Tag Archive for: Defence Spending

Defence’s acquisition plan risks leaving ADF with stranded assets

In my previous article, I looked at the transition that’s underway in Australia’s electricity sector, driven by technological innovation. The electrical grid is moving from one based on a small number of large, inflexible generators to one consisting of a large number of small (and, in the case of rooftop solar, very small), responsive, disaggregated generators.

It’s a textbook case of disruptive innovation. The incumbents didn’t see it coming. Now they’ve been left with stranded assets and are scrambling to adjust. They can’t sell them because nobody wants to put their own money into a losing economic proposition. If it made economic sense to sink a lot of money into new power stations fired by fossil fuels such as gas, the private sector would be lining up to do it.

The traditional generators are taking a range of measure to save themselves. They are writing assets down, essentially accepting that they’re uneconomic. They are bringing closures of coal-fired power plants forward; AGL, for example, recently announced that it was moving the closure of the Yallourn brown coal plant in Victoria forward from 2032 to 2028. It’s a measure of how far the transition has come that nobody other than federal government ministers and some news commentators expressed any concern that this would lead to shortages and price increases. Industry and investors were uniformly confident that renewables would easily fill the gap.

Traditional generators are also entering the renewables market, either buying up renewable generators, building their own renewable arrays on greenfield sites, or seeking to re-role existing locations, for example into sites for big batteries. And they are quarantining these new ventures from their unviable traditional assets; AGL has split its business into old and new generation, presumably to prevent the former from dragging everything down with it.

Whether these measures will be successful remains to be seen. History is replete with incumbents overtaken by disruptive innovation (Kodak, for instance), but there are also examples of companies that have successfully reinvented themselves (Netflix is a recent one).

So, what does this mean for the Department of Defence? Will it too be left with expensive stranded assets? It certainly is facing disruptive innovations. These include the robotic and autonomous systems I mentioned in my last post, but there are many more, such as the proliferation of cheap guided weapons that challenge a business model based on expensive, crewed platforms such as surface ships and armoured vehicles. There’s also the question of what happens when the world moves away from fossil-fuel-driven transport and the global infrastructure to produce and distribute liquid fuels dries up. That’s not so far away, with many countries having already agreed to end the sale of new petrol and diesel cars by 2030.

There are, then, many technological innovations that could leave Defence with stranded assets. In the defence context, stranded can mean uneconomical, but it also means technologically obsolete, to the point that it’s just too risky to deploy the outmoded capability. As I noted in my previous post, day one of the next war is the worst time to have this realisation.

One way to avoid stranded assets is to not invest in them in the first place—that’s the tipping point the electricity sector has reached. But Defence is a long way from there. It continues to invest in traditional platforms that face the disruptive threats identified above, even ones that won’t enter service for a decade. Defence’s domestic shipbuilding program is spending around $1.7 billion in 2020-21; that’s likely to grow to $4 billion per year. The frigate and submarine programs between them are likely to spend around $20 billion before the first of each class enters service in 2031 and 2034, respectively.

In times of uncertainty, it’s wise not to be overly invested in one potential future. That means hedging by spreading risk. One way to do this is to invest in other futures, especially when there’s a high likelihood they will occur. In Defence’s case, that would mean investing in research and development on the kinds of disruptive technologies mentioned above. But it’s hard to argue that Defence is taking a balanced approach. Its two innovation funds, the Next Generation Technologies Fund and the Innovation Hub, are each budgeted at around $100 million per year over the next decade. Out of a total defence budget of more than $40 billion per year, that’s less than 0.5%, far short of what technologically innovative organisations invest in R&D.

There are likely to be other lines of R&D spending in Defence than just its two innovation funds, but it’s difficult to identify them from the outside. In response to ASPI’s inquiry on total R&D spending, Defence stated, ‘The Australian government has committed around $3 billion of capability investment in Defence innovation, science and technology over the next decade.’ That’s still well short of 1%.

Defence does have substantial investment in robotic and autonomous systems programmed into its future investment plan—but those large sums are still some time away and by then Defence will be deep into the acquisition of the next generation of large, expensive crewed systems with the sunk costs rapidly mounting.

So when we reach the tipping point of whatever disruptive technological innovation is coming down the track, it’s highly likely that Defence will have a long list of potentially stranded assets on its books. Because of the huge economic and cultural outlays on them, Defence will be unwilling to simply write them off. It’s likely that Defence will attempt to adapt them to reap some return on its investment. After all, one of the main selling points of crewed, multirole platforms is their versatility and adaptability.

We can already see that approach emerging with the development of concepts such as human–machine teaming in which those large, crewed platforms continue to play a key role as motherships or command-and-control nodes in distributed webs consisting of large numbers of small uncrewed systems. I’ll look at whether this is a viable way to ‘unstrand’ those traditional assets in my next post.

External workers behind only army as Defence’s second biggest branch

One of the more interesting numbers released by Defence this year was the size of its external workforce, which the department is now measuring through a biannual census. The total number is 28,632 full-time equivalent workers. If we regard those people as Defence’s fifth ‘service’, it would easily be its second biggest, just behind the army at 30,000 and well ahead of the public service at 16,000.

In one sense, the size of this fifth service shouldn’t be surprising as it’s the result of several broad movements affecting Defence over the past three or four decades. The first was the selling off of government-owned defence industries. The second was successive governments’ efforts over the past decade to reduce the number of public servants in Defence. That hit Defence’s Capability Acquisition and Sustainment Group particularly hard as it fell from 6,000 to 3,660 Australian public service staff. And the third is the growing size and complexity of Defence’s acquisition and sustainment programs that require skilled workers to administer and deliver. In short, there is a lot more work and fewer people inside Defence to do it.

I collated data around this phenomenon in part 2 of this year’s The cost of defence. In this post I’ll look at some of the numbers. In the next, I’ll look at what, if anything, we should do about it.

