhancements to soldier systems. The delivery of key air capabilities such as P-8A maritime patrol aircraft and trainers is nearing completion. The Air Force still has some way to go to get the Reaper and Triton unmanned aerial systems into service. And Defence is in something of a golden age of infrastructure investment. Also, the upgrades necessary to keep the Anzac-class frigates and Collins-class submarines a relevant capability for many years during the long transition to the future fleet are being delivered.

The other key capability transition from the classic Hornet to the F-35A has entered a critical phase. While the first F-35A aircraft have arrived in Australia and supporting infrastructure has been delivered, the fleet’s flying hours will need to increase nearly sixfold over the next four years to achieve final operating capability. As with every other platform, the increase in capability delivered by the new air combat fleet will come at significantly greater cost, particularly if the F-35A hourly flight cost continues to be twice the classic Hornet’s.

This year in Chapter 5 we provide an update on progress in the Naval Shipbuilding Plan (NSP), which is at the core of the investment program and the government’s Defence Industry Policy. In many regards, the NSP has made great progress. The Arafura-class offshore patrol vessel has started construction on schedule. In the past year, BAE’s Type 26 was selected as the design for the Hunter-class future frigate. Importantly, the revised commercial strategy under which ASC Shipbuilding become a subsidiary of BAE has been implemented, and a head contract for the frigate program has been signed in an astonishingly short time.

In contrast, the Future Submarine Program delivering the Attack-class submarines took nearly three years to sign its head contract, which is the strategic partnering agreement. But it’s done now, and Defence has repeatedly stated that the long negotiations over the agreement haven’t affected schedule.

Progress continues on underpinning programmatic elements of the shipbuilding enterprise. Development of the Osborne South surface shipyard should be completed in time to start prototyping of frigate blocks in 2020. Work has commenced on the submarine yard, though its mainly still in the design phase. The development of the necessary workforce was always one of the greatest risks and that hasn’t changed. Nevertheless, several measures to address this risk are underway, including the start of the Naval Shipbuilding College (which in reality has more of a coordination function than an instruction-delivery function) and the release of the Naval shipbuilding strategic workforce discussion paper to inform development of a shipbuilding workforce strategy. While the number of skilled workers required may sound large and some skills in short supply, it’s small compared to both Adelaide’s and Australia’s workforce. This means that the challenge is not insoluble, but also that the supply of shipbuilding workforce will always be exposed to changing demands for workers in the broader economy.

But as the schedule for the future frigates and submarines becomes clearer, we can see that we won’t get the first of the frigates into service until around 2030. All going well, the first submarine won’t be in service until 2034 or 2035, despite a conservative design philosophy based on using only currently mature technologies. Even if they deliver the planned capability, that’s a long time to wait.

Moreover, the annual cash flow for the NSP is ramping up quickly. It passes $2 billion this year even though the two biggest programs (frigates and submarines) don’t start construction for several more years. Last year, we predicted that the annual cash flow for the NSP would reach $3.5–4 billion; that’s looking increasingly certain. We also predicted that Defence will have spent over $20 billion before the first frigate and submarine become operational. That’s looking conservative.

Meanwhile, as we review in Chapter 1, Australia’s strategic circumstances are increasingly uncertain as China’s power grows along with its willingness to use that power outside of the rules-based global order. US military power is increasingly stretched, and that can’t be rectified through greater spending. So far, the government hasn’t signalled any substantial changes either to the military strategy of the White Paper or its force structure, but it’s likely we’ll need to become more self-reliant, at least in some areas of military capability. That probably can’t wait until the 2030s.

The ships being delivered by the NSP will enter an operating environment characterised by proliferating threats, such as cheap anti-ship cruise missiles and potentially hypersonic missiles as well as a more congested undersea domain. While modern warships are designed to defeat a range of threats, this has meant they have become exquisitely expensive, so much so that they can only be acquired in small numbers. The value-for-money calculus doesn’t favour billion-dollar manned platforms that are too valuable to risk losing.

The capability we need in the future could be enabled by another fundamental development reshaping the world: the ‘fourth industrial revolution’ (4IR). The key elements of the 4IR include autonomous systems, artificial intelligence (AI), more accessible space resources, and 3D printing. While these have the potential to ‘democratise’ technology by increasing the threat posed by non-state actors, they could help militaries to break out of the vicious cycle of increasingly complex but increasingly expensive manned platforms.

