Tag Archive for: Integrated Investment Program

We need more defence capability long before the first SSN arrives

AUKUS is the great polariser of Australia’s national security community. Supporters are accused of risking too much for one capability; critics are accused of being unhelpful or lacking belief in Australia.

All this misses the point. We have about 1000 days before a possible conflict breaks out over Taiwan. That is the deadline the American military has set itself to prepare, US defence sources tell me, and Australia must do the same. Yet in choosing to acquire nuclear-powered attack submarines (SSNs), we are incurring a greater opportunity cost to the rest of our defence budget than any other country.

We must adapt our funding model to reduce that opportunity cost and prepare the Australian Defence Force for the possibility of conflict within the decade. That means leveraging private capital to rapidly acquire new defence capabilities before the delivery of the first Australian SSN.

We can also look to Ukraine for inspiration in how to adapt quickly. Its application of inexpensive uncrewed aircraft and boats has been an example—one that has been vastly faster and cheaper than our SSN program.

The opportunity cost of SSNs

Six nations have SSNs: the United States, China, Russia, Britain, France and India. Each has a larger economy than Australia, and some spend larger fractions of their economies on defence.

The smallest of those economies is Russia, whose GDP is just 15 percent larger than Australia’s, but whose defence budget is almost 2.5 times larger. The next smallest is France, whose GDP is 75 percent larger than ours, and whose defence budget is 74 percent larger.

Why does this matter? Because the size of the economy limits the federal budget, which limits the defence budget. For Australia, acquiring SSNs incurs an opportunity cost inversely related to the size of our economy, unless we make cuts to other areas in government spending, take on more debt or better harness private capital.

Under Defence’s current Integrated Investment Plan all additional funding over the next decade will be consumed by the SSNs, the general-purpose frigate program and exchange rate compensation, as reported by Australian Defence Magazine.

By choosing to acquire SSNs, Australia is now largely unable to provide new funding for other defence capabilities, other than the general-purpose frigates. There is no new money in the budget for medium-range ground-based air defence, a fourth F-35 squadron or a range of other capabilities that have been axed to make way for SSNs. The Australian economy is just not big enough.

We have already seen significant drops in defence industry workforce and turnover in the past financial year. And key programs have been cut from the acquisition program, such as mine countermeasures, which are vital to protecting our sea lanes.

Yes, the government is still acquiring other things for the Australian Defence Force; yes, some of those deliveries have been accelerated. But that is not enough. The maritime domain will soon consume a greater proportion of our defence budget than land, air and cyber combined. Our strategy may not be solely contingent on submarines, but it will be far, far more contingent on submarines than ever before.

This is not about Australia’s self-belief, as some commentators, including Jennifer Parker, argue. It is the inescapable financial reality of AUKUS.

Alternative approaches

So, what other opportunities are out there?

Well, Ukraine has just used cheap sea drones, uncrewed aircraft and cruise missiles to force the Russian Navy to withdraw to the eastern shore of the Black Sea. Kyiv has protected its shipping lanes and denied a much larger naval power access to its maritime approaches. This is the same strategic effect we want AUKUS to eventually achieve, but it will take us decades to get there. It took Ukraine less than two years and it cost a lot less than SSNs.

Meanwhile, since the US military is preparing for conflict over Taiwan to begin roughly 1000 days from now, that’s how long we have to give the ADF the capabilities it requires in case an Australian government decides that defending the island is in our national interest.

On this timescale Australian SSNs, due to begin arriving in 2032, are irrelevant. To meet this deadline Australia must harness private capital to deliver small, smart, cost-effective capabilities like those Ukraine has used, especially those that can be delivered within 1000 days. Australian companies like C2 Robotics and Ocius, for example, can deliver a large number of cheap, effective uncrewed submarines and uncrewed boats at speed.

First, that means redefining environment, social and governance standards to include national security and remove this common barrier to private investment in military technologies.

Second, that means creating a wider understanding of defence as a financial asset class through open forums, including: the specific capabilities Defence is seeking; the associated risk/return profiles; exit strategies; and the roles of growth versus venture capital. The takeover of Marand by CHAMP Private Equity is a good case study.

Third, private funds will not invest in defence if they do not understand it. Yet the Department of Defence routinely refuses to answer even basic media questions. Defence ministers must change this behaviour if Defence is to compete for investment against transparent asset classes like clean energy.

Fourth, we should use faster co-funded acquisition models that can quickly turn prototypes into production contracts. This creates advantageous entry points for private capital investors—provided the first three steps are already met.

