Australian Parliamentary Library - 1996-97 Current Issues Brief 6

Current Issues Brief 6 1996-97

Should the Defence Budget be Cut? Arguments For and Against

Gary Brown and Derek Woolner
Foreign Affairs, Defence and Trade Group

Introduction

How governments have managed the Defence budget

Why Defence should continue to receive special treatment

The Basis of Australian Defence Planning

No Argument on Strategic Grounds

An Outcome of Insufficient Funding -

The Defence Record of Micro-Economic Reform

Little Scope for Funding Cuts

Stockholdings and the Problem of Operational Capability

Conclusion

Why Defence should not receive special treatment

Improved post-Cold War situation

Efficiency and sound management

Endnotes

Appendix:

Examples Of Poor Defence Project Performance, 1974-1996

1. Early-mid 1970s:

Mirage

2. 1979: Failure of the Turana Target Project

3. 1983: The Audit Office on Defence Project Management

4. 1984: The HMAS Tobruk Project

5. 1986: Defence Project Management Generally

6. 1976 to 1992: The Inshore Minehunter (MHI)

7. Assessing Additional Costs ('premiums') for Local Military Construction

8. 1992: The Collins Submarine Project

9. 1994-95: The US Landing Ships Acquisition

10. The JORN (JINDALEE radar) project

Endnotes

Introduction

With the election of a Coalition Government committed to significant reductions in overall Commonwealth spending, there has inevitably been a degree of criticism from affected interest groups whose constituencies have been adversely affected by funding cuts. Whether this criticism is wholly or partly justified in any particular case is not under consideration here, but in a period of government financial stringency any area apparently exempt from such treatment is naturally going to attract attention.

The Defence budget, which is now over $10 billion ($10 027 million in financial year 1996-97) is exempt from many of the Government's savings measures. Indeed, it has for many years been exempt from a number of controls and checks to which most government departments and authorities are expected to submit. But it is the recent heavy reductions in Government spending which have caused some to argue that it is inequitable to reduce desirable funding programs which deliver services and support to those less well-off while exempting a big-budget area like Defence.

As well as this argument from equity, it can also be argued that the exemption of an area from otherwise standard government funding reductions and scrutiny mechanisms can encourage inefficiencies and wastefulness in the exempted area. Further it can be argued that Australia's strategic circumstances are secure enough to permit some real reductions in Defence outlays without jeopardising the national interest.

Against this, the Government considers that Defence is a major responsibility which was not well managed under the previous government. In addition, Defence has found it difficult to fund its planned development of military capabilities. The Government has warned that the spread of military technologies in the Asia Pacific region is increasing uncertainty about the strategic situation. It has decided that savings to be made from improved administration should be invested in operational areas of Defence activity.

The purpose of this paper is to set out for Senators and Members the principal lines of argument, and supporting facts, for and against substantial modification of the way in which the Defence budget has hitherto been treated. It is not intended to reach conclusions of a prescriptive nature, but to provide readers with a factual background and a comment to further the process of debate.

The paper consists of an introduction, some background on the defence budget and how it has been handled by governments (of either persuasion) and arguments on the need (or lack of need) to reconsider the treatment of defence funding. These pro and con sections were prepared separately by the co-authors of this paper.(1) Each section carries its own conclusion.

The then Coalition Opposition issued a defence policy for the 1996 election which set out an approach to defence funding somewhat different to that for most other departments and authorities. The policy stated:

We will at least maintain defence spending at current levels and in line with the Forward Estimates in the 1995-96 Budget.

The spending commitments made in this policy are funded by a reallocation within existing resources in the Defence budget.

There will be no new net additional portfolio expenditure.(2)

Since the Liberal-National Party Coalition came to power in March 1996, it has sought to significantly reduce levels of government spending. The 1996-97 Budget contains measures intended to reduce government outlays by $2.929 billion in 1996-97, a further $5.197 billion in 1997-98, $4.847 billion in 1998-99 and $6.065 billion in 1999-2000.(3) This amounts to a reduction in outlays of about $19 billion over four years. The following table, extracted with modifications from the Budget Papers, gives details.(4)

Major Government Savings Measures

For the purposes of this paper, the most notable thing about the savings measures listed above is that 'Defence' is nowhere listed as a source of savings. The Government has stated:

.... Within total Defence outlays, resources have been redirected from administrative expenses, civilian salaries, property operations and information technology to combat and combat support capabilities. Defence has identified savings of $125 million per annum commencing in 1996-97, a level that is equivalent to a 6 per cent reduction in civilian salaries and administrative expenses. These resources have been reallocated within the Portfolio to implement the Government's policy commitments and priorities.(5)

Thus it can be seen that the advent of the new Government has had little adverse impact on the Defence vote. No two per cent efficiency dividend was paid by Defence back to Consolidated Revenue - were it paid, Defence would have had to find some $200 million on the basis of its 1995-96 budget of $10.01 billion. The 0.5 per cent reduction in real Defence funding announced in the first Coalition budget was programmed by the former Labor administration and although the Government has identified $125 million per annum in savings in the Defence Portfolio, this money is retained by Defence and will contribute nothing to reduction of the overall Budget deficit.

How governments have managed the Defence budget

The funding of defence is one of the largest financial responsibilities undertaken by the Commonwealth Government. In 1995-96 outlay on the Defence function (hereafter 'Defence') was $10 010.6 million, which constituted 7.9 per cent of all Commonwealth Outlay and ranked it the fifth largest area of spending after social security, health, general purpose payments to the States, and education. Within this total outlay 40.0 per cent ($4007.2 million) was allocated to salaries, 29.4 per cent ($2947.4 million) to capital investment - new equipment and facilities - , and 36.5 per cent ($3649.9 million) to operating costs,(6) which includes finance for consumables used in Service training as well as rent and other administrative costs.

In recent years the size of Defence budgets has been controlled by guidelines (known as the 'guidance') intended to restrict, or (frequently) to reduce, the rate of real growth of total Defence Outlay.(7) From 1989-90 and for three years thereafter, it was planned that Defence outlay would remain constant in real terms, but funding was reduced by 0.75 per cent in 1993-94, when it was also decided to implement a reduction of 0.5 per cent in real terms in each of the three financial years following.(8) In general, since 1987-88, the real level of Defence outlay has declined slightly, by 1.25 per cent.(9) However, the impact of such reductions has been ameliorated to some extent by the special arrangements which uniquely apply to the management of the Defence budget.

Many of these conditions originated in the Force Structure Review (FSR) of 1991. This exercise evaluated progress made towards, and the prospects of meeting the force structure objectives of the 1987 defence policy paper The Defence of Australia. By 'force structure objectives' is meant those military capabilities (equipment, weaponry, stores, training) which would be needed to allow the ADF to perform the tasks identified for it by Government.