The first of three categories of external workers are consultants, whom Defence defines as people who ‘carry out defined research, reviews or evaluations or provide independent advice, information or creative solutions’. Despite stereotypes of Canberra being overrun by overpaid consultants who borrow your watch to tell you the time, they make up less than 1% of Defence’s external workforce.

The largest category are the 21,000 who deliver services on a long-term basis with ‘skills or expertise that are not required to be maintained by APS or ADF in Defence’. Think of employees of companies providing base services such as messes and cleaning, performing deeper maintenance on aircraft or staffing IT helpdesks.

Despite the size of that category, it’s relatively uncontroversial. There’s little appetite in either the government or Defence to bring those functions back inside the department. The Middle East wars of the past two decades have shown that industry can deliver support even on deployed operations. There’ll always be debate about which maintenance functions frontline ADF units need to be able to perform themselves, and there’s still considerable nostalgia for the traditional military mess, but we aren’t going to fundamentally reverse course here.

The area where there’s a greater need for scrutiny is in the final category: the 6,567 contractors, people ‘engaged by Defence under a contract for skills that would normally be maintained in the Australian Public Service (APS) or Australian Defence Force (ADF) workforce … to perform day-to-day duties of Defence’. So those are mainly people working ‘above the line’—that is, working on behalf of the Commonwealth to run projects and activities—as opposed to people working ‘below the line’ delivering services and products to those projects. The largest subcategory is project management,  with 2,311 people.

While those may be skills that are ‘normally’ maintained in the APS or ADF workforce, Defence doesn’t have the people anymore. So it’s had to find them outside. With its demand for skilled professionals growing and its own workforce unable to meet that demand, in 2018 Defence established a support services panel to ‘provide a more strategically managed approach to the engagement and management of above the line services’. The panel consists of four major service providers and was meant to provide ‘greater visibility and control over market engagement and service delivery’.

Hopefully it has provided that visibility to Defence, but it hasn’t to the public and parliament. It’s hard to say from the outside how much that skilled on-demand workforce is costing Defence. Last year Defence signed contracts worth $2.17 billion for various kinds of professional services, according to AusTender, which reports Commonwealth contracts valued at over $100,000. But we can’t really tell from AusTender how much of, say, the $662 million in ‘professional engineering services’ contracts that Defence signed was above or below the line.

We can see, however, that the four major service providers have certainly received big contracts—like Downer’s $170 million contract described as ‘Major Service Provider to CASG—Enterprise Support Service Agreement’, which sounds a lot like it’s above the line.

There are some big numbers there. But does that mean the Commonwealth isn’t getting value from them? By the simple metric of daily rates, it might appear that Defence is overpaying. At first blush, public servants appear to be more affordable. The top of the salary band for a someone at ‘Executive Level 1’, essentially an experienced professional such as a project manager, cost analyst or engineer who might supervise a small team, is $115,000 per year. If we convert that to a total cost to Defence (including things like sick leave and training) and divide by around 220 days, they are costing Defence around $800 per day. Anecdotally, the daily rate charged by service providers for those skills is much higher, around $1,500–2,000, and at times more.

I’ll look at whether we should be worried about this in my next piece.

The strange submarine saga: how did we get there?

As Australia’s defence minister does her quarterly meetings with the French to push, pummel and pull at the future submarine project, Linda Reynolds is entitled to reflect, ‘How in heavens did we get here?’

Creating the 12 Attack-class submarines is a ‘wicked problem’.

The cost of the largest defence procurement in Australia’s history has blown out to $90 billion. The timelines stretch and the effort to get Australian industry to do the build is also a stretch.

Answering the ‘How’ question involves the strange sub saga of the last decade and the sliding-door moments: the opportunities that surfaced and became reality versus the possibilities that submerged and sank.

Before going through those doors to see what sank, consider what’s struggling to surface.

Surveying this megaproject, one of Canberra’s sharpest umpires, the Australian National Audit Office, didn’t offer any recommendations, only ‘key messages’, in its January performance audit.

When the ANAO can’t discern a better way—and goes gentle on whip, hammer or scalpel—it’s a mega toughie. The dollar meter tells the story, as the ANAO recounts:

In 2016 Defence reported the acquisition cost of the new submarines as more than $50 billion (out-turned). In November 2019, Defence advised the Senate that the acquisition cost of the Future Submarine was ‘in the order of $80 billion out-turned’, with an estimated sustainment cost of $145 billion out-turned to 2080.

‘Out-turned’ is Defence-speak for ‘accounting for inflation’. As it’s turning out, the dollars are blowing out. The $80 billion figure quickly turned upwards.

The July strategic update upped the acquisition cost of the Attack boats to $89.7 billion, in a forecast extending beyond 2040.

The precision of that last $700 million in the $89.7 billion forecast, 20 years from now, is a nice touch—nearly $90 billion, but not quite. ‘In the order of $80 billion’ in November; in the order of $90 billion by July. A billion here, a billion there, and that’s another 10 billion. Truly, this is a very hungry future submarine.

Defence deserves sympathy on timelines because of politics as well as complexity. In this telling, the figure of Tony Abbott, prime minister from 2013 to 2015, looms large.

After overthrowing Abbott as PM, one of Malcolm Turnbull’s first meetings was with Defence Secretary Dennis Richardson to discuss what became the 2016 defence white paper. Turnbull writes:

Dennis came straight to the point. ‘PM, you will by now have a copy of the draft Defence white paper. It’s a good piece of work. But part of it is complete and utter bullshit.’ Well, that got my attention. ‘It says,’ he continued, ‘that the future submarines can start to be delivered in the mid-2020s—so about ten years from now. That’s simply not possible. I told your predecessor this and he insisted that the 2020s date should go in and leave the problem for another government.’ I didn’t have to think too long about that—so I told Dennis we should include a completion date that matched reality, which was the early 2030s.