Chapter 6 suggests ways to hedge in the development of our future naval capability. The key is to devote more resources to autonomous systems. Even the US Navy, the world’s largest, seems to have realised that this is the only viable way to deliver greater mass and is making significant investments in unmanned platforms that will complement manned vessels. The ADF needs to do the same to compensate for its lack of mass, to get new capability sooner, and perhaps most importantly to remove humans from an increasingly lethal battlespace. Moreover, the technologies in fields such as AI can be integrated into legacy platforms to enhance their effectiveness. Australian industry and academia are well placed to contribute to this—perhaps even better placed to do so than export large finished platforms.

Of course, it will require investment, but it needs to be done. Currently, less than 1% of Defence’s budget goes into its innovation funds. That must be increased, and in a way that connects innovation to the large, well-funded programs in the IIP. But just as important is imagination and a willingness to pursue the disruptive potential of new technologies so they aren’t dismissed out of hand as poor substitutes for traditional platforms.

Chapter 7 briefly considers the way forward after the election. ASPI recently published Agenda for change 2019: strategic choices for the next government, which proposes policy recommendations for the new government in the areas of strategy, defence and security. Rather than duplicate them here, we refer readers to that document. However, there’s no doubt that the world has changed fundamentally since the 2016 White Paper. There’s no point investing billions in military capability if it doesn’t support Australia’s political or military strategy. It’s time for a new Defence White Paper so that the government can assure itself that the strategic triumvirate of ends, ways and means are properly aligned to preserve Australia’s security.

Author Marcus Hellyer discusses key findings of this years report with Michael Shoebridge

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Download the full report here.

Dr Hellyer presents this years report at the launch event.

Notwithstanding the above, educational institutions (including schools, independent colleges, universities, and TAFEs) are granted permission to make copies of copyrighted works strictly for educational purposes without explicit permission from ASPI and free of charge.

Agenda for change – 2019

26 February 2019

In 2018, many commentators pronounced the rules-based global order to be out for the count. This presents serious challenges for a country such as Australia, which has been an active contributor and clear beneficiary of that order. The government that we elect in 2019’s federal election will be faced with difficult strategic policy choices unlike any we’ve confronted in the past 50 years.

This volume contains 30 short essays that cover a vast range of subjects, from the big geostrategic challenges of our times, through to defence strategy; border, cyber and human security; and key emergent technologies.

The essays provide busy policymakers with policy recommendations to navigate this new world, including proposals that ‘break the rules’ of traditional policy settings. Each of the essays is easily readable in one sitting—but their insightful and ambitious policy recommendations may take a little longer to digest.

Previous Agenda for change publications are also available here: 2016 and 2013.

Launch Event

The Cost of Defence. ASPI Defence Budget Brief 2018-2019

24 March 2018

Australia’s strategic situation is deteriorating—is it time to revisit the Defence White Paper?

Australia’s strategic situation is deteriorating. The 2016 Defence White Paper set out six drivers that shape our security environment. None has improved since the White Paper appeared, and most have worsened significantly.

The existing rules-based global order is under threat. China simply ignores it when it chooses, for example with its de facto annexation and subsequent militarisation of the South China Sea, and is embarking on creating a new regional order that it seeks to define alone. The current leadership of the US appears unable to decide whether it wants to support the existing order, ignore it, or tear it down. Meanwhile, the relative power gap between the two continues to decrease, as China’s economy and military grows.

The development of emergent technologies such as cyber, space-based capabilities, artificial intelligence and hypersonics continues apace. We’re also seeing clear Islamic State links into terrorist attacks in Southeast Asia, some involving returned fighters. All of these developments, taken together, suggest that the ADF will be confronted with an increasingly broad spectrum of threats. The question is whether Defence can be stretched even further to cover them all, or whether it should focus on addressing particular ones.

Unfortunately, the 2016 Defence White Paper doesn’t provide clear guidance on prioritisation. It might be time for the government to revisit some of the White Paper’s assumptions, either to confirm that it does set out the right path, or, as we believe it should, make some changes to the plan.

Marcus Hellyer discusses key findings with Michael Shoebridge

Funding

With $36.4 billion in funding, Defence is heading towards 2% of GDP

Against that strategic background, the 2018–19 defence budget continues to deliver the vision set out in the White Paper. In 2018–19, the government is increasing the defence budget towards its commitment of 2% of GDP by 2020–21. Based on the Defence Portfolio Budget Statements (PBS) and GDP predictions in the budget papers, we calculate that it will fall just short, at 1.98%, but that’s essentially a $400-million rounding error. And, based on forward estimates predictions, the Defence budget will grow past 2% in 2021–22.