The FSR concluded that it would be imprudent to assume that there would be any sustained increase in defence funding before the end of the century. Defence Outlay over the previous four financial years had been allowed no real increase despite the planning on which they were developed providing for a 3 per cent annual real increase.(10) Yet, the value of existing programs, most of them for new equipment, constituted the highest level of obligation to funding requirements in future years (known as 'future commitments') ever experienced by Defence.(11) Consequently, the development of the ADF was likely to stall as funding would be insufficient to start new equipment programs until the late 1990s.

The solution adopted in 1991 was to reduce Defence operating and personnel costs so as to allocate a higher proportion of total outlays to capital expenditures. This involved the introduction of a range of sometimes innovative procedures which were equally significant for their departure from standard Commonwealth budget processes. As a result,

savings made against the running costs of the Defence function are retained by the Department, not returned to consolidated revenue
funds made available by reductions in staffing are re-allocated to other areas of the portfolio, such as equipment, as are
savings from the efficiencies gained by contracting defence activities in some fields to private enterprise.

In general, the Defence budget for the following year is not reduced to reflect the lower outlays in these areas.

From the 1990-91 Budget, Defence has been able to retain the income from asset sales up to a total the equivalent of one per cent real growth in total Outlay, and of any total exceeding that amount, 50 per cent of the net proceeds. In the seven years to 1995-96, Defence added $75.2 million to its revenues, from the sale of properties, with $50 million expected to be received that year and a further $200 million until the end of 1998-99.(12)

Further, Defence outlays are supplemented during the course of a financial year for tasks undertaken unexpectedly, many of them non-military or peacekeeping operations. However, in at least two instances - the purchase of additional F-111 aircraft and the communications project at Geraldton - budget supplementation has been for traditionally military purposes. In the four years to 1994-95 Defence received $650 million in supplementary appropriations to the budget,(13) significantly offsetting the negative growth factored into Defence outlays by the guidance.(14)

The concession of allowing Defence to absorb its savings is made particularly valuable by the fact that it receives a global budget. That is, the Government decides a quantum for Defence Outlay for the coming financial year and allocates a total amount to the portfolio. The Minister then has the authority to approve allocations to programs and projects upon the advice of his officers and can redirect funding gained from efficiencies. Unlike other Departments of State, the Minister for Defence is not required to justify individual spending initiatives before the Expenditure Review Committee, which, in the case of other departments examines individual projects to identify activities to be curtailed.

Officially, the size of the quantum allocated to Defence in any one financial year is decided by the 'guidance', that is, a decision by Cabinet as to the nature and extent of variation in Defence Outlay from year to year. For instance, the current guidance, established in framing the 1993-94 Budget, but adopted by the new Government, is for 1996-97 Defence Outlay to decline by 0.5 per cent in real terms in comparison to 1995-96 and for outlays thereafter until 1999-2000 to be held at the same value (zero per cent real growth). The guidance figures have been ignored frequently in the past, and the outlay appropriated for Defence in any one financial year has varied from that projected by the guidance, sometimes even that given as recently as in the previous budget.

On the other hand, the Defence Budget is not subject to the efficiency dividend, the recurring reduction of departmental running costs by 1 per cent. In effect, Cabinet could apply a notional dividend by varying the scope of the guidance to reflect the extent of efficiency improvements they required of Defence. However, in 1995-96 a one-off 1 per cent efficiency dividend was included in the budget. The Government has decided that for three years from 1996-97 $125 million will be reallocated from general administrative outlays, to operational areas of the Defence function.

It appears this latter action will be but the first step in an attempt to further sharpen the focus of Defence financial management. On 5 September the Minister announced that he would be establishing a review of the effectiveness of Defence spending with the objective of maximising the amount of the budget allocated to operational capabilities. The review team is yet to be announced but will consist of prominent business people, public servants from outside Defence, and Defence Service and civilian representatives. This team will be given broad authority to recommend such changes in organisation or management as they think necessary to improve the cost efficiency of the Defence function. However, the process is not intended to reduce the size of the Defence Budget, as 'Identified savings will be directed to improving Defence capabilities and preparedness.'(15)

This again reflects the fact that, because Defence does receive its annual appropriations in a global allocation, it has more discretion than other departments to organise its affairs. As a former Minister for Defence Science and Personnel said, 'In defence we get a global allocation. .... As a portfolio we are able to determine how we spend it ... (and) in doing that ... have a degree of freedom other departments envy.'(16)

Why Defence should continue to receive special treatment

Basic Overview of the Case

The case for sustaining the Defence Budget within the current range of Outlay rests primarily on the significance and extent of the task performed by the ADF. These are both so important that they require sustained policy and financial support from government. Whilst the best way of managing this responsibility will be debated often, there is no cogent argument which suggests that either the efficiency or effectiveness of the nation's defence will be improved by cutting Defence finance.

The importance of the defence of the nation is not in doubt. It is one of the unequivocal responsibilities given the Commonwealth under the Australian Constitution. Although the task of protecting the nation only infrequently requires committing the ADF to action, such is the nature of international conflict that a nation's defence apparatus has to maintain a state of latent capacity if it is to perform its duties when required. Australia and its approaches occupies some 10 percent of the earth's surface; to simply maintain the latent capacity to provide a presence over such an area requires significant capabilities which will not be maintained cheaply.

Furthermore, if a defence force is able to demonstrate its latent capacity through exercises, exchanges with other military establishments, peacekeeping deployments and apparent logistic and technological support, so that it maintains a reputation for professional excellence, it may well play a role in stabilising the regional strategic situation, even in peacetime. An adequately developed national defence capacity gives the Government a greater number of options which might be adopted in matters of national security, foreign affairs and trade without compromising national interests.

Nor is there any issue concerning Australia's current strategic environment which indicates that Defence funding should be reduced. Australia's policy for developing the latent capacity of the ADF avoids linkages to the environment of possibly transitory political alignments. Instead, it focuses on the fundamental issue of assessing the force structure best suited to defending Australia in the circumstances of the continent's geography. It gauges the adequacy of competing options Australia might adopt from this process with the basic strategic prudence of measuring the capabilities of military forces in the region, so that any advantage these might possess can be offset should they be used against Australia.

The mere size of the Defence Budget does not of itself support a case that it should be cut. Even meeting such a basic requirement as current ADF force structure objectives produces a task which is technologically and managerially challenging, and is expensive. Reviews of progress made in developing the capabilities of the ADF have shown that, at each juncture, funding has been inadequate to meet objectives. These reviews have generated changes in Defence management to direct greater resources to those objectives. Despite claims that the Defence organisation is a poor manager of its responsibilities, it has been among the first over the last decade to corporatise and privatise functions, to outsource activities, to discard surplus assets, and to streamline support functions. During the last decade this action has produced considerable efficiencies which have sustained the development of defence capabilities, at no increased cost to the taxpayer, when the cost of other services has been increasing.

