Defence and security issues


Budget Review 2009-10 Index

Budget 2009 10: Defence and security issues

Defence

Laura Rayner and Steve Dyer

Taxpayers and their elected representatives should have a clear idea of where their defence dollars are going and how the Government plans to manage strategic risks in the years ahead.[1]

Introduction

Total Defence funding in the 2009–10 Budget will be somewhat over $26.641 billion compared to $22.690 billion allocated in the 2008–09 Budget, and the estimated actual for 2008–09 of $23.169 billion. Total Defence funding over the forward estimates shows a relative decline from $27.028 billion in 2010–11 to $27.001 billion in 2011–12 then to $26.337 billion in 2012–13. Against a promise of three per cent real growth until 2017–18, and 2.5 per cent indexation, this apparent decline requires some further analysis. As will be outlined, there are other factors at play, including the requirement for Defence to find substantial savings over the forward estimates, and delaying the application of the calculated indexation over the same period.

The information on the future funding of the defence function in the recently released Defence White Paper, Defending Australia in the Asia Pacific Century: Force 2030, was criticised for its brevity.[2] The Government’s financial plan for defence rated only a page and a half but the Minister for Defence promised the ‘fine detail’ would be in the Budget.[3] As in most years, the devil is in the detail in the Defence budget, but the fine detail of how Defence is to achieve up to $20 billion gross savings over the next decade was absent, with one commentator who examined how Defence would achieve its savings target describing the budget papers as notable for their ‘paucity of useful information’.[4] The Minister is reported to have ‘pledged further details in the coming months’, with ‘plenty of transparency’.[5] The details may be presented in the eight companion reviews commissioned with the White Paper, or in the independent audit of the defence budget conducted for the Defence Minister by George Pappas, a former senior vice president of Boston Consulting Group. However none of these documents have yet been publicly released.

The 2009 Defence White Paper set the Defence future funding parameters (independent of internal savings and funding for major overseas operations) as:

  • 3 per cent real growth in the Defence budget to 2017–18
  • 2.2 per cent real growth in the Defence budget from 2018–19 to 2030 and
  • 2.5 per cent fixed indexation to the Defence budget from 2009–10 to 2030.

Real growth

Confirming what was in the recently released Defence White Paper, the Budget has promised that Defence is to get three per cent ‘real growth’ until 2017–18, after which ‘real growth’ will be pegged to 2.2 per cent until 2029–30. It must be noted, however, that the authors of the White Paper did not promise three per cent real growth ‘per annum’. Nor did the Defence Portfolio Budget Statement commit the Government to three per cent each year–the term used is ‘average real growth’. Combined with the other two elements of the new funding arrangement described below, this means that the Defence budget will not see a steady annual rise, but actually will rise only marginally over the forward estimates, with more money being promised from 2015–16 onwards. Thus both the White Paper and the Budget presuppose that whichever government follows the Rudd Government will continue with the same funding arrangements, and that this will be financially possible. As one commentator has noted, ‘[t]hat requires faith beyond scepticism’.[6]

Indexation

The second element of the new funding model for Defence, announced in the White Paper and implemented in the Budget is the move to a new method of calculating price indexation supplementation. The Government will no longer use the Non-Farm GDP Implicit Price Deflator which has been the method of Defence indexation since 2000 used to compensate Defence for price increases. The 2009 White Paper abandoned this because the global economic crisis had subjected that index to ‘substantial fluctuations’.[7] Instead, for the next twenty years Defence will be tied to a fixed indexation of 2.5 per cent.

The explanations for fixing on 2.5 per cent are somewhat confusing. The White Paper, Budget Papers No.1 and No. 2, and the Minister’s press release all refer to 2.5 per cent as the target for consumer price inflation agreed to the Australian Government and the Reserve Bank of Australia.[8] The Defence Portfolio Budget Statement, however, says that ‘the 2.5 per cent fixed price indexation is consistent with the long-term Non-Farm GDP Implicit Price Deflator’.[9]

Given that the average increase in both the consumer price index and the Non-Farm GDP Implicit Price Deflator over the last twenty years has been 3.2 per cent, 2.5 per cent fixed indexation for the next twenty years might not cover Defence’s price increases. This could have the effect of eroding the ‘real growth’ that has been promised in the White Paper and the Budget for this period.