We should note, however, that Defence’s funding, as presented in this year’s budget, falls short of the fixed funding line presented in the White Paper by around $5 billion by the end of the forward estimates. The government essentially made two funding commitments—2% of GDP and a fixed funding line—and it’s possible it could meet one without reaching the other. Nonetheless, Defence continues to enjoy real increases to its funding.

The growth continues to be centred on Defence’s capital program. While capital investment has historically been the poor cousin alongside personnel and operating funding, the three are now roughly equivalent, and by 2020–21 capital funding could exceed the others for the first time. But it will need to, if Defence is to be able to afford the future force.

Defence has used that increase to invest heavily in remediating infrastructure. And while the shipbuilding enterprise is still in its early days, many other capital investment projects are delivering capability—Air Warfare Destroyers, P-8 maritime patrol aircraft, trucks, battlefield communications and airlifters, for example. And the Air Force’s transformation into a fifth-generation force is well underway. There is no doubt we are getting a more capable ADF.

Signs of pressure

We are starting to see the first signs of cost pressure on Defence

But, as always, there are things to be concerned about.

Full-time ADF personnel numbers are programmed to grow to 59,794 this year on the way to the White Paper target of 62,000. But actual growth has been slow, and Navy (potentially the service whose future platform growth is greatest) is going backwards. Civilian numbers fall by around 2,000 due to the Australian Signals Directorate becoming a statutory agency. Overall, however, net civilian numbers remain unchanged at the White Paper level—that is, well below where they were five years ago, potentially requiring greater reliance on expensive contractors. Funding for personnel effectively flat lines at less than 1% real increase annually over the forward estimates. That seems to be inviting future cost pressures, since ADF numbers are meant to increase, and individual personnel costs have historically increased in real terms.

Also, sustainment budgets appear to be increasing faster than predicted. Between last year’s PBS and the mid-year Additional Estimates update, the sustainment budget increased by $1.5 billion, or 16.7%. And this year’s sustainment budget is around $1 billion more than predicted last year. Some of that is likely to be due to different accounting practices that Defence has adopted, but one gets the sense that perhaps the sustainment requirements of an increasingly complex force were underestimated in the White Paper and Defence is having to adjust.

That could be one reason why Defence is underachieving against its predicted capital spend. Overall, its capital spending is increasing at a healthy rate, but it is likely to fall short of the spend predicted over the 2016–17 forward estimates by about $4 billion or so. Half of that may be due to foreign exchange adjustments, so it’s not a huge shortfall in the grand scheme of things, but probably confirms, first, that it’s always hard to ramp up investment spending quickly and, second, the sustainment increase had to come from somewhere.

Investment in ICT appears to have crashed last year, falling by 72% or $644 million between the PBS and Additional Estimates. It may be that ICT projects failed to deliver, or that sustaining current legacy ICT systems sucked funds away from investment in new acquisitions. Since there’s a complete lack of public reporting on the ICT program, it’s impossible to know what happened. The lack of transparency on ICT is particularly troubling, as the Integrated Investment Program foreshadows over $10 billion in ICT projects that are central not only to Defence’s corporate information systems, but also to its war-fighting ability.

This lack of transparency extends beyond the ICT program. While the government is claiming to be approving record numbers of projects, there’s no public record of what they are, let alone information on their scope, schedule or budget. For approved projects, there’s no reporting on progress unless they’re big enough to make the Major projects report of the Australian National Audit Office (ANAO). This year, for the first time, the PBS does not even include a list of project approvals planned for the coming year. That’s unfortunate, because capital investment projects lie at the heart of the government’s White Paper plan, so both the government and Defence should do better at transparency.

Location, location

Everybody has a view on industry policy but the key question must always be, does it make sense to do it here?

The Cost of Defence looks at two issues in more detail this year. The first is the government’s defence industry policy. A few years ago, it seemed as if everybody had an opinion on which fighter planes and submarines Australia should buy. Now the discussion has moved on to whether and what we should build in Australia. At some level, this isn’t a debate that can be resolved by data alone, as it involves issues of identity and ideology. At one end of the spectrum there are the economic rationalists who argue that there’s no net national benefit in subsidising uncompetitive industries, whether they be car manufacturing or shipbuilding. While Australia has been the world’s fifth biggest arms importer over the past decade, that has enabled us to get access to the most advanced military technologies when we need them at a price we can generally afford.

At the other end there are those who argue, whether for reasons of sovereignty, jobs, or even parochialism and prestige, that we should do as much as we can here. And in between there are those who see merit in both sides; perhaps we should be doing more to keep some of the money that we send offshore to buy arms here in Australia, but not at the 30-40% premium RAND Corporation suggested we were paying for shipbuilding, particularly if it means less capability for our servicemen and women.