The Basis of Australian Defence Planning

Australian defence planning is not based on the existence, or otherwise, of a military threat to Australia. It has been over forty years since the intelligence community and the military staff nominated a specific threat to the security of the Australian continent and its people. In the early 1970s Defence Minister Barnard stated that no military threat could be identified which might arise within the next ten years. In 1976, the White Paper Australian Defence, having noted that Australia had been free from the threat of military attack since the Second World War, said

Strategic pressure or direct military threat against Australia, its territories, maritime resource zones, or lines of communication are at present not estimated as probable.(17)

While acknowledging that political changes meant some continuing uncertainties in the strategic situation, the White Paper did not suggest that these might alter the lack of an identifiable threat to Australian security.

The most recent expression of policy, outlined in Defending Australia - released in 1994 and known as DA 94 - differs little in its outlook:

...no country has either a motive or an intention to attack Australia, and we have no reason to expect that any country will develop such a motive or intention.(18)

DA94 develops the planning rationale further, by noting that the process of assessing regional security focuses on 'capabilities rather than threats'. Deciding how to best shape the ADF to contribute to national security in current circumstances is done on the basis of understanding Australia's geography and analysing the environment of regional military capabilities. The former is significant because it determines the nature of operations which would be conducted were defence of the nation required, indicating the importance of air and naval forces to engage an enemy in the distant maritime approaches to the continent. The latter is simply an act of prudence because it indicates the capability of the type of forces which might be turned against Australia with only short warning, should political circumstances change in some part of the region. Australian defence planning is 'therefore is not based on an expectation of threat to Australia from any country'.(19)

No Argument on Strategic Grounds

It follows that changes in global international relationships and defence establishments do not have significant impact upon Australian defence planning, unless they portend changes to international order which might upset aspects of Australia's broader security environment. Hence the end of the Cold War and the reduction of military expenditure by the US and amongst many nations of Europe do not provide trends that directly indicate the course which should be taken in Australian defence planning.

Therefore, the course of Australian defence planning is not to assess an appropriate peace dividend but to evaluate progress in the task of developing an ADF able to provide security in terms of the demands of the nation's geography and the military capabilities employed in the region. These two criteria are often joined, although the ADF may conceivably lack a capability needed for the task, regardless of the military capabilities of other nations. For instance, the Army might be assessed as not having sufficient personnel to guard all significant facilities in the north of Australia, at any level of operations. However, in most cases the evaluation of ADF force structure will be made in the context of growing regional military capabilities.

While the end of the Cold War has seen a decline in defence spending in most areas of the world, with an average fall of over one-third between 1987 and 1994, expenditure in East Asia rose by 14 per cent over the period. Between 1992 and 1994 spending rose by 9 per cent, and the International Institute of Strategic Studies predicted that it would have increased by 6 per cent during 1995. Eleven East Asian nations spend more than $1 billion on defence and of these only North Korea has not significantly increased its expenditure since 1987.(20) Economic growth rates for most countries in the region will allow them to sustain such rates of increase in defence spending if they wish so to do.

In this context, the rate of growth of Australia's defence spending has not kept pace with East Asia, but neither has it provided a peace dividend. There is little in the security environment around Australia's region which justifies such a reduction of Defence outlay. Current policy on financing the Defence budget at least provides some prospect of responding to the changing strategic environment created the by the increased wealth of Asian nations.

An Outcome of Insufficient Funding - The Defence Record of Micro-Economic Reform

This position might be reassuring if it were not for the public and official evidence that the effort to provide the ADF with the planned force structure is in danger of failing.(21) In 1991, the Force Structure Review (discussed above p.5) studied the progress made towards providing the force structure objectives outlined in the 1987 policy paper, The Defence of Australia. It noted that the rate of growth in Defence Outlay since the tabling of that document had been zero per cent, and not the three per cent on which the policy paper's conclusions had been postulated. Consequently, only 75 per cent of the force structure program The Defence of Australia had outlined could be delivered by 2001. Further, the FSR concluded that if Defence Outlay were instead cut by 1 per cent, only half of the 1987 program could be delivered.(22)

The outcome of the process which the FSR set in place was a radical reorganisation of the way in which the Defence organisation worked. The objective was to reduce personnel and recurrent costs and make good the short fall in equipment funding, and to move Service personnel from commercial-type activities to operational areas. Efforts were made to identify tasks that did not have to be undertaken by military personnel and to increasingly civilianise these and subject them to competition under the Commercial Support Program (CSP). Functions performed by civilian components of the Defence organisation were also examined. Where an activity was put to tender Defence staff were given the opportunity to develop a commercial bid. The major support functions of the ADF were rationalised through programs such as the Logistics Redevelopment Program and the Regional Support Review, single Service responsibility for select items was developed and the location of facilities rationalised, freeing several large properties for sale.

The implementation of the FSR has seen a number of functions taken over by the private sector. By the end of 1995-96, some 72 activities had been put to contract through the CSP, with 50 being won by commercial firms. Altogether, the CSP is now providing $117.4 million in savings per annum back to Defence outlays. As well as financial benefits, the CSP has contributed to changed approaches within the organisation, with the 22 activities tendered but won by Defence personnel contributing $36.8 million of the total savings.(23) By the end of 1994, CSP activities had freed some 2200 military and almost 1000 civilian positions from non-essential support activities.(24)

In 1994 it was estimated that the eventual outcome of the FSR process would reduce Service and civilian numbers across the Defence organisation by almost 12 000 and will produce a level of recurrent annual savings of $440 million by 1997-98.(25)

This record constitutes a major effort in micro-economic reform effort. Treasury has identified the ability of Defence to retain the savings from its reforms and reallocate them within a global allocation as a paradigm of efficient resource allocation.

As Defence retains the savings it generates from reforms for redirection to higher priority areas, as well as providing APP increases to its staff, it has significant incentive to implement the major (FSR) reforms mentioned above.(26)

The reform effort has now been reinforced by the Government's decision to divert $125 million from administrative functions to operational areas. However, despite these efforts it remains apparent that there is little flexibility in Defence outlays to support the development of ADF force structure, and that, far from having the capacity to offer savings, significant problems may be developing in this area.

The Persistence of Financial Pressures

DA94 claimed that funding at the then current levels of Defence outlays would be insufficient to maintain the planned development of the ADF, even with further efficiencies in other Defence activities.(27) The White Paper's proposals to maintain the development of the ADF as has been planned require a small degree of real growth in Defence Outlay in the period from 1997-98 to the end of the century. The forward estimates of the Defence Outlay presented with the 1996-97 Budget show zero real growth for this period.

Furthermore, readjustments within the structure of total Defence Outlays to boost expenditure on capital equipment funds are lagging. In the 1995-96 Budget it was foreshadowed that the internal re-direction of funds within the Defence Budget would result in real outlays on defence equipment growing between then and 1998-99 at a rate (deduced to be) slightly less than four per cent per annum.(28) In the event, actual outlay on capital equipment in 1995-96 fell $113 million (4.5 per cent) short of the Estimates and the Estimate for 1996-97, which benefits from a significant proportion of the favourable movement in exchange rates totalling $50 million, is $55 million dollars less than the Estimates of the previous year.

