Budget 2011–12: Defence major capital investment program
The Defence Portfolio budget statements 2011–12 provide an estimate of expenditure on major capital expenditure of $5128.6 million in 2011–12. In addition to this, Defence will spend $739.8 million on minor capital purchases of equipment and infrastructure, and a further $1180.3 million on major capital facilities. This adds up to $7046.6 million.
In one of the media releases accompanying the budget, the Minister for Defence reveals that the Defence Materiel Organisation (DMO) has underspent its budget for 2010–11 by $1.1 billion. Some $815 million of this comes from the Approved Major Capital Investment Program (AMCIP) and the balance is from the major Capital Facilities Programs (MCFP). 
Most of the unspent AMCIP money relates to non-delivery of projects being undertaken by industry for the DMO.
In contrast to previous years, in which the DMO has been able to retain this money for future use, this year the unspent $1.1 billion will be returned to the official public account for general government use. In addition to this, a further $1.3 billion will be handed back to the Government over the forward estimates.
Budget Measures: Budget Paper No. 2: 2011–12 states that this money will be reprogrammed beyond the forward estimates. The Minister’s budget media release states:
The reprogramming is necessary to better reflect realistic achievement of milestone delivery payments by industry for capability and infrastructure projects.
This might mean that the DMO will get the money when they, and industry, can spend it. However, together with the projections of expenditure in the forward estimates, it raises important questions about the Government’s ability to fund the ambitious White Paper materiel requirements.
No mention is made by the Minister of the contribution of Government scrutiny to delays in project approvals as they move through the two-pass approval process. The Australian Industry Group has criticised Defence for achieving only 10 out of 29 of the possible first and second-pass approvals set out in the Portfolio budget statements 2009–10.
Professor Peter Leahy, a former Chief of Army (and now Director of the National Security Institute at the University of Canberra), has told the Canberra Times that the political process is contributing to delays:
He said the National Security Committee appeared to be a bottleneck and said this was delaying the acquisition of new defence capability. "Industry is finding it difficult to cope in an environment where there isn't a smooth spread of projects over time but, rather, a boom and bust cycle," he said.
Indeed, while the initiative recently announced by the Minister that minor projects (those with a value of less than $20 million) will now go though the post-Kinnaird Review two-pass approval process may strengthen the Government’s ability to scrutinise and control defence projects, it also carries with it the potential for further delays.
However, it could also be argued that such scrutiny is a matter of proper management and accountability. In announcing a recent set of reforms to project management accountability the Minister for Defence Materiel noted that projects which have been through the two-pass approval process gain a 20–25 per cent improvement to their schedule compared to projects that are not subject to this process.
Less money now, more money later
The Major Capital Projects line from the Total Capital Investment Program shows the proposed pattern of expenditure through the forward estimates.
Table 1: Defence Capital Investment Program
2011–12 Budget Estimate
2012–13 Forward estimate
2013–14 Forward estimate
2015–16 Forward estimate
Major Capital Investment Program
It is apparent that the reduction in spending over the next two financial years will be followed by two years which contain substantial increases in expenditure. These increases are required in order to get spending back on course to meet the Government’s target of a 3 per cent average spending increase in the overall defence budget through to 2017–18.
This raises two questions:
- will the necessary increases be affordable if the overall budget situation does not improve at the rate indicated by government forecasting?
- can the DMO and Australian defence industry cope with such a substantial increase in the amount of available money?
The Minister for Defence denies that there is any problem with the fulfilment of the White Paper plans, and has asserted:
It will be spent in future years. So, that the timetable has a couple of important points. None of the projects that we are referring to here are what you regard as any of the big projects out of the white paper, all of which are, you know, to be constructed, somewhere, from 2020 through to 2040 and so some people are erroneously suggesting that that has implications for the big bills in the white paper. It doesn't. All of those are in their preliminary or planning stages.
This might well be true, and it might be assumed that a substantial amount of this money will go towards the purchase of the first fourteen F-35A Joint Strike Fighters in 2014, but questions have been raised about the capacity of Australia’s defence industry to respond when spending is increased later in the decade. As Mark Thomson from the Australian Strategic Policy Institute (ASPI) notes:
We are two years in and the Defence white paper is substantially behind schedule . . . the concern is that when spending finally recovers, industry simply won't have the capacity to deliver the projects.