The government’s industry policy includes elements of all of the above, which means that at times it appears inconsistent. Its policy documents state that, ultimately, developing Australian industry and exports is about improved capability for the ADF. Yet in practice it appears to favour building in Australia regardless of the cost premium and consequent decrease in output delivered to the ADF. Ultimately, our view is that we should support Australian defence industry when the costs and risks are understood and it makes sense to do so. However, based on the ANAO’s analysis, it doesn’t appear that Defence understands the premiums involved in local builds, so it’s hard to see how robust the business cases for local builds can be.

That said, once the government has made the initial decision to build in Australia, its choice of submarines, offshore patrol vessels, and armoured vehicles appears to have been based primarily on capability. For their part, the international primes have got the message that to be competitive they need robust Australian industry plans and partnerships with local companies and universities. Centres of excellence and cooperative research undertakings have been established, so industry seems to be meeting the government’s demand it put more skin in the game.

Innovation and R&D

Increasing funding for innovation and R&D seems like a safe bet

The innovation programs announced in the White Paper appear to be getting grant money out the door and, while it’s early days, anecdotally at least we are seeing local success stories. Since the funding involved is small compared to that spent on things like shipbuilding, it makes sense to double or even triple it in order to support the government’s broader innovation agenda, to keep up with other nations’ investments in emergent technologies, and to enhance Defence’s existing capabilities, which will have to remain in service for a long time until the future force is delivered.

In terms of exports, the goal of becoming a Top 10 defence exporter seems not only overly ambitious but also distracting. Rather than focusing on exporting platforms, there’s probably more benefit to be had by leveraging our involvement in the shipbuilding and armoured vehicle projects into greater access for Australian industry into the international primes’ supply chains for projects that they’re conducting around the world, not just here. That can achieve economic benefits here long before the mirage of submarine exports is realised.

Naval Shipbuilding

Naval Shipbuilding locks in $3.5-4 billion of cash flow, every year, forever

Which brings us to the second area that we’ve examined in more detail: the affordability of the Naval Shipbuilding Plan. There’s no getting around the fact that building modern warships is expensive. There are two numbers that perhaps warrant closer consideration than the $89 billion headline figure that’s widely quoted. The first is the $20 billion that the future frigate and future submarine projects will have spent between them before they each deliver usable capability (probably around 2028 and 2032, respectively). That’s a lot of cash to have tied up while our strategic circumstances deteriorate and our current platforms age. As ASPI has suggested previously, it’s probably worth looking at what Defence can do in the meantime in the form of cost-effective ways to enhance capability sooner.

The second number is the $3.5–4 billion in annual cash flow that we estimate the shipbuilding plan will require once it’s up and running. Granted, the capital equipment budget is growing. But shipbuilding will potentially consume around 30% of it on an ongoing basis. On the one hand, this smooths out the peaks and troughs, but on the other, since it sits at that level forever, it limits the room available for other capabilities. And since continuous local build appears to now be the government’s policy, there are likely to be other builds locked in forever (protected vehicles, armoured vehicles and so on), further shrinking the funding space for other capabilities and future flexibility.

Since the Navy is essentially undergoing a transformation that will double its tonnage, sustainment costs will also increase. Submarine and frigate sustainment (currently the largest and third largest sustainment lines in Defence) are likely to triple and double, respectively. Submarines alone could cost $2 billion a year to operate, on top of $2 billion a year to build, which together will potentially require 10% of Defence’s total budget for one capability. Granted, we are still a long way away from having all the future frigates and submarines, but at a time when western navies are shrinking due to the cost of building and operating modern warships, the fact that we are moving in the other direction raises questions about affordability.

And in order to get something close to a reasonable return on that capital investment, the Naval Shipbuilding Plan locks in a two-year delivery ‘drumbeat’ for frigates and submarines. Not only does this mean that it will be a very long time before the future fleet is delivered while our strategic environment is deteriorating, but it also limits Defence’s ability to manage cash flow by slowing things down, as that will further delay delivery and affect jobs.

There are other cost pressures. The future sustainment cost of the Joint Strike Fighter is a big unknown, but if it’s anywhere close to the jump from the classic Hornet to Super Hornet (around three times as much per aircraft), it will be hard to absorb.

In short, the megaprojects, in particular shipbuilding, have the potential to crowd out other capabilities. Historically, it’s the enablers (facilities and ICT) holding everything together that suffer. But it could be that the big projects will also distort the overall force structure. There are already signs of that, and the ANAO has noted that Defence may have to increase the future submarine project’s budget by $6.7 billion, even before the first submarine is delivered. That can only come from other areas of planned expenditure, most likely other capital investment.