If Abbott had lasted as PM, he could have aimed for that mid-2020s target by torpedoing the bipartisan consensus on building Oz submarines in Oz.

Abbott wanted submarines based on the Japanese Soryu class, designed and built in Japan. He embraced Japan’s Shinzo Abe as a kindred conservative spirit. Getting a Japanese-made sub would cement a quasi-alliance with Japan within the trilateral relationship with the US.

Powerful arguments could be mounted: defence policy is too important to masquerade as industry policy. Every defence dollar must get the maximum bang for the buck. The Japanese sub would cost less and enter service quicker than an Oz build. Australia must move swiftly to deal with a darkening strategic outlook. It’d be a fiendishly difficult debate—even within the Liberal Party—but this big policy argument sank before being launched.

After presiding over the final death of the Australian car industry, Abbott quietly inched towards sinking the Oz submarine industry, running an ‘internal process’ to choose the builder of the new submarine.

Japan was entitled to think the deal was done. That changed when Abbott suffered an extraordinary caucus revolt in February 2015. A motion to ‘spill’ the leader got 39 ‘yes’ votes versus 61 to keep Abbott: about 40% of the caucus voted for an empty chair rather than the prime minister.

Scrambling for votes to avert the spill, Abbott agreed to South Australian Liberals’ demands for an open tender for the submarine contract. The concession fed into the fundamental fight to have future subs built at Adelaide’s Osborne shipyard, birthplace of the six Collins-class subs.

The open tender became a contest between Japan, France and Germany.

By September 2015, the caucus completed the job of beheading
Abbott. Building subs in Japan went with him. Tokyo, though, believed it was still in the game.

In the cabinet reshuffle after Abbott’s fall, Adelaide MP Christopher Pyne became minister for industry, innovation and science. He writes of a Canberra meeting with Mitsubishi executives and the Japanese ambassador:

We had a wide-ranging and candid discussion about the submarine project, defence and the historical relationship between Australia and the three nations who were bidding—France, Germany and Japan. My suspicion that the Japanese believed they were likely to win was confirmed when I was told informally that only after this meeting did the Japanese bidders believe they might not win.

As the tender process concluded, Turnbull worried that Abbott had encouraged Abe to believe the decision would be ‘political’ and Japan would get the nod. Adelaide politics trumped Tokyo.

Calling Abe in April 2016 to tell him that France had won, Turnbull said the Japanese leader ‘felt, with some justification, that they’d been let down … The political way in which the tender arose always had the potential to create awkward misunderstandings in Japan.’

Politics is like that. And aligning Oz defence needs with industry policy makes for difficult politics with a mega price tag.

Hunting for the reason—the new frigates

The 2016 Defence White Paper stated that the nine new future frigates will be ‘optimised for anti-submarine warfare’. According to the Turnbull government, they will be ‘one of the world’s most advanced anti-submarine warfare frigates’. It stands to reason, hopefully, that for $35 billion the government is addressing a serious submarine threat to Australia.

There has been a significant increase in interest in submarine acquisition in Southeast Asia. Vietnam has purchased six Kilo-class submarines from Russia. Indonesia is adding three Korean-built submarines to its inventory of two upgraded Type 209 Cakra class. Two German-built submarines have been ordered to supplement Singapore’s existing fleet of four. Thailand will buy three Chinese Yuan-class vessels, and Myanmar has indicated an interest in gaining a submarine capability. Malaysia has long-term plans to double its current submarine numbers to four by 2040.

The white paper predicts that ‘[w]ithin the broader Indo-Pacific region, in the next two decades, half of the world’s submarines will be operating in the region’ and ‘[b]y 2020 China’s submarine force is likely to grow to more than 70 submarines’. India currently operates 14 submarines. This is likely the real strategic issue.

Sound practice in force structuring is not to rely on being able to guess the future intentions of neighbouring states—circumstances and politics change, and over time allies can become friends and vice versa—but to look at the possible forces that could be arrayed against national interests. Taking a narrow view and just focusing on the burgeoning interest in submarines in Australia’s near region, it’s easy to appreciate that a threat from submarines is not totally negligible.

But given the additional factor of constrained resources, governments have to allocate a priority to confronting the submarine threat relative to other strategic challenges. In addition, within that constraint, a decision is required on how much anti-submarine warfare capability is enough. Does the regional threat warrant the very expensive ‘world’s most advanced anti-submarine warfare frigates’?

This is a difficult question to answer from outside the Department of Defence’s Russell offices. Anti-submarine warfare is a complex and evolving business. It’s a highly classified cat-and-mouse game where submariners and surface antagonists are constantly trying out better measures and countermeasures. And the contest takes place in a hostile and unforgiving environment.

Sonar technology is divided into two areas—the ‘wet end’ and the ‘dry end’. The wet-end research is based on acoustics and oceanography. The effectiveness of sonar depends on understanding the unique physical, chemical and biological signature of the body of water in which the sensor is being operated. Aside from scientific expertise in geophysics and oceanography, underwater acoustics involves confronting a host of practical issues, including how to detect and distinguish the target signature amid noise from wind, waves, ship engines and strumming cables, and from sounds scattered from other distant objects.

Increasingly sophisticated dry-end processing employs digital technology, statistical programs and now artificial intelligence to try to surmount these challenges. Standard signal-processing techniques such as beamforming, spectral analysis and statistical analysis determine the probability of achieving a target detection or identifying a false alarm.

Developments in unmanned underwater vehicles for military applications, while still immature, promise to disrupt current operational and tactical approaches to undersea warfare. China, Russia and the US are all pursuing this technology.

It takes decades to build up a national capability in the bodies of technical expertise that are essential to effectively operating submarines. Submarines also require a well-trained professional service to operate them and maintenance arrangements. Apart from Singapore, no Southeast Asian nation is likely to be able to mount a potent submarine force for a long while.