Little Scope for Funding Cuts

That there are difficulties with the FSR-based planning to divert funds to capital equipment to sustain the development of the ADF is confirmed by the 1995 comments of the then Chief of the Defence Force, Admiral Beaumont,

You'll recall that we set out in the Force Structure Review ... that we intended to divert funds into major capital equipment. However we've had to use a lot of those funds to pay our people salary increases, and therefore we haven't been able to put as much into capital equipment as we wanted.(29)

This observation appears as true for 1996-97 as it did last year. For 1996-97, the Government's policy initiatives produce a reduction of 519 in average funded civilian strength. Service average funded strength will also fall by 910.(30) Despite this, the proportion of current total Defence Outlay allocated to personnel, (41.3 per cent) is the highest since 1991-92, when Defence carried the appropriation for military superannuation. It is considerably higher than the 34.3 per cent allocated to the personnel component in 1992-93 when superannuation was removed from the Defence function. This is a significant reversal of a major policy thrust, which since Australian Defence in 1976 has emphasised the need to reduce the proportion of Defence outlays spent on personnel and increase those devoted to capital procurement. It certainly does not support any argument that there is much scope for cutting Defence outlays.

These circumstances lie behind the Minister's observation, when announcing the review of Defence financial management, that he would ask them to

free the resources we need to equip and train the ADF for warfare in the next century. Preserving the status quo is not an option. To do so in the long term would be to condemn the ADF to a slow decline in the face of the enormous strategic and technological changes sweeping through the region.(31)

Defence continues to face difficulties in funding its central undertaking, the maintenance of ADF capabilities. Unless the review can find ways to divert funds for capital equipment from other activities at a rate seldom achieved previously, including the restructuring involved in the FSR process, the warnings of DA94 concerning the need to increase the real value of the Defence Outlay will be vindicated

Beyond that, modest real increases in Defence expenditure will be necessary to sustain the defence investment program needed to address obsolescence and to meet the technological demands of an increasingly sophisticated regional security environment.(32)

Stockholdings and the Problem of Operational Capability

The focus on the difficulty of funding capital equipment is, of course, selective. It is done here because of the direct link between capital expenditures and the development of the ADF to meet the requirements determined by defence planning for safeguarding national security. There are many areas of Defence activity where adequate funding is equally important and some where it may be that repairing past neglect could prove costly.

One of these is the question of the stocks of war materiel held by the ADF. Obviously, armed forces use greater quantities of ammunition, weapons, missiles and other projectiles in armed conflict than in peacetime training. It is also apparent that the Services would most probably use them at a greater rate than these systems could be manufactured or delivered from overseas, at least in the initial stages of a conflict. For this reason it is usual for armed forces to develop stockholding policies specifying the extent and nature of such war materiel that should be held in case of an outbreak of hostilities.

The justifiably limited evidence available suggests that the ADF has been able to implement only a restricted stockholding policy and that this might result in significant limitations on the ADF's performance in modern combat. In his Review of Australia's Defence Capabilities, tabled in 1986, Paul Dibb recorded that no recommendations on stockholding policy had been made since 1963.(33) Whatever initiatives stemmed from this particular event could not have been entirely satisfactory, for the Australian Army task force which was deployed to South Vietnam shortly afterwards became viable only through dependence on the American logistics network.

Despite these lessons and, more importantly, the adoption by all governments since 1970 of defence policies embracing defence self reliance (which implied a need for the ADF to develop its own logistics support capacity), there has been little progress towards an agreed Defence stockholding policy. By 1990 only an unofficial position paper had been prepared within Defence. Two years later a Parliamentary committee observed, on Defence evidence, that stockholding issues had not yet been resolved and, in August 1993, the then Minister stated that a 1992 review of past practice had recommended staying with the status quo.(34)

There is evidence that this status quo has distinct limitations, most conspicuously so with guided weapons and other modern systems. A former Chief of Air Staff, Air Marshall David Evans, commented in 1986 that the stock of Precision Guided Munitions (PGM) held by the RAAF would not last for even a day of high level operations.(35)

Four years latter, when RAN vessels were sent to support the UN blockade of Iraq in the Persian Gulf prior to the Gulf War, an extensive list of systems and materiels ranging from satellite communications to radar absorbent material, had to be purchased to bring RAN surface combat vessels up to a suitable state for possible involvement in modern naval warfare.(36) So limited is the RAN's stock of missiles that its six FFG-7 class frigates fire an average of one Standard surface-to-air missile each during the year, despite the fact that the vessels' primary role is anti-air warfare. The Navy is apparently so constrained that it can fire only one Harpoon anti-shipping missile every two years.(37)

Whatever the assessment of the current probability of the ADF having to embark on warlike action, there is no doubt that Australian defence structures are not currently supplied with the materiel to sustain significant levels of hostilities for any length of time. Although details of stocks of such weapons are classified, the frequency of complaints made about their levels by retiring senior officers indicates that the issue continues to be one of persisting frustration. That it is currently alive is confirmed by the comments of the retiring head of the Army, Lt Gen John Grey, made less than a year ago, warning of dangers from a 'run down' of defence stocks.(38)

Conclusion

The situation facing the ADF with stocks of war materiels possibly inadequate to respond to a sudden requirement, such as that of the Gulf War, could also be discussed with regard to other important areas such as training. The point of discussing the stockholding issue here is to indicate the reality that expenditure on the nation's security could be virtually endless. Debate on Defence outlays can be extended by simply discussing the requirements for providing the ideal circumstances in any area of Defence activity.

In reality, spending on defence in Australia is not in a state of rampant excess but is severely controlled by Government policies, of which the diversion of $125 million from administrative to operational activities is simply the latest, to be followed no doubt by the recommendations of the review of Defence finances. There seems to be no case for reducing Defence Outlay in the current circumstances where policy makers are attempting to adjust financial management to prevent significant damage occurring to the objective which is central to defence spending - the capacity of the ADF to support the nation's security.

Why Defence should not receive special treatment

There are two broad lines of argument, and a principle, which support the proposition that the Defence budget should no longer receive special treatment and should not be exempted from cuts when governments decide to rein in outlays.

The principle is that of equity. When a highly desirable scheme, one agreed by Ministers in the present Government to be worthwhile, has to be cut in order to meet deficit reduction targets, it is difficult to argue on equity grounds that Defence should be exempt. For example, the Government has abolished the Commonwealth Dental Scheme, which provided dental services to low-income earners, ahead of its scheduled date, thereby saving approximately $112 million per annum.(39) Again, persons with a concessional health card - generally low-income people - will now be expected to pay an increased charge ($3.20 per script) under the Pharmaceutical Benefits Scheme, saving about $82 million per annum. Yet at the same time Defence has generated savings of $125 million per annum which it is being allowed to keep within the portfolio. It is noteworthy that Defence's own $125 million internal savings effort, however praiseworthy, fell about $75 million short of what it would have had to find were it required to meet a two per cent efficiency dividend.

The two lines of argument derive from strategic considerations and from issues of efficiency and sound management.