But before all that, it means escaping the simplistic, for-or-against polarisation of the AUKUS debate.

National Defence Strategy: Cancellations cover 22 percent of acquisition costs

Defence will continue to operate within a tight financial straightjacket as it executes the massive redirection demanded by last year’s Defence Strategic Review and the AUKUS program, with cuts to existing projects expected to make a greater contribution to new acquisitions than fresh government funding.

The government expects that savings from cancellations will deliver $73 billion towards the total of $330 billion to be spent on new equipment over the coming 10 years. So cancellations will cover 22 percent of the total cost of acquisitions in the period, including the new nuclear-powered submarines.

And that contribution from eliminating or scaling back equipment purchases compares with the $50 billion that the government says it is adding to acquisition funding over the decade.

The Defence Strategic Review, led by former defence force chief Angus Houston and former defence minister Stephen Smith, was a radical document, declaring that the strategy behind Australia’s defence for the previous 50 years was no longer fit for purpose and calling for a sweeping overhaul of capabilities and force structure.

The review said more defence funding would be needed. ‘Defence spending must reflect the strategic circumstances our nation faces,’ it said.

Last year’s government budget, framed by the need to combat inflation, provided no additional money for defence over the four-year budget period, but Defence Minister Richard Marles extracted a new $30 billion commitment for 2027–28 to 2032–33 to help implement the review and the demands of AUKUS.

With the release last week of the National Defence Strategy and the Integrated Investment Program (the acquisition plan), Marles has responded to the review with a spending scheme that incorporates the major upgrades in naval and long-distance strike capability.

Fuller details of where cuts will be made should be in the forthcoming budget papers, but they include the cancellation of two large naval support vessels, cuts to upgrades of Canberra-based facilities, delaying purchase of another squadron of Lockheed Martin F-35 Lightnings, and last year’s 70 percent cut to the number of  new infantry fighting vehicles.

Besides the submarine program, which will absorb between $53 billion and $63 billion over the next decade, a further $51 billion to $69 billion is being spent on new ships.

Spending on acquiring maritime capabilities will reach $125 billion over the next decade, which is 38 percent of the value of all acquisitions in the period. The 2020 Force Structure Plan, prepared and published before the AUKUS agreement, anticipated that 28 percent  of acquisition spending would go to maritime capabilities.

It is a big shift in priorities. Acquisition spending for the air domain has fallen from 24 percent in 2020 to only 14 percent now.  The share going to the land domain has dropped from 20 percent to 16 percent, though cyber has risen from 6 percent to 7 percent and space from 2 percent to 3 percent.

The distribution of defence spending between capability acquisition, sustainment and workforce, which has historically been about even, becomes much more focused on equipment purchases.

The share of spending on new capabilities will rise from 34 percent in 2024–25 to 44 percent by 2033–34, while sustainment drops from 34 percent to 30 percent and the workforce drops from 33 percent to 26 percent.

Over the next decade, spending on new equipment is expected to rise at an annual rate of 9 percent; meanwhile sustainment spending will grow at 5 percent a year and funding for the workforce at 4 percent a year.

The rate of growth in the Defence budget will begin to increase from 2027–28, which will be the final year in the four-year forward estimate period in next month’s budget. Figures in the new National Defence Strategy show annual increases in resourcing of about 5 percent over the next three years but then 11 percent in 2027–28, to $67.9 billion; the following year’s rise will be similar.

Marles said the government would spend $5.7 billion more over the next four years than was provided when the government came to office in 2022.

That includes $3 billion in 2027–28, a new $1 billion injection over the next four years included in the National Defence Strategy, and $1.7 billion for new ships, the latter part of $11.1 billion new outlays over a decade announced in February following an independent review of naval forces.

Last year’s budget included an additional $30.4 billion from 2027–28 to 2032–33.  The passage of another year shifts the 10-year horizon out by a year and adds another $9 billion to the total, while the response to the naval review lifts outlays over the decade to $50 billion.

Marles says that by 2033–34 the annual defence budget will reach $100 billion, which would be equivalent to 2.4 percent of GDP. That is an increase from 2.0 percent in 2021-22 and a low of 1.6% in 2012-13, in the wake of the global financial crisis.

Overseeing such a significant re-shaping of defence planning, with a financial map incorporated in the budget, is a significant achievement for Marles. It follows his similar success in turning the ambitious but ill-defined AUKUS concept into an operational strategy last year.  Now that the National Defence Strategy and plans for AUKUS have been set out, the challenge will be in the implementation.