So, the government’s decision to spend $35 billion over the coming decade to build the Hunter-class fleet raises a question. Is this level of capability commensurate with the regional threat?

The P-A8 Poseidon, as the prime minister announced, ‘has been designed by the US Navy to dominate in Anti-Submarine Warfare’. The $50-billion future submarine project can, according to the white paper, also make ‘a meaningful contribution to anti-submarine warfare operations in our region’. On balance, the overall anti-submarine warfare capability provided by the Hunter class, the P-A8s, and the future submarine force seems disproportionate to the regional threat.

On the other hand, all this capability could be intended for the South China Sea. However, optimising the anti-submarine capability to operate in the cold, deep waters off China as opposed to the warm, shallow waters of the Australian littoral would presumably be a far from cost-effective outcome for the Defence dollar. If that is the intent, then Australians have been misled.

The overemphasis on interoperability with the US contained in almost all government equipment announcements might indicate that the real object of investment approaching $100 billion is to be ready for Australia to sail in tandem with the US into the South China Sea if a conflict breaks out.

There may be a strategic justification for diverting investment into this capability and away from national infrastructure or the provision of health or education services. Rather than trying to placate the Australian public with reassuring words about borders and search and rescue, and endlessly reiterating meaningless simplistic slogans about security, the government should say if there is a tacit understanding in Canberra and/or an informal commitment to Washington to automatically side with the US in an East Asian conflict.

$35 billion on frigates: BAE wins—has Australia won too?

So, the nine new Hunter-class anti-submarine warfare frigates will be built by BAE Systems in Osborne, South Australia, with ASC Shipbuilding acting as BAE’s subsidiary over the decades-long, $35 billion shipbuilding program.

The decision raises two big risks for the government to manage—the fact that the BAE ship does not yet exist and the project risk from an overlap between the Royal Navy frigate project and Australia’s.

We also have yet to see just how well the government has used its unique leverage from spending $35 billion on frigates to get Australian firms into the production of BAE’s eight ships for the Royal Navy and into the production chain of the 15 Canadian frigates if BAE wins that contract. This is key to ensuring a solid rolling work program for Australian workers and firms—and to reducing the very high premium Australia pays to build warships locally.

Of the three ships that were considered—Navantia’s, Fincantieri’s and BAE’s—the Type 26 global combat ship is the most modern design. Taking all the knowledge from the UK’s earlier very capable Type 23 anti-submarine frigate lineage and applying modern design and engineering approaches to further minimise the acoustic signature of every item on the ship should result in the Type 26 being a very quiet, effective anti-submarine warfare frigate. On capability, then, the Type 26 is a good choice.

It’s not in the water yet. This brings risk both because it’s a new ship and because the UK and Australian builds will overlap.

The overlap comes from the fact that the first UK ship is scheduled for delivery to the UK Ministry of Defence in mid-2025, with trials taking it to 2027 for entry into service with the Royal Navy. The first Australian frigate is planned to be completed around 2027. So there’s not a lot of time for problems in the UK build to be resolved before they’re encountered in the Australian build. Rework and delay from this will drive up costs.

Malcolm Turnbull, Marise Payne and Christopher Pyne have said the ships are ‘to be designed by BAE Systems and built by ASC Shipbuilding’. This may be surprisingly loose language; however, it raises a serious issue for the success of the program.

The air warfare destroyer project showed that not having the ship designer–builder very closely involved in leading and managing construction by ASC led to major quality trouble, and cost and schedule blowouts. The problems were only corrected once Navantia took control as the lead designer–builder in the Osborne yard.

The lesson for the government is that BAE’s designers and shipbuilders need to be heavily involved from the start, pretty much just using and developing ASC’s workforce. BAE needs to run the program, not just hand over the design and related intellectual property and leave construction to ASC. BAE running the program is also the way that BAE will transfer knowledge to ASC and develop ASC’s leadership and workforce for the future. It’d be nice to hear this from the prime minister.

That’s going to be tricky for BAE, because its top team will obviously be focused on the first Type 26, being built in Glasgow for the Royal Navy. Let’s see how the government has ensured BAE brings a large, capable team of designers and shipbuilders to Osborne to run the program from the start.

Austal shipbuilding’s absence in the government’s and BAE’s information seems to show that this successful Australian shipbuilding company may not play a prominent role in the frigate program. Maybe the experience of the offshore patrol vessel program, where Austal and the lead builder, Lürssen, couldn’t come to terms played a part here. No doubt we’ll hear more from Austal, as missing a big role in this $35-billion prize must make its future in naval shipbuilding here in Australia less certain.

On shipbuilding and costs overall, the contract with BAE needs to drive down the 30–40% premium that the RAND Corporation has shown Australia pays for building warships here. Such a large overhead for local construction is bad for the taxpayer. It’s also bad for the Australian Defence Force, because the defence dollar is buying less capability than it should. That needs to change.

A big way to drive down the cost premium is for the government to use its unique global leverage from spending $35 billion on naval shipbuilding to get Australian firms into all BAE’s warship production—the eight UK Type 26 frigates, follow-on UK ships, and the 15 Canadian frigates if BAE wins the Canadian frigate contract.

This would spread our industry cost base over a much wider pool of work, and give Australian workers in our shipbuilding industry greater continuity and value of work. There’s been a lot of talk about 4,000 jobs being created (500 Aussie companies have ‘pre-qualified’ for work on the ships, making it an average of eight jobs per company), but far less about driving the cost of these ships down.

If the government has used its buying power well and negotiated access for Australian firms to contribute to all BAE’s future warship production internationally, this would be good news in another way for the ADF—it would open up the possibility of getting these frigates faster than the two-year ‘drumbeat’ Defence plans.

Australia’s strategic environment is deteriorating faster than the government’s 2016 Defence White Paper predicted, so getting these capable new ships to the navy faster than one every two years after 2027, as seems to be planned, makes a lot of sense.