Australia's favourable strategic environment

Despite the end of the Cold War, one fundamental aspect of Australia's strategic environment still remains in place. Whatever their deficiencies, for decades all official assessments of Australia's strategic situation have concluded that the country faces no readily identifiable threat of major direct attack. This conclusion is common to evaluations as early as a classified (later released) strategic assessment paper prepared in 1956, and to all subsequent papers. It was true during the Cold War and, as the 1994 Defence White Paper recognised, remains so today and for the foreseeable future.(40)

There are two broad groups of factors governing evaluations of Australia's strategic security. One concentrates on those things which can be taken as 'given', principally the geography of Australia and its region. The other deals with the impact on our security of relations between relevant states and other actors.

Enduring Geographic Factors

Australia is arguably one of the most geographically secure countries in the world. It has no land borders with any other state, and so cannot be invaded or even attacked by hostile ground forces alone. It has a large air-sea gap separating it from all its neighbours (except Papua New Guinea, where the gap is very small). This confers on Australia, on a continental scale, the strategic advantage long enjoyed by Britain vis-a-vis mainland Europe - that of being an island. Thus, any power which wishes to threaten core Australian security interests is obliged to deploy significant maritime power - air and sea - if it is to be able to deliver forces to Australia. These are enduring favourable geographic factors which act to support Australia's strategic security. They impose on all potential aggressors requirements - for air and sea as well as land power - which many states would find very difficult to meet.

Moreover the difficult, often hostile, nature of the areas of Australian territory most exposed to attack - the northern third of the continent - add to the difficulties which would confront any aggressor. Without detailed local knowledge, one cannot 'live off the country', as is sometimes done in military operations, and the extremes of wet and dry seasons mean that for many months of the year some areas are either submerged or at least impassable to most vehicles, while for the remainder they are desiccated by the tropical north Australian sun. The ADF of course has actively prepared itself for operations in this environment and has the 'home ground advantage', while any aggressor would be forced to adapt its forces to a most difficult and challenging operational environment.

Improved post-Cold War situation

In the Cold War period, Australia's region was disturbed by communist insurgencies in some states, and Australia was moreover a likely nuclear target of the Soviet Union by virtue of important American facilities on Australian territory. With the exception of the Philippines and the disintegrating Khmer Rouge remnants in Cambodia, communist guerrilla warfare activity has since vanished from the region. Governments need no longer fear armed communist subversion or insurrection as part of a putative broad plan or scheme to expand the influence and territories of the communist bloc. Where insurgencies do exist, they are largely home- (or, at least, regionally-) grown and not orchestrated by superpowers or major powers with extra-regional agendas.

While there are a number of security-related problems in Australia's region, none threaten fundamental Australian interests. The insurgency on Bougainville, the disputation over the South China Sea islands, and even the China-Taiwan issue are all of regional significance, but do not imply that the region is about to come apart, or to be involved in major conflict.

There are of course uncertainties in Australia's strategic circumstances. The future can never be predicted with accuracy, and things can occur with little or no warning. It is important to consider, however, the severity of a potential security problem, its likely warning time and also its probability.

In general it can be stated the more severe a potential military problem is likely to be, then the less likely it is to arise. The most serious threat imaginable to Australian interests is probably an attempt to invade and conquer the country. This, however, is extremely improbable because no state (possibly aside from the United States) has the military capabilities needed to carry out such an operation. Nor does any state (including the US) have any apparent reason to want to undertake such operations against Australia. Again, should some state decide that it did wish to conquer Australia, it would need to make certain long-term, high-cost and highly visible preparations which would provide a prudent government with ample warning time in which to prepare a reaction. At the other end of the scale, a state might decide to undertake small-scale, low-level harassment activity against Australia. This is less improbable than the invasion contingency (though still quite unlikely) and would not require elaborate preparations to execute. Thus, warning time could be very short if a political decision was made in a foreign capital to carry out this type of activity. However, the level of activity would pose no substantial threat, though of course it would need to be addressed in short order.

Indeed, perhaps the worst construction one can put on the post-Cold War Australian strategic environment is that it includes some uncertainties. But in considering possible future developments there are always uncertainties, which is just another way of saying that one cannot predict future developments with complete confidence. Were the mere existence of uncertainty used to justify special treatment of the Defence vote then one would have an open-ended case which would apply regardless of strategic circumstances, and one could then dispense with time-consuming analysis and simply pump funds into Defence without even considering strategic issues. This, clearly, is not a responsible course of action.

A compelling case could be made for special treatment of Defence if Australia's strategic circumstances took a drastic turn for the worse, so that government and people felt that Australia's defence capacity needed a rapid boost. But in the absence of such a turn, it can be cogently argued that there is little strategic reason to support the continued quarantining of Defence from normal levels of scrutiny. This is not to suggest that Defence should be handled more severely than other areas: all that is suggested is that it play on a level field with other contenders for the taxpayer dollar.

One can make a useful analogy with the non-Defence sector of government outlays. Governments provide funding for schools on the basis of a need to provide education to a certain number of school-age children. Schools are built in areas where the population is young; if demographic changes later reduce the number of young people in a given area some schools will be closed. If the reverse occurs, schools will be opened. In short, resources are allocated in accordance with the need. Where children are few, so should schools be few.

For Defence the parallel to numbers of school-age children is the national strategic environment. If the environment shows signs of deterioration, then a case can be made for putting additional resources into Defence. If, as is the case since the end of the Cold War, the environment has actually improved, there is a strong case for spending less. Yet no-one has been able to show anything more alarming about our post-Cold War strategic circumstances than that uncertainties exist and, as noted, there are always uncertainties. This does not justify the maintenance of high levels of defence spending or the provision of special treatment.

For some time governments of both persuasions have argued that Defence programming is not conducted on the basis of planning against possible threats. This is both true and valid, but can easily be misrepresented as disconnecting Defence planning from the national strategic environment.

The distinction is important. It is unsound to plan against a particular threat - eg, that country X will try to extort concessions from Australia by military harassment activity - because if the threat fails to materialise, the ADF could be, as it were, 'all dressed up with nowhere to go'. But it is equally unsound to attempt defence planning and, more important, the funding prioritisation of Defence versus other Commonwealth activities, with eyes firmly closed to the reality of Australia's sound strategic situation. In fact, to argue in this way is little more than a rationalisation designed in advance to support an otherwise indefensible status quo.

Efficiency and sound management

It well known that organisations facing budget reductions (whether less revenue or reduced funding) are obliged to find efficiencies, or reduce the number of tasks done, in order to meet the shortfall. To paraphrase a well-known saying, it concentrates the mind wonderfully to know that one will have x per cent fewer dollars next year to do the same work one did this year. Managers of organisations (be they public or private sector) confronted with this prospect naturally and normally scour their operations for redundant or non-performing personnel, superfluous functions, waste and so on. In short (though it is true that excessive reductions can destroy an organisation's ability to adjust and do serious harm), reasonable funding constraints tend to force organisations to become more cost-efficient.