To complicate matters further, the Budget changed the timeframe of the White Paper’s application of indexation. The Budget provides that the 2.5 per cent is ‘to be calculated from 2009–10 but applied from 2013–14’.[10] In other words the money will not be available for use until 2013–14.

In addition there will be an ‘extension of the efficiency dividend of one per cent of the administrative activities for the life of the White Paper’.[11] The effect of the one per cent efficiency dividend is not clear because of the undefined nature of the ‘administrative activities’ to which it applies.

Another consequence of the change in indexation method would appear to be the demise of the defence operations reserve which was established only in last year’s Budget—to be set up with the ‘windfall’ Defence received from increased non-farm prices. The impact of the global financial crisis on this ‘windfall’ meant that this source of funding for the reserve was short-lived and Defence will go back to being supplemented for the cost of these operations—$1.7 billion in 2000–10 and $2.1 billion over the four years.

Savings

The third element of the new Defence funding package is the ambitious savings program referred to above, with an agreement that Defence will be able to reinvest all the savings from the White Paper’s Strategic Reform Program (SRP), ‘a program of reform, efficiencies and savings that will generate around $20 billion worth of savings over 10 years’.[12] The Portfolio Budget Statement refers to a ‘$45 billion savings program across the decade’.[13] This is a misnomer—what does exist is a funding program to that value, of which a savings program is a significant part.

The defence savings initiatives over the forward estimates period (2009–10 to 2012–13) comprise:[14]

  • the SRP
  • further savings initiatives and
  • reprogrammed funds.

The source and value of the ‘further savings initiatives’ are not identified, and appear to have been included in the savings of $4.404 billion recorded under ‘reprogramming’.

Reprogramming, defined as ‘reprogramming of funds to future years’ produces only notional ‘savings’ to the ongoing Defence budget—the spending has been postponed, not cancelled.[15]

Under the SRP heading the Budget states that the SRP will ‘fundamentally overhaul the entire organisation, driving efficiency and creating over $3 billion of savings across the Budget and Forward Estimates’.[16]

The Minister has broadly outlined the reforms which the Government expects will generate savings:

•        reforming ‘the design of the military support backbone’ (efficiencies supply chain and inventory management and military equipment maintenance): savings amount to approximately $1.5 billion across the forward estimates and $5.5 billion across the decade

  • creating ‘more efficient enterprise support functions’ (centralised support to the ADF, reducing contractor numbers): savings amount to approximately $0.5 billion across the forward estimates and $3.5 billion across the decade
  • rebalancing the Defence workforce (converting contractor positions to Australian Public Service positions; focussing military personnel on military tasks): savings amount to approximately $0.5 billion across the forward estimates and $2 billion across the decade
  • reducing ‘input costs to doing business’ (including non-equipment procurement such as making greater use of videoconferencing rather than single-day travel): savings amount to approximately $1 billion across the forward estimates and $4.5 billion across the decade
  • other initiatives including the implementation of Mortimer Review: savings amount to approximately $1.5 billion across the forward estimates and $5 billion across the decade
  • total savings across the forward estimates amount to $5 billion
  • total savings across the decade amount to $20.5 billion.[17]

The savings totals appear to have been derived from ‘Table 3: White Paper Savings and Initiatives’ in the Defence Portfolio Budget Statements (shown below). This shows gross forward estimates savings of $4.966 billion (less $1.436 billion cost of savings equals $3.503 billion net savings); and gross savings across the decade of $20.682 billion (less $2.444 billion cost of savings equals $18.237 billion net savings).[18]

Table 3: White Paper savings and initiatives

Table 3: White Paper savings and initiatives

(Source: Australian Government, Portfolio budget statements 2009–10: budget related paper no. 1.4A & 1.4C: Defence Portfolio, Commonwealth of Australia, Canberra, 2009, p. 16.)