There was probably some ‘geopolitical emotion’ in the decision given the UK Brexit, with some in the government wanting to help the UK in the post-Brexit world, and hoping that the UK will reach out to deepen the Australia–UK relationship. That’s all great, but a test is how much access the UK has given for Australian industry to its own and future projects—not much would show that this is a commercial thing more than a strategic thing.

So, it’s a good capability decision, laden with local industry fervour and geopolitical emotion, but with some critical industry and project details yet to be clear. Those details will determine the success of this $35 billion endeavour.

Shipbuilding—making it up as we go along

In its 50‑page review of the implementation of Australia’s naval shipbuilding program, the Australian National Audit Office managed to avoid using the word ‘shambles’. That’s more than I can manage. We’re only at the starting line of a multi-decade undertaking, but there are already plenty of reasons to worry.

The auditors are generous in saying that the Defence Department is ‘on track to deliver the Offshore Patrol Vessel, Future Frigate and Future Submarine programs’, though they note that it’s still early days. But when we look at the first of the programs to kick off—the building of 12 offshore patrol vessels (OPVs)—it’s hard to see a lot of positives. For a start, we’re saddled with a plan that builds the first two vessels in one state, and then moves to another state, with another builder in another yard, for the remaining 10. That’s not something shipbuilders would normally choose to do.

The ‘split build’ approach is a government-mandated decision, and is a legacy of the gap between the construction of three air warfare destroyers and nine future frigates for the navy. The rationale for what’s described as a ‘medium risk’ approach is keeping part of the workforce in the government-owned shipyards in Adelaide skilled up.

Meanwhile, Austal, the nation’s most efficient shipbuilder—the only company to export a naval vessel from Australia in the past 20 years—is now absent from the build altogether after failing to reach an agreement with the prime contractor. That development leaves Austal without any domestic government work. Unless it’s successful in winning some work in the future frigate program, business planning will likely see the future of the company’s Australian assets come under scrutiny, given that it also has shipyards in the US and the Philippines. Presumably there were commercial reasons for the company to miss out on the OPVs but, given that the whole program is already driven by maintaining skills in the sector rather than economic rationality, a little extra skewing wouldn’t have been a surprise.

The auditors also note that the governance arrangements for the expenditure of some $90 billion aren’t yet clear. That’s alarming, given that recent and imminent decisions will lock in effective monopolies for decades. The worst-case scenario is that we end up with less diversity in our shipbuilding sector, and with huge contracts over which the Commonwealth has little future leverage.

Insufficient thought has gone into planning such a colossal enterprise and we’re rushing ahead without the right structures in place. The following passage in the audit report is extraordinary:

Defence has advised the Government of its assessment that the naval construction programs carry high to extreme risk [related] to the delivery of expected capability, program cost, ability to meet program schedules, and management of the industrial base. The Naval Shipbuilding Plan did not address the management of these risks in any detail. However, Defence advised the ANAO that these risks will be managed by the individual shipbuilding programs.

The notion that enterprise-wide risks can be managed piecemeal within contracted build projects is just plain wrong. The whole rationale for the expansion of the domestic naval shipbuilding sector and continuous building was the holistic management of workflows and capability delivery. It looks a lot like we’re making this up as we go along.

The audit’s main recommendation concerns establishing the affordability of the shipbuilding enterprise, and identifying capability trade-offs elsewhere in defence investment required to fund shipbuilding. In other words, they think that the funding envelope remains underdeveloped in current plans, and that the cost of building ships here in Australia could crowd out other investment in our defence forces in the decades to come.

It’s not surprising that costs aren’t firm yet, when the design for the future submarine hasn’t been finalised and the government is yet to choose a designer/builder for the future frigates. But the auditors are right to worry about the potential impact on the rest of the force. By establishing shipbuilding as a perpetual national enterprise, which necessarily requires continuous funding, we’re essentially making warships a higher priority than other defence capabilities. That’s a big strategic bet in light of developments in anti-ship missiles in recent years.

It’s not clear that the government is fully aware of the squeeze that its long-term commitment to shipbuilding could place on future force structures. And it’s not clear that it’s getting advice along those lines from the Defence Department. In its response to the audit report, the department said that it:

takes an enterprise approach for Naval Construction Programs. The shipbuilding provisions identified in the Integrated Investment Program are consolidated for Government to consider the Naval Construction Program affordability as each project is presented to Government.

And that:

Offsets are recommended to Government if there is a shortfall between the funding requirement and existing provision.

That’s at best a partial solution to what’s likely to be a perpetual problem. If I read that correctly, each time a shipbuilding project goes to government, Defence provides a running total for the overall bill, and offers up cuts elsewhere in Defence’s investment program. That’s sustainable as long as the opportunity costs aren’t too high, but what happens when shipbuilding starts to really bite into other ADF capability?

In summary, we’ve embarked on a ‘high to extreme’ risk enterprise with inadequate governance and a piecemeal approach to the management of risk. It’s intended to deliver a specific capability to the defence forces in perpetuity, crowding out other capabilities as it grows, independent of external strategic or technical developments. This is a shambles.

Sovereignty and self-reliance: the new Defence Industrial Capability Plan

After almost four years in gestation, a Defence Industrial Capability Plan has emerged. Like the recently released Defence Export Strategy, the industrial capability plan is rich in aspirational targets and administrative detail. Less obvious are the document’s broader public policy implications.

By way of background, the 2016 Defence Industry Policy Statement—upon which the new plan seeks to build—eschews dealing directly with two factors that traditionally dominate policy debate and remain critically important today. One is the extent to which government should pay a price premium to have defence capital equipment built domestically rather than overseas. The other is the degree to which market competition should be used as a method for equipment procurement.

Instead, elements of both factors are subsumed under the industry policy statement’s discussion of the industrial capabilities considered important to hold in-country, ostensibly for military–strategic reasons. Rather than designating these capabilities as a priority for the defence of the nation (the capability ‘should haves’), the statement adopts the concept of industrial sovereignty (the capability ‘must haves’).