Contrariwise, organisations which do not have to worry so much about funding constraints have no such incentives to seek efficiencies and eliminate waste. And because Defence has enjoyed something approaching this status for many years, it should not be surprising to learn that it has a long record of ineffective management, cost blowouts and delays on major projects. These have been of such degree that it has for over twenty years frequently been criticised by the Australian National Audit Office (ANAO) and by a number of Parliamentary committees with briefs in the defence area.

The Appendix to this paper provides short 'case histories' of Defence Department project management which have attracted adverse findings from either the Audit Office, the Parliamentary Committee system or in some cases both. The Appendix outlines the persistent recurrence over many years of several themes or criticisms in many of the cases discussed, including:

poor project definition;
inadequate specifications;
badly drafted contracts;
poorly enforced contracts;
unwillingness by sponsoring Services to put pressure on contractors;
poor record keeping and acquittals;
absence of adequate warranty and penalty provisions;
poor assessment and management of risk.

(This is only an incomplete and summary list. For more detail, see the Appendix).

The persistence of errors and failings like these suggests strongly that the Defence Department has failed to learn as much as it should from previous mistakes. A principal source of this malaise would seem to be the confidence with which Defence can rely on maintaining its vote, or suffering only minimal cuts, or receiving supplementary funds to retrieve disasters. The privileged budgetary position of the Department of Defence appears to have fostered a culture of inefficiency which has been expensive in failures, cost blowouts and time overruns. The Appendix records, for example, the failed Inshore Minehunter project on which at least $100 million was spent to little effect, and the recent time and cost overruns on the JINDALEE Operational Radar Network (JORN), for which the taxpayer will inevitably have to pay.(41)

Moreover, the Government has recently announced a review 'to undertake a massive re-evaluation of how Defence spends its $10 billion budget.' That such a review is judged necessary, even though the Minister (Mr McLachlan) was explicit in his opposition to any reduction of the Defence budget, suggests that perhaps Defence has not always made the best use of the resources it receives. Indeed, the Minister stated that, while in his first six months in the portfolio he was 'enormously impressed in some respects' with Defence decision making processes, 'I have been less impressed with other examples...' The Minister also observed that if Defence did not undertake a thorough review now, 'there is a danger that a process could be imposed on us in a few years time by agencies driven by the desire to make savings...'(42)

But, if Defence were subjected to all - or at least most - of the controls to which other departments and authorities are subject, it would have an incentive to be considerably more solicitous of its budget. It would exert additional pressure on managers (civilian and uniformed) to perform efficiently. It would require tightly written contracts containing effective penalty clauses, and where necessary it would seek more effective enforcement of such contracts.

It is noteworthy that the new Government's National Commission of Audit, which reported in June 1996, saw little justification for exempting Defence from many of its proposals. For example, it specifically recommended that Defence pay an efficiency dividend on its running costs. It also proposed that:

(including the Department of Defence...(43)

The outcome of all such measures should be that Defence would be confronted with the same disciplines under which most departments have had to work for many years. More efficient and effective management of public funds should be the result.

Furthermore, the application of such disciplines will have a salutary effect not just on the administrative and managerial efficiency of the Defence Department, but also on the structure of the Australian Defence Force. By forcing the Department and ADF to more rigorously prioritise their choices - particularly in so-called 'big ticket' major capital equipment projects - the imposition of appropriate financial controls would deliver a force structure more closely aligned to genuine strategic and operational needs. There should then be less concern over issues of inter-Service rivalry, a reduced tendency to 'gold plate' specifications and less of a reflexive tendency to replace a piece of equipment with a modernised version of the same type instead of considering whether that equipment type is still really required. This would benefit not only the taxpayer but also the management of major Australian defence projects, and so the military security of the nation.

Endnotes

For the purposes of this paper, the case pro revising the treatment of the Defence budget is by Gary Brown, that con by Derek Woolner. It should not be assumed, however, that either case represents in detail the personal views of the authors.
Liberal and National Parties, Australia's Defence, February 1996.
Australia, Budget Statements 1996-97 (Budget Paper No.1), p.1-18, Table 4.
This table is extracted from Budget Paper No.1,1996-97, p.1-18, Table 4.
Minister for Defence, 1996-97 Defence Budget: Fact Sheet, p.1.
'Defence Portfolio', Portfolio Budget Statements 1996-97, Appendix 3 'Defence Function 1996-97 Programs by Major Categories', p.260.
Rates of real change in the Defence budget are calculated using a unique 'Defence deflator' which makes allowance for the nature of Defence outlays, which have comparatively large components of capital expenditure (up to 30 per cent) and overseas expenditure (about 13 per cent). For this reason estimates of rates of growth which may be given in Defence statements, and those appearing in 'Budget Paper No.1' vary significantly.
Australia, Budget Statements 1995-96, (Budget Paper No.1), p.3-66.
Senator the Hon. Robert Ray, Minister for Defence, 'The 1994 Defence White Paper', in Jennelle Bonnor and Gary Brown (eds.), Security for the Twenty-First Century?, Australian Defence Studies Centre, Canberra, 1995, p.18.
Department of Defence, Force Structure Review, May 1991, p.3.
ibid.
'Budget Paper No.1', 1995-96, p.3-66.
Senator, the Hon. Robert Ray, loc. cit.
Australia, Budget Statements 1994-95, (Budget Paper No.1), p.3-32.
The Hon. Ian McLachlan, Minister for Defence, Address to the 81st National Congress of the Returned and Services League, 5 September 1996, p.8.
The Hon Gordon Bilney, MP, Speech, Defence News Release, 1 March 1991, p.2.
Australian Defence, AGPS, Canberra, 1976, p.10.
Defending Australia, Defence White Paper 1994, AGPS, Canberra, 1994, p.22.
ibid.
Bernard Gray, 'Pacific Rim bucks trend of defence spending cuts' , Financial Times, 11 October 1995, and, Peter Wilson, 'Australia climbs the defence dollars table', Australian, 5 July 1996
There is insufficient space in a paper of this nature to detail the proposed development of ADF force structure or the methods used for deriving the proposals. Details of the former are available in Defending Australia (1994) and the basis of the latter is outlined in Paul Dibb's Review of Australia's defence capabilities (1986).
Force Structure Review, p.3.
'Defence Portfolio', Portfolio Budget Statements 1996-97, Appendix 6, 'Status of the Commercial Support Program', pp. 272-277.
Defending Australia, p.119.
ibid., p.149.
'Budget Paper No.1', 1994-95, p.3-33.
ibid, p.145
'Budget Paper No.1', 1995-96, p.3-65.
'Five-year rolling Budget "will help planning"', Australian Defence Reporter, August 1995, p.14.
'Defence Portfolio', Portfolio Budget Statements 1996-97, p.31.
The Hon. Ian McLachlan, op. cit., p.8.
Defending Australia, pp.145-146.
Paul Dibb, Review of Australia's defence capabilities, AGPS, Canberra, p.96.
Gary Brown, Australia's Security, Issues for the New Century, Australian Defence Studies Centre, Canberra, 1994, pp.68-69.
S D Evans, Air Marshal, RAAF (Ret), 'Air Power in the Defence of Australia: The Strategic Context', in Des Ball (ed.), Air Power Global Developments and Australian Perspectives, Pergamon Press, Sydney, 1988, p.122.
Brown, op. cit., pp.71-72.
Daniel Lewis, 'Fire one! And that's it for another year', Sydney Morning Herald, 1 June, 1995.
'Defence budget has "run down"', Canberra Times, 27 November 1995.
Speaking on the ABC TV 7:30 Report (29 August 1996), the Minister for Health, Dr Wooldridge, said 'In the whole scheme of things, if we hadn't been left with the Budget deficit by Labor, it [the dental scheme] would have kept going. It was a measure that we had to do so we could live within our means.'
Defending Australia, paras 4.5-4.6. Gary Brown, Breaking the American Alliance: An Independent Security Policy for Australia, SDSC (ANU) 1989, pp.24-5.
This is so because the prime contractor, which is liable for over-budget costs, is Telstra which was at the time of contract signature 100 per cent publicly owned.
The Hon. Ian McLachlan, op. cit., pp.7-8.
Australia, National Commission of Audit, Report to the Commonwealth Government, June 1996, recommendations 5.10 and 5.11 (emphasis added).