Information sharing

Because these things are so big, and so important, Defence needs to get better at sharing information with the public

In the light of their centrality, both to Australia’s future military capability and to the government’s defence industry policy, there need be informed understanding and public scrutiny of the future frigate and future submarine projects—the two biggest projects in Defence’s, and potentially the nation’s, history. That discussion must be supported by real data. As a minimum, the two projects should be included in the ANAO’s Major projects report, regardless of whether they have received formal second-pass approval from government.

Because the media, the public and Defence often argue past each other when discussing the cost of military equipment, we have include a chapter (Chapter 7) that illustrates how Defence costs major acquisitions and shows why the ‘sticker’ price is very different from Defence’s total project budget. Hopefully this will contribute to better discussion around what the cost of Defence and its capabilities actually is.

So to sum up, the government is broadly meeting its commitment to get the Defence budget to 2% of GDP. But the content and timing of Defence White Paper’s investment program have not been revisited, despite changes (for the worse) in the strategic environment it was intended to address. Funding pressures are already emerging, with more to come in sustainment and personnel right at the time when a large share of the investment budget is being tied up in shipbuilding.

Informed decision making and public debate on these issues is essential to navigating them in order to keep Australia secure. To support this, the government needs to demand Defence provide greater public transparency in its planning and reporting.

Download the Report

The full report is available here.

Marcus Hellyer presents an overview of the report.

Notwithstanding the above, Educational Institutions (including Schools, Independent Colleges, Universities, and TAFEs) are granted permission to make copies of copyrighted works strictly for educational purposes without explicit permission from ASPI and free of charge.

Published in Australia by:
Australian Strategic Policy Institute (ASPI)
Level 2, 40 Macquarie Street
Barton ACT 2600
Australia

Note on title:
The figure of $99,606,202.74 represents one three-hundred-and-sixty-fifth of the consolidated Defence appropriation (including the Australian Signals Directorate) for 2018–19. This does not include funds appropriated to the Defence Housing Authority, nor those administered by Defence for military superannuation schemes and housing support services.

Agenda for Change 2016: Strategic choices for the next government

7 June 2016

The defence of Australia’s interests is a core business of federal governments. Regardless of who wins the election on July 2, the incoming government will have to grapple with a wide range of security issues. This report provides a range of perspectives on selected defence and national security issues, as well as a number of policy recommendations.

Contributors include Kim Beazley, Peter Jennings, Graeme Dobell, Shiro Armstrong, Andrew Davies, Tobias Feakin, Malcolm Davis, Rod Lyon, Mark Thomson, Jacinta Carroll, Paul Barnes, John Coyne, David Connery, Anthony Bergin, Lisa Sharland, Christopher Cowan, James Mugg, Simon Norton, Cesar Alvarez, Jessica Woodall, Zoe Hawkins, Liam Nevill, Dione Hodgson, David Lang, Amelia Long and Lachlan Wilson.

ASPI produced a similar brief before the 2013 election. There are some enduring challenges, such as cybersecurity, terrorism and an uncertain global economic outlook. Natural disasters are a constant feature of life on the Pacific and Indian Ocean rim.

But there are also challenges that didn’t seem so acute only three years ago such as recent events in the South China Sea, North Korea’s nuclear and missile programs, and ISIS as a military threat and an exporter of global terrorism.

The incumbent for the next term of government will have to deal with these issues.

Launch Video

Transport Fuels from Australia’s Gas Resources

11 December 2014

The transport sector in Australia depends heavily on imported oil-based fuels. With this comes the ever-present risk of oil supply shortages. But Australia is gas-rich and oil-poor, so it makes practical sense to assess how our own gas resources can be used to produce these fuels.

Natural gas can be used directly as a fuel, blended with diesel in modified diesel engines, and converted into a conventional liquid fuel – all at a modest cost. This book, written by Australia’s leading experts in the field, demonstrates how using natural gas as a transport fuel could increase our fuel self-sufficiency to 50–70 per cent by 2030. And with three-quarters of our freight being moved by road, it’s clear that these developments will have major benefits for Australian transport efficiency.

Order a copy from New South Book s.

The Cost of Defence: ASPI Defence Budget Brief 2009-2010

27 May 2009

This report, prepared by Mark Thomson, gives interested readers greater access to the complex workings of the Defence Budget and promotes informed debate on Defence budget issues.

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