Driven by a belief within government that priority industry capabilities (PICs) had ‘served their purpose’ and that it was ‘time to take a fresh view’, the industry policy statement expounds the virtues of a narrower, more selective approach.

Fast forward to 2018, and what kind of outcome did we get? Well, something that’s a little perplexing might be the best way to describe it. Leaving aside the impression that the method used to select sovereign industry capabilities is considerably more complex and opaque than the method underpinning the selection of PICs—when a ‘simpler and clearer’ approach was the stated objective—two aspects of the new plan stand out.

The first is that the plan doesn’t specify which among the PICs have been retained and now fall under the umbrella of industrial sovereignty. However, a close investigation suggests that most of those capabilities have been included in one form or another. Indeed, contrary to early indications, rebadged PICs appear to constitute the backbone of the new sovereignty framework.

The second is that the policy shift from ‘priority’ to ‘sovereignty’ didn’t narrow the scope of critical industrial capabilities. Instead, the government has moved in the opposite direction—greatly expanding the proportion of defence industry now deemed to be of the highest military–strategic value.

Expansion occurred through several avenues. A number of rebadged PICs have been reshaped to include a broader range of goods and services. Submarines provide just one example: the industrial capability necessary to support the upgrade of the combat system has been superseded by the capability needed to sustain most elements of the vessels.

Equally, significant capabilities have been added that weren’t included as PICs—the most important being naval shipbuilding, combat vehicle manufacture and aircraft deep maintenance. Each of these capabilities is, or will soon become, a major contributor to defence industry activity.

Unfortunately, the plan makes no specific mention of why naval shipbuilding and vehicle manufacture in particular are now sovereign capabilities. Nor does the document indicate, even in approximate terms, what proportion of defence industry now enjoys sovereign status. These are significant omissions.

However, in relation to the last of these points, what is clear is that this proportion is well above the figure of roughly 20% ascribed to PICs. Indeed, the magnitude of the expansion—driven primarily, but not exclusively, by naval shipbuilding and vehicle manufacture—moves Australia from a situation in which a small proportion of its defence industrial base was considered especially important to retain in-country for military–strategic reasons to a situation where only a small proportion of the industry isn’t considered especially important. That’s a big shift.

There’s little evidence in the plan or elsewhere to indicate that this shift is the result of some PICs being too narrowly defined previously—such as cyber, which is now designated as sovereign but had been excluded from the PIC on electronic warfare. Nor is there much evidence that the shift is a result of changes in the structure of the ADF and Australia’s strategic outlook since the PICs were introduced more than a decade ago.

Consequently, the single most important factor behind the shift seems to be a change in definition—away from sovereignty as a concept based purely on military–strategic necessity and towards a concept based to a significant extent, and perhaps even predominantly, on whatever industrial capability falls within Australia’s technical reach.

If so, the plan moves defence industry policy much closer to the notion of industrial self-reliance (as distinct from industrial sovereignty) than has been the case for many decades.

A critically important issue in relation to all of this is what the cost of the shift to sovereignty might involve. With so much of an already highly concentrated defence industry now protected from direct import competition by virtue of its sovereign status, the questions naturally arise as to what effect this might have on the cost of procuring capital equipment and what measures Defence has in place to ensure that value for money is achieved.

On this, and other key issues raised above, the new plan is largely silent.

2% of GDP: just a hop, skip and a jump away

The government may be planning to get into surplus in 2019–20, a year earlier than it looked like last year, but that doesn’t mean it has also brought forward its commitment to increase the Defence budget to 2% of GDP by 2020–21. That might be asking a little too much. So the main news out of this year’s budget is that the government is standing by its 2016 Defence White Paper commitment.

So 2% is now only a hop, skip and a jump away. The hop from last year to this was a healthy if not spectacular nominal increase of $1.2 billion, up to $36.4 billion for Defence, which translates into a 1.4% increase in real terms. Next year’s skip is slightly better, but that will still leave a big jump of nearly $3.4 billion, or a 6.2% increase in real terms, to hit the magical 2% in 2020–21.

Generally there’s not a lot of new news in Defence budgets. This year’s is no exception. In terms of money moving around, Defence got an extra $500 million late in 2017–18—probably to help out Treasury with balancing the broader government’s books—which Defence has to pay back over the forward estimates. With its big US-made projects (like the Joint Strike Fighter (JSF) and P-8A maritime patrol aircraft) Defence can do this simply by bringing forward a scheduled payment to the US from this July into June.

With the Australian Signals Directorate becoming a statutory agency, its funding of $827 million has been removed from Defence’s tally and doesn’t show up in Total Defence Resourcing. But the government and Defence still count that money towards the 2% target (which is fair enough).

In terms of uniformed people, Defence’s allocation appears to be unchanged from the white paper plan and increases by nearly 600 to 59,794 this year. Whether it can achieve that target is another matter, since in actual terms it missed hitting its 2017–18 allocation by about 600 people, with the biggest shortfall being in the Navy. In essence the uniformed workforce will need to increase by 1,200 this year to make up for last year’s shortfall.

Defence civilian allocation is around 2,000 people fewer that its white paper target of 18,200—but before public servants start having heart attacks, Defence’s advice is that the change is entirely due to ‘machinery of government’ changes—in other words, taking ASD’s people (and some others) out of the Defence column. Without a detailed accounting we’ll have to take their word for it.

Funding for operations this year is $750 million. With the exception of a $150 million decrease in Operation Okra (Iraq), presumably due to the F/A‑18s coming home, that’s about the same as last year.