Appendix

Examples Of Poor Defence Project Performance, 1974-1996

1. Early-mid 1970s: Unaccounted Mirage spare parts worth $34m

At this time the RAAF was operating the French Mirage IIIO fighter aircraft. Concerns surfaced about the fate of a large quantity of Mirage spare parts which could not be accounted for. These concerns were investigated at length by the Joint Committee on Public Accounts and by the Audit Office in a series of reports.(1)

It became apparent, as the Audit Office concluded in 1977, that a massive failure of accounting had taken place. Mirage spares worth (at the time) over $34 million could not be accounted for. It has never been made clear whether these stores were received and paid for but simply badly documented, or never received at all but paid for, or simply lost. The then Department of Productivity believed that all stores paid for were received, but was unable to demonstrate this to the satisfaction of either the PAC or the Audit Office.

2. 1979: Failure of the Turana Target Project

Turana was to be a pilotless jet aircraft for use by the Navy in training with gunnery and missile systems. It was begun as a prototype in the late sixties, and received initial approval in 1971, with an authorised cost of $1.183 million. An order for twelve vehicles was placed by Navy with the then Government Aircraft Factories (GAF). The project design and production was carried out by GAF acting as a contractor for Navy.

By 1978-79, failures and consequent redesign work resulted in a blowout to $3.4 million. The Government eventually cancelled the project in September 1979.(2) The Audit Office criticised the Navy in its report on several grounds:

Navy ordered a production version of Turana despite the fact that trials to that time had revealed significant faults;
Navy did not adequately specify its requirements to GAF;
there was unsatisfactory communication from Navy to GAF: Audit found that the consultative process was insufficiently effective to resolve defects in the redesigned system.(3)

Although this particular failure did not involve very large sums, the deficiencies it revealed - willingness to press ahead regardless of past failures, poor communication and consultation - are common to other instances noted below.

3. 1983: The Audit Office on Defence Project Management

In the period April 1980 to September 1983 the Audit Office had conducted reviews of more than ten Defence projects, in each case finding significant deficiencies. This consistent pattern of problems led Audit to undertake a general review of Defence project management based on its previous work on these projects(4). It found that:

significant additional costs to the Commonwealth (incurred and prospective)

the need for scarce resources to be engaged in rectifying project problems, and

diminution of the Defence capability through untimely delivery of equipment and facilities and through equipment and facilities not meeting technical performance objectives.'

Audit concluded that 'urgent action is needed so that all issues within the control of the Department are fully recognised and appropriate measures taken to contain lead times, ensure adherence to specified service requirements and minimise cost escalation.'(5)

4. 1984: The HMAS Tobruk Project

HMAS Tobruk was an Australian-built amphibious transport and landing ship based on a British design (the Sir Bedivere type). Its principal roles were to embark, transport and land (across beaches if necessary) Army elements, including vehicles. The Tobruk project was criticised by the Auditor-General in a March 1982 Report. It had been found by this time that the ship was significantly overweight, a problem which significantly reduced its operational value to the Defence Force. Audit found that this problem arose for a number of reasons:

Departmental documentation lacked detail necessary to clear assign responsibility for weight monitoring in Navy Office;
The contractor and Navy Office used different weighing systems, leading to different results;
the contract had no penalty clauses on the contractor if specified weight was exceeded;
Government Furnished Equipment (GFE) was supplied late to the contractor;
Navy Office and contractor delays, design changes and modifications led to delays;
the Department did not meet contractual requirements with respect to determination of 'excusable delay' as per the contract.(6)

These Audit comments notwithstanding, it was not until Tobruk went to sea that its deficiencies really came to public notice. The ship was delivered to Navy 293 days late (as against the original contract) and 22 days late even against an amended contract. It also came in 42 per cent over budget (project cost of $59.2 million).(7)

There were particular problems with the sewerage system, but no defects were officially reported before Tobruk was commissioned into the Navy in April 1981. The same day a major sewerage spill occurred on board, and other defects were noticed later. On December 14 that year a young Naval Reserve Cadet, Kenneth Dax, was fatally gassed at sea by a malfunctioning sewerage unit aboard Tobruk. This prompted a fullscale inquiry by the Parliamentary Public Accounts Committee (PAC). Space does not permit even a full summary of the PAC report, but the principal findings were:
the Defence Department's formal organisation and lines of responsibility reduced the effectiveness of the project team's interactions elsewhere in the Department (including the ADF);
the Department failed to secure (from the contractor) system handbooks and drawings for Tobruk;
the Department either allocated insufficient resources to a study of Tobruk's 'key build approval drawings' or, alternatively, never had the resources to allocate - especially trained engineers and draughtsmen;
the Department neglected its contract supervision duty to ensure that the contractor supplied it with warranty/guarantee information in a timely manner;
the Department failed to simplify and standardise warranty/guarantee information through use of contract clauses and specifications.

In addition the Committee found adversely against the Navy in respect of some events leading up to the gassing and death of Naval Reserve Cadet Dax.(8)

5. 1986: Defence Project Management Generally

By 1985 the list of significant problems in defence projects was sufficiently long to persuade the Public Accounts Committee that it should examine, not another individual project, but Defence Department project management in general.

Tobruk

Like the Audit Office before it (1983 - see item (3) above), the PAC was seeking systemic answers to what was clearly a pattern of poor Defence management over many years. It focused its attention on issues of 'efficiency, effectiveness and accountability.'