Similarly, James Brown from the Lowy Institute has said:
But the bigger concern is the delay in spending the money allocated for new equipment necessary to build Force 2030. Defence and the Defence Material Organisation failed to spend $1.1 billion allocated for new projects this year and will hand it back to Government. Their allocation for new projects has been cut by $1.3 billion in the forthcoming year and looks set to be cut again next year. Finally, the promised 3% real annual increase on defence expenditure, necessary to pay for Force 2030, has failed to eventuate.
As has so often been the case with the purchase of major capital equipment in recent years, the final outcome of these things will not be known for some years.
The Government has also agreed to cancel the purchase of two C130J Hercules aircraft and, according to the Portfolio budget statements, this will result in the saving of $111.3 million over the forward estimates and $520.1 million over the ten years to 2021. This decision has been made in light of the intention to acquire an additional C17A Globemaster from the United States. The Globemaster has a greater load capacity than the Hercules and the $251 million cost over the forward estimates is being met from within the existing Defence budget.
Defence Capability Plan
Table 44 in the Portfolio budget statements lists 36 projects for which second-pass approval might be sought from the Government at some point during the next two financial years. Table 45 lists 54 projects intended for first-pass approval. The Defence Minister’s budget media release on defence capability chooses to highlight the following five major projects to which the government expects to give second-pass approval in the next 12 to 18 months.
Air 9000 Phase 8 future naval combat helicopter
This project seeks to provide a replacement for the Royal Australian Navy’s (RAN) ageing Seahawk helicopters and the cancellation of the Seasprite helicopters project in March 2008. This is particularly important because the RAN currently has a serious gap in its anti-submarine warfare capabilities. The White Paper identified this ‘as a matter of urgency’ in 2009 so the Government is under some pressure to make a decision soon. Fortunately, the choice has been narrowed down to two aircraft, the NH90 NFH (NATO Frigate Helicopter) or the MH-60R Seahawk, both of which have been praised as suitable for Navy needs.
Land 121 Phase 3 Project Overlander
Phase 3 of Land 121 is intended to deliver Light and Lightweight unprotected Class vehicles and Medium and Medium Heavy protected and unprotected vehicles for land forces. Specifically, this refers to Bushmaster protected mobility vehicles (approximately sufficient to equip four battalions plus support), lightweight field vehicles and compatible trailers. This is particularly important for military personnel operating in Afghanistan because the vehicles are expected to operate in rugged conditions and, in the case of the Bushmasters, provide protection against Improvised Explosive Devices and road mines.
This phase of Overlander is well past second-pass approval but the Minister’s media release states that it will be reconsidered by Government when Defence completes the current tender evaluation activities for Medium and Medium Heavy protected and unprotected vehicles.
Land 121 Phase 5A Project Overlander
This project, which seeks to provide unprotected vehicles for tactical training purposes, was listed in the Defence Capability Plan 2009 for second-pass approval during 2010–11 or 2011–12.
Joint Project 2072 Phase 2A Battlespace communications systems
JP 2072 is a multi-phased project designed to enhance communications for ADF land forces. It covers the spectrum of Combat Net Radio and trunk communications as well as local area voice and data systems. It also seeks to improve the ADF’s ability to transmit tactical data to units in the field.
JP 2048 Phase 3 Replacement Watercraft project
This project will provide landing craft with the capacity to transport personnel, equipment and vehicles from the Canberra Class Landing Helicopter Docks to shore when the LHDs are in service. Given the cancellation earlier this year of the proposed watercraft for the Kanimbla and Manoora as a result of their unsuitability for purpose, this is a project which perhaps should now be considered a priority.
Still no serious money for submarines
It is notable that there is little mention in the budget papers of project Sea 1000—the Future Submarine. Sea 1000 is listed in the Portfolio budget statements as one of the projects which might go to the Government for first-pass approval but the window allowed for this extends out to 2014–15.
ASPI has suggested this project might cost $36 billion, and based on experience with the Collins Class, it is also likely to be a task of substantial complexity. A number of commentators have pointed to the problems that Australia will have in realising a project of this complexity if progress is not made soon.