As ASPI has previously noted, there has been a significant decline in transparency in Defence, particularly in its capital program. Defence isn’t reporting project approvals in the annual report or additional estimates statements in anything resembling a comprehensive fashion. And now it’s no longer including a list of planned project approvals for the coming year in its portfolio budget statement (PBS). So we can’t know what approvals are coming up or whether they’re actually approved. That’s not to mention that there’s no coverage at all of the information and communications technology (ICT) program. It’s really an abysmal situation.

One good thing about this year’s Defence PBS presentation is that the capital program is now better aligned with Defence’s Integrated Investment Program. The PBS now shows only major capital equipment (the biggest), facilities, ICT and minor projects. The ‘other capital’ line has been moved into sustainment and operating costs, where it fits better.

But even taking the removal of ‘other capital’ into account, the capital program falls short of last year’s predictions. This year’s total, for example, is more than $700 million short of where last year’s PBS said it would be—and the figures for major capital, facilities and ICT individually are all short of last year’s predictions. The same goes for the next two years.

Exchange rate adjustments don’t seem to be significant enough to account for the reduction in the capital budget either. With the sustainment budget up from where last year’s PBS predicted it would be, it’s possible that Defence has needed to move money from capital expenditure to meet rising sustainment costs.

That said, the capital program is still showing a very healthy rate of increase, averaging real double digit percentage increases over the forward estimates. Lots of money is continuing to go into fixing Defence’s neglected facilities. We’re a long way from the dark days of 2012–13 and 2013–14 when the capital budget crashed.

But Defence is going to need all of those investment dollars. This year, for the first time, a single Defence project will hit $2 billion in annual cash flow, with the JSF program spending $1.8 billion on equipment and over $200 million on facilities. Considering that Defence still needs to spend another $10 billion or so to get its 72 aircraft into service by mid-2023, it’s probably going stay around that level of cash flow for another four years.

And the shipbuilding program, the monster that potentially will eat everybody’s lunch, has barely begun to get hungry. Between them, the future submarine, future frigate and offshore patrol vessel projects will spend nearly $750 million this year even though the submarines and frigates are still in the design stage and won’t cut steel for several more years. So as construction starts, that number is going to get many times bigger.

A sovereign defence industry for Australia

International defence companies have been warned that seeking a share of the $200 billion to be spent upgrading the Australian Defence Force will require a much greater commitment than simply obtaining an Australian business number.

Defence Industry Minister Christopher Pyne used a speech at the Australian Strategic Policy Institute last night to launch Australia’s first Defence Industrial Capability Plan, which he described as a blueprint to create the maximum alignment between defence needs and defence industry.

Mr Pyne said the government’s goal was a sovereign defence industry with the capability, readiness and resilience to help meet Australia’s needs, to the greatest extent possible, within its own borders.

He said the plan restated the need to maximise the involvement of competitive Australian companies in the acquisition, operation and sustainment of defence capability.

‘The plan has a key message for industry—that we expect all companies, including primes, that want to work with Defence, to consider how they currently or might best fit in to the big picture,’ Mr Pyne said.

We are redefining the phrase ‘Australian Defence Industry’. Having just an ABN is not enough if you are planning to be part of this. Being a serious contributor in the Australian defence industry means having Australian-based industrial capability.

It means company and board presence, infrastructure and a skills base that can complete value-added work here in Australia, employing Australian workers.

Mr Pyne said Australia had to have access to, or control over, certain industrial capabilities. This ‘sovereign industrial capability’ will secure the ADF’s ability to achieve its operational mission today and well into the future.

In the national defence context, the term ‘sovereignty’ means the ability to independently employ defence capability or force, when and where required, Mr Pyne said, ‘to produce a desired military effect, with or without notice, with or without our allies’.

He said governments on both sides had announced many policies and initiatives over time to support defence industry.

But the unmet challenge, until now, has been to unite these initiatives in a single, detailed policy framework that reaches across the breadth of planning and decision-making through to implementation.

We are looking for an Australian defence industrial base that will stand us in good stead through to the end of the century and beyond.

‘Our goal is clear,’ Mr Pyne said. ‘We seek to achieve, by 2028, a matured, innovative Australian defence industry with greatly enhanced levels of competitiveness in the international marketplace. We talk about a decade but we are really looking way beyond that point.’

The government was fully committed to Australian participation to the highest extent possible but the nature of global supply chains meant no country could be fully self-sufficient in its defence or defence industry.

Our defence sovereignty is enabled by industrial capability sourced both within Australia and overseas.

Thus we will continue to leverage the US and the international market for many major platforms and systems, to deliver the best capability to our warfighters.

Mr Pyne said he had pushed for more work to be done by Australian companies on the Joint Strike Fighter program. So far Australia had won JSF contracts totaling $1 billion, he said.

He indicated that the tempo of government decision-making on key defence issues had increased significantly, with 90 approvals up to March. While those will not each launch a separate project, such decisions are a key to keeping the business of defence moving and the rate is much higher than in recent years.

He listed an initial 10 ‘sovereign industrial capability priorities’ operationally critical to the Defence mission. There are priorities within the Integrated Investment Program over the next three to five years, or which need more dedicated monitoring, management and support due to their industrial complexity, government priority or requirements across multiple capability programs.

They are:

  • Collins-class submarine maintenance and technology upgrade
  • Continuous shipbuilding program (including rolling submarine acquisition)
  • Land combat vehicle and technology upgrade
  • Enhanced active and passive phased array radar capability
  • Combat clothing survivability and signature reduction technologies
  • Advanced signal processing capability in electronic warfare, cyber and information security, and signature management technologies and operations
  • Surveillance and intelligence data collection, analysis and dissemination, and complex systems integration
  • Test, evaluation, certification and systems assurance
  • Munitions and small arms research, design, development and manufacture
  • Aerospace platform deep maintenance.

Mr Pyne also announced a new, dedicated grant program valued at up to $17 million per year to provide direct support to Australian small to medium-sized enterprises (SMEs) that contribute to the sovereign industrial capability priorities.