Effectiveness was defined by the Committee as managing resources so that actual outcomes agree with planned outcomes at minimum cost. Efficiency is defined either as managing resources to achieve a given output at minium cost (ie, economy) or as maximum output for a given input (productivity).(10) The PAC found that most problems arose from ineffective Defence project management - including:

poor assessment of financial/technical risk;
cost and time underestimates;
inadequate project planning;
insufficient attention to management information and control arrangements;
inadequate technical specifications in contracts;
lack of comprehensive tender evaluations;
contracts which do not equitably share risk or which do not protect the Commonwealth interest;
contract changes inadequately scrutinised before agreement;
inadequate monitoring of contractor performance;
slow response to difficulties;
unsatisfactory project records and reports;
absence of project evaluation and review machinery; and
that inefficiencies existed in project approval procedures, contractual arrangements project administration and resource management.(11)

6. 1976 to 1992: The Inshore Minehunter (MHI)

In 1976 it was decided that Australia required Inshore Minehunters to locate and disable sea mines which might laid close to or inside ports. For various technical reasons, this requires vessels with three key characteristics. First, their hulls and equipment must be as far as possible absolutely non-magnetic (to avoid triggering mines which react to metallic magnetic signatures). Second, a sonar capable of reliably detecting submerged mines in shallow and disturbed water is required. Third, the hull must be sufficiently stable to allow the craft to operate in inclement weather up to a defined level.

A prototype construction and evaluation contract ($112 million) was let in 1990, after a 1988 Project Definition Study. Unfortunately, two of the three necessary characteristics were never achieved by this prototype. While the catamaran-type non-magnetic hull (glass-reinforced-plastic or GRP) was indeed non-magnetic, it transpired that its stability in inclement conditions was less than desired. Worse still, the Krupp Atlas minehunting sonar failed to perform.

In the event, as the former Government's Force Structure Review of May 1991 admitted, 'The inshore minehunter project has not met performance expectations, and there are also severe limitations to its deployability around the Australian coast.'(12) This was an admission of the failure of the hull to meet seakeeping requirements and of the sonar to function.

It is hard to state exactly the amount expended on this project. However, the Defence Department's Program Performance Statements for 1992-93 show that to 30 June 1992 not less than $102.655 million had been spent. In addition, a further $13.321 million was authorised for the 1992-93 financial year.(13) Changes in presentation of budgetary information make it impossible to state with authority whether this sum was actually spent. If it was, then the total outlay on the MHI failure amounted to $115.886m. In any case one can say with certainty that over $100 million was spent.

In the event, the two MHI vessels that were constructed had to be confined to Sydney Harbour and used for mine warfare training.(14) In terms of the Public Accounts Committee concepts of effectiveness and efficiency (noted in item (5) above), this project was neither effective nor efficient.

7. Assessing Additional Costs ('premiums') for Local Military Construction

The question of whether it is cheaper to acquire major items of defence equipment (eg, warships, aircraft) from external sources or to construct them in Australia is one of the most hotly debated questions in the whole defence field.

This is not the place to pursue that debate. But it is reasonable to assume that the Defence Department, which advises Government on these matters, would understand the cost implications of the various choices. In this way it could, eg, advise Government that tax clawbacks, job creation, external trading deficit issues and so on would justify some level of extra cost (a 'premium') for local construction - or, indeed, advise the other way if the numbers suggested it in a particular case.

However, it seems that Defence only rarely makes any estimate of the extent of the local construction 'premium' before Government proceeds to a decision. Moreover, the Industry Commission records that for one very large project - the F/A-18 fighter acquisition - the Department's estimate was significantly in error. The error was so large that the difference between the estimated premium and that actually paid would have bought fourteen extra fighter aircraft.(15)

But, in general, the Industry Commission said:

...based on the evidence available to it, the Commission concludes that only in very few major capital equipment projects have the nature and extent of premiums been adequately and rigorously assessed.(16)

Clearly, the Defence Department has been less than energetic in seeing that Governments are properly advised and informed about the cost implications involved in decisions to buy major equipments overseas or construct them locally. The Industry Commission records that no premium estimates were made for either the Collins submarine or the ANZAC frigate projects, which between them involve over $9 billion of public money.

8. 1992: The Collins Submarine Project

This project is still in progress, but is now admitted to be about 18 months behind schedule, mainly due to significant software problems. An important Audit Office report released in late 1992 raised a number of concerns, several of which will be familiar to readers who have perused the items recounted in this Appendix.(17)

Audit found that:

Substantial profits were made by the contractor (the Australian Submarine Corporation - ASC) well before the first boat was launched (August 1993), and the Federal Government appears to have funded seventy five per cent of ASC's assets as distinct from only two per cent funded by the ASC shareholders (the balance being eighteen per cent 'third parties' and four per cent from the South Australian Government).
The shareholders have nevertheless achieved substantial profits which, no matter what may occur in future, are apparently irrecoverable by the Commonwealth by virtue of a specific clause in the contract.(18)
Over sixty per cent of the total contract price had already been paid to ASC by late 1992 before the first boat was even in the water, and the corporation apparently achieved significant returns for itself by the simple expedient of investing funds not immediately required.(19)
A serious and significant Audit observation concerned the performance of the RAN submarine Project Office:

At times it has appeared to the ANAO that the Project Office has a perspective that its role is to act as an agent of the Contractor in its dealings with the Commonwealth rather than as an arm of the Commonwealth monitoring and controlling the Contractor

Given the importance of the functions of a Defence Project Office for a construction effort on the scale of the Collins class, this is one of the most significant and critical comments ever to come from the independent observer, the Australian National Audit Office.

9. 1994-95: The US Landing Ships Acquisition

This episode has occurred so recently that there is relatively little on the 'official' record as yet. Therefore what follows relies principally on media reports.

In brief, the former Labor Government decided to acquire two ex-US Navy landing ships at a claimed 'bargain basement' price ($61 million).

This was an example of the post-Cold War defence equipment 'fire sale' phenomenon, where equipment surplus to the superpowers (and, indeed, others) came on the market at much reduced prices. The other instance for Australia was its acquisition of ex-US Air Force F-111G bombers.

However, it has subsequently been found that both ex-US vessels are severely affected by rust. This rust, it seems, was in places inaccessible before the main boilers were removed in Australia. Thus the Navy team that examined the ships did not see it. Some suggestion of deliberate deception by the US Navy has been made, but not yet proven.(21)

The upshot is that the original $61 million acquisition has blown out to about twice that amount.

The Minister for Defence (Mr McLachlan) has called for a full report into the matter.

At present it is not possible to state with certainty:

whether the US deliberately concealed the rust from Australian Navy inspection teams;
whether Australian Navy inspection teams were negligent; or
whether the rust was genuinely unknown to both parties.

All that can be said is that there has been a massive cost overrun, with some Government backbenchers reportedly calling for Australia to cut its losses and scrap both ships.(22)

10. The JORN (JINDALEE radar) project

JORN (JINDALEE Operational Radar Network) is a long-range radar project designed to give broad area surveillance of the northern approaches to Australia. The prime contractor is Telstra, working for the Defence Department through a Defence JORN Project Office. The contract is of the fixed price type. It is clear from a scrutiny of the recent report on JORN that many of the themes identified in earlier reports and studies of major defence projects have yet again surfaced in this project. Below are set out the principal themes identified by the National Audit Office.

Risk assessment and management

Though the contract required 'formal and systematic risk management