Under ‘Initiatives in ‘Table 3: White Paper Savings and Initiatives’, which appears to identify the purposes to which the overall $45 billion funding program will be put, a sum of $2 billion appears as ‘Reprofiled Savings’. [19] The implication is that $2 billion of the net $3.503 billion saved over the forward estimates through the SRP will not immediately be available to Defence. This is confirmed under the heading ‘Savings and Initiatives’, where the Budget states that $2 billion of the savings over the forward estimate years will be returned to Defence after 2015–16 ‘in line with revised funding requirements’. [20]

These projected savings across the Budget and the forward estimates seem to indicate that the bulk of the $20 billion planned savings will occur after 2012–13, with any savings achieved only being available for reinvestment in Defence in the years beyond the forward estimates.

Data provided for the SRP identifies net savings of $3.503 billion over the four years of the Forward Estimates, an average of $875.8 million per annum, to be reinvested in Defence. The savings estimate over the ten years to 2018–19  is $18.237 billion. How the savings for the final six years, which average out at $2.455 billion per annum, are to be achieved and calculated is unclear given that many programs would already have had savings extracted in the first four years.

New project proposals

Defence has agreed that, in relation to new projects:

Government approval of major Defence projects should occur through a tailored application of the two-pass process. For simple acquisitions where project definition is complete, Government may decide that Defence Capability Plan entry satisfies first pass requirements. If the complexity or cost of a project is high or project definition is uncertain, a minimum of two passes should be employed.[21]

In the corrected Portfolio Budget Statement 14 Significant Defence Capability Plan projects’ for second pass approval in 2009 are listed.[22] Nine of these were not in the most recent public version of the Defence Capability Plan (2006–2016). Four of the nine were not referred to directly in the 2009 Defence White Paper:

  • AIR 5440 Phase 1, C-130J Block Upgrade Program 7.0 was partially approved by the Government in 2007–08, with the Defence annual report for that year indicating that the remainder of the project would be ‘approved later’
  • AIR 9000 SCAP1, Seahawk Capability Assurance Program 1. AIR 9000 is a broad program to provide the ADF with an appropriate mix of helicopters. SCAP was identified in the Defence annual report in 2007–08 as a measure to ‘ensure the current level of Seahawk antisubmarine warfare capability [is maintained] until introduction of the Future Naval Aviation Combat System through Project AIR 9000 Phase 8 mid–next decade’[23]
  • JP 154 Phase 1, Joint Counter Improvised Explosive Device. Defence has previously been reported as collaborating with others on such technologies[24]
  • JP 2008 Phase 3H, Military Satellite Capability Ground Stations will relay communications from satellites to ADF assets operating in a network enabled environment.

In addition, two projects were listed in the original Portfolio Budget Statement, but were removed in the corrections issued subsequently. [25] Both were absent from the most recent public version of the Defence Capability Plan (2006–16):

  • JP 3027 Phase 1, Joint Direct Attack Munition Enhancement and
  • LAND 121 Phase 5A , Overlander—Field Vehicles & Trailers.

The corrected Portfolio Budget Statement also includes 15 projects to be considered for first pass approval in 2009–10.[26] Of these, 14 were foreshadowed in the most recent public version of the Defence Capability Plan (2006–2016). The additional project is phase 4 of JP 2044 Digital Topographical Systems Upgrade, (Defence GEOINT Capability).

In addition, four projects for first pass approvalwere listed in the original Portfolio Budget Statement, but not in the corrected one.[27] Three of these were already in the 2006–2016 Defence Capability Plan: AIR 5431 Phase 1: Future Air Traffic Control Surveillance Systems; SEA 1778 Phase 1: Deployable MCM—Organic Mine Counter Measures; and AIR 8000 Phase 2: Battlefield Airlift: Caribou replacement. The Caribou were removed from service recently.

The remaining program, JP 2110 Phase 1B, Chemical, Biological, Radiological, Nuclear Defence is a new phase of a project listed for first pass approval in the 2008–09 Defence Portfolio Budget Statement.

Capability

B737 Wedgetail airborne early warning & control aircraft

In Table 27: Air Force Deliverables there is the prediction that five of the six Wedgetail aircraft will be in service in 2009–10 with the last aircraft delivered in 2010–11, ‘subject to delivery schedule’.[28] This is a prudent caveat because, to date, the program is running three years late. Press reports also suggest that it is possible that bringing the aircraft into service may not initially generate any operational capability. These press reports indicated that the first aircraft, now due in November 2009, would have ‘limited capability suitable for training, not operations’.[29]

On 16 April 2009, Warren King of the Defence Materiel Organisation (DMO) gave evidence to the Joint Standing Committee on Foreign Affairs, Defence and Trade on the progress of the project, saying ‘[t]here is no doubt about the fact that the program remains challenged’.[30] DMO has contracted the services of Massachusetts Institute of Technology Lincoln Laboratory to look at the likely performance and soundness of the radar. At the time of Mr King’s evidence, DMO was awaiting the Lincoln Laboratory report and Mr King stated that ‘[i]f it has no future there is no point in going forward with it’. More recent reports indicate that the Lincoln Laboratory assessment did not find any fundamental problems with the phased array radar that would place the project in jeopardy.[31] Additionally, Wedgetail is reported to have performed well in flight tests over the Northern Territory in early May 2009.[32]

Submarines

Fleet availability

The Navy routinely puts three submarines to sea,[33] against an operational requirement ‘generally set at two’.[34]

Against an average of 923 unit ready days for the submarine fleet over the previous five years, the budget predicts an increase from 762 in 2008–09 to 916 in 2009–10. During this time two submarines will be in full cycle docking all year and one other will complete full cycle docking in late 2009. One will be alongside in a training role from late 2009. Both of the remaining two have short maintenance periods scheduled in 2009–10.

In 2009–10 the Navy also aims to continue to increase the size of submarine crews from 46 to a total of 58. This will give it three enlarged crews by the end of 2010–11, and a fourth by the end of 2011–12.[35]

Over the same period the submarine fleet’s unit ready days will decline from 916 in 2009–10 to 820 in 2010–11 and further to 733 in 2011–12. An increase to 781 days is forecast for 2012–13.

Delivering the defence White Paper’s ‘future submarines’

Defence expects an ‘increase in the number of submarines from 2030’.[36] Currently the submarine fleet comprises six Collins Class, so the fleet will be seven from 2030. There is no indication of the composition of this force—seven of the White paper’s ‘Future Submarines’ or six Collins Class plus one ‘Future Submarine’.



[1].    Department of Defence, Defending Australia in the Asia Pacific Century: Force 2030, [Department of Defence, Canberra], 2009, p. 17, viewed 19 May 2009, http://www.defence.gov.au/whitepaper/docs/defence_white_paper_2009.pdf

[2].    P Murray, ‘Danger in defence plan is the missing funding’, West Australian, 5 May 2009, p. 20, viewed 19 May 2009, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2FBDGT6%22

[3].    ‘The Oakes interview: Joel Fitzgibbon’, TODAY on Sunday, Nine Network, 4 May 2009, viewed 18 May 2009, http://news.ninemsn.com.au/newsroom/oakes/809267/the-oakes-interview-joel-fitzgibbon

[4].    M Dodd, ‘Reform program “short on details”’, The Australian, 14 May 2009, p. 8, viewed 15 May 2009, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2FT4KT6%22

[5].    J Pearlman, ‘Where’s the detail, asks defence adviser’, Sydney morning herald, 14 May 2009, p. 9, viewed 15 May 2009, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2FHYJT6%22

[6].    G Barker, ‘No defence for secrecy’, Australian financial review, 13 May 2009, p. 27, viewed 19 May 2009, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2FRZIT6%22

[7].    Department of Defence, Defending Australia in the Asia Pacific Century: Force 2030, p. 127.

[8].    Department of Defence, Defending Australia in the Asia Pacific century: Force 2030, p. 138; Australian Government, Budget strategy and outlook: budget paper no. 1: 2009–2010, Commonwealth of Australia, Canberra, 2009, p. 6-16; Australian Government, Budget measures: budget paper no. 2: 2009–10, Commonwealth of Australia, Canberra, 2009, p. 135; J Fitzgibbon (Minister for Defence), Budget 2009–10: defence budget overview, media release, 12 May 2009, viewed 19 May 2009, http://www.defence.gov.au/budget/09-10/pbs/releases/07909_BudgetOverview.pdf

[9].    Australian Government, Portfolio budget statements 2009–10: budget related paper no. 1.4A & 1.4C: Defence Portfolio, Commonwealth of Australia, Canberra, 2009, p. 15.

[10]. Budget related paper no. 1.4A & 1.4C: Defence Portfolio, p. 15

[11]. Budget related paper no. 1.4A & 1.4C: Defence Portfolio, p. 15.

[12]. J Fitzgibbon (Minister for Defence), Budget 2009–10: defence budget overview, media release, 12 May 2009.

[13]. Budget related paper no. 1.4A & 1.4C: Defence Portfolio, p. 16.

[14]. Budget related paper no. 1.4A & 1.4C: Defence Portfolio, p. 16.

[15]. Budget related paper no. 1.4A & 1.4C: Defence Portfolio, p. 15.

[16]. Budget related paper no. 1.4A & 1.4C: Defence Portfolio, p. 12.

[17]. J Fitzgibbon (Minister for Defence), Budget 2009–10: defence savings initiatives, media release, 12 May 2009, viewed 19 May 2009, http://www.defence.gov.au/budget/09-10/pbs/releases/08109_DefenceSavingsInitiatives.pdf

[18]. Budget related paper no. 1.4A & 1.4C: Defence Portfolio, p. 16.

[19]. Budget related paper no. 1.4A & 1.4C: Defence Portfolio, p. 16.

[20]. Budget related paper no. 1.4A & 1.4C: Defence Portfolio, p. 15.

[21] Department of Defence, The response to the report of the defence procurement and sustainment review: Mortimer review, Canberra, n.d., p. 20, viewed 19 May 2009, http://www.defence.gov.au/publications/Mortimer_Review_Response.pdf

[22] Department of Defence, Portfolio budget statements 2009–10, corrections, Table 33, viewed 19 May 2009, http://www.defence.gov.au/budget/09-10/pbs/2009-2010_Defence_PBS_09_corrections.pdf

[23] Department of Defence, Annual report 2007–08, Vol 1, p. 55, http://www.defence.gov.au/budget/07-08/dar/2007-2008_Defence_DAR_13_v1_full.pdf

[24]. ‘2009/10 Defence budget analysis’, Australian defence business review 2009/10 post-Budget brief, [May 2009].

[25] Budget related paper no. 1.4A & 1.4C: Defence Portfolio, p. 77.

[26] Portfolio budget statements 2009–10, corrections, Table 34, viewed 19 May 2009, http://www.defence.gov.au/budget/09-10/pbs/2009-2010_Defence_PBS_09_corrections.pdf

[27] Budget related paper no. 1.4A & 1.4C: Defence Portfolio, p. 78.

[28] Budget related paper no. 1.4A & 1.4C: Defence Portfolio, p. 51.

[29] ‘Fitzgibbon stands by Wedgetail aircraft’, The age, 12 April 2009, viewed 13 May 2009, http://news.theage.com.au/breaking-news-national/fitzgibbon-stands-by-wedgetail-aircraft-20090412-a3ro.html

[30]. W King, Defence Materiel Organisation, evidence to Joint Standing Committee on Foreign Affairs, Defence and Trade Defence Subcommittee, Inquiry into Department of Defence Annual Report 2007–08, 16 April 2009, viewed 20 May 2009, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees%2Fcommjnt%2F11876%2F0002%22

[31]. P Walters, ‘Flying colours for Wedgetail’, The Australian, 19 May 2009, p. 2, viewed 20 May 2009, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressclp%2FTGLT6%22

[32]. P Walters, ‘Flying colours for Wedgetail’.

[33] Chief of Navy, evidence to Senate Standing Committee on Foreign Affairs, Defence and Trade, Inquiry into estimates (supplementary budget estimates), Defence Portfolio, 22 October 2008, p. 71, viewed 19 May 2009, http://www.aph.gov.au/hansard/senate/commttee/S11361.pdf

[34] Chief of Navy, evidence to Senate Standing Committee on Foreign Affairs, Defence and Trade, Inquiry into estimates (budget estimates), Defence Portfolio, 4 June 2008, p. 157, viewed 19 May 2009, http://www.aph.gov.au/hansard/senate/commttee/S10871.pdf

[35] Department of Defence, Navy's response to the submarine workforce sustainability review, April 2009, pp. 17–18, viewed 19 May 2009, http://www.defence.gov.au/publications/SubmarineWorkforceSustainability.pdf

[36] Budget related paper no. 1.4A & 1.4C: Defence Portfolio, p. 12.


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