This competitive grant process, to be delivered by the Centre for Defence Industry Capability, will help SMEs meet a portion of the costs for capital equipment purchases and non-recurring engineering costs.

Mr Pyne said the government’s vision for defence industry a decade from now, in 2028, had five objectives:

  1. A broader and deeper defence industrial base where agile SMES are better placed to interact with Defence and global defence companies, and aren’t solely reliant on the Australian Defence Force for their success.
  2. A strategic approach to defence industry investment to ensure government investment in critical defence capabilities is prioritised, and that Australian businesses are provided the maximum opportunity to be involved.
  3. For an innovative and competitive defence industry boasting world-leading defence capabilities developed through increased collaboration between Defence, business, universities and the research sector.
  4. A robust export capability where Australia’s defence industry is a key player internationally, providing greater stability for businesses across peaks and troughs in domestic demand and increasing their capability to support Defence.
  5. For a Defence and industry partnership that enables Australia to position for the future by ensuring it has the right people with the right skills, in the right place, at the right time to respond to changing environments, to seize opportunities and to manage increasing strategic and technological complexity.

‘We are at a very important moment in time for Australia’s defence industry, a true watershed moment for our whole nation,’ Mr Pyne said.

If a project is approved in a forest …

One of the key elements of the government’s strategy for national defence is an ambitious recapitalisation of the Australian Defence Force. The 2016 Defence White Paper and its supporting Defence Integrated Investment Program (IIP) announced $195 billion in capital investment over the coming decade.

That’s a big number and getting that money out the door will be challenging, particularly when spending a lot of it requires setting up production lines for ships, submarines and armoured vehicles from a cold start. On the flip side, if Defence got its cost estimates wrong, then the government’s promised 2% of GDP may not be enough to pay for it.

So how is it going? We would like to answer that in ASPI’s forthcoming annual Cost of Defence budget brief (stand by for launch on 24 May). One traditional metric is project approvals—how many, which ones, how many dollars and are they getting pumped through the system on schedule. ASPI has tried to track these over time, with declining success due to Defence’s reduced reporting of this data.

One would hope it would be easier, particularly since Defence says it has met the First Principles Review’s recommendation to establish a single Defence Investment Plan that would include all capital investments, so that all the information should now be in one place and easy to publish.

And yet it has become impossible to answer those questions from the information the government and Defence publish.

For example, on 13 December 2017, Minister Christopher Pyne stated that ‘in 2016–17 we issued 74 defence capability-related project approvals’. The 2016–17 Defence annual report is consistent with this, reporting that ‘a total of 74 capability-related submissions were agreed by Government against an initial plan of 62 as outlined in the 2016 Defence White Paper. These approvals comprised 15 first pass approvals, 31 second pass approvals, 15 other types of IIP project approvals, and 13 capability-related submissions.’

At first blush it would appear that Defence overachieved with the 74 approvals, exceeding expectations by 12. But since 13 of the 74 were ‘capability-related submissions’, it would appear they aren’t actually project approvals per se but some form of more general advice to government.

Nor is it possible to confirm whether the 62 ‘proper’ approvals were originally planned in the IIP, or when they were planned for. Unfortunately the IIP is so vague that it’s difficult to confirm what approvals were originally scheduled for 2016–17. The 2016–17 Portfolio Budget Statements (PBS) listed only 36 projects planned for approval, but these were only capital equipment projects and didn’t include ICT or facilities (tables 68–70)—as a single, integrated investment program logically would.

Quibbling about numbers aside, the main problem is that it’s impossible to confirm what the approvals were. The 2016–17 annual report actually has two separate lists of project approvals achieved—one lists 11, the other lists 15 and three appear on both, making a total of 23—far short of 74. What were the other ones?

It might be possible to piece together other approvals, perhaps by tracking ministerial media releases or by monitoring the AusTender database for notification of contract signatures (assuming one can link an AusTender entry to a specific project). But why should this be necessary? It’s ASPI’s view that not releasing a singly authoritative list of all project approvals falls far short of meeting a minimum duty of transparency and accountability.

There are some signs of improvement, and signs that Defence is meeting the First Principles Review’s recommendation. For example, for the first time, the 2017–18 PBS provided a list of planned approvals that included ICT and facilities projects, as well as equipment projects. There were a total of 59, including eight ICT and nine facilities (tables 64–66). This is a positive development.

However, this doesn’t guarantee that there will now be reliable reporting of all approvals made in a financial year. In the same speech in December 2017, the Minister stated that the government had already made 61 decisions halfway through financial year—not bad when only 59 are planned for the whole year! However the Defence Portfolio Additional Estimates Statements released in February 2018 listed a grand total of … five.

So what’s the big secret? Why wouldn’t the government and Defence want to tell the public (and industry in particular) what it has achieved?

Well, in managing the Defence budget, cash is king. It doesn’t matter that Defence theoretically has a capital budget of $195 billion over 10 years. What matters is this: does it have the cash flow to meets its pressures this year? If unforeseen new costs have arisen, or predicted costs have gone up, Defence has to free up cash somewhere.

There are only limited options. It’s hard to reduce personnel numbers quickly, particularly uniformed people. It’s hard to reduce sustainment costs quickly as a lot of big support contracts are locked in. Plus there’s no point having the ADF if you can’t use it. And approved capital projects are in contract, so they’re hard to reduce or slow down without really annoying industry (and local politicians and workers).

So the bank Defence traditionally goes to is the unapproved capital program. But freeing up cash there means delaying project approvals, or shrinking their scope. If a megaproject needs more cash, then you have to delay or shrink a lot of regular-sized projects to find it. And as we will argue in our budget brief, the megaprojects will be requiring a bigger and bigger share of Defence’s cash flow.

Is that happening? Well, without an IIP that gives clear information about planned project schedules and budgets for all projects, and robust information from the government and Defence on which projects were approved and with what budget, no one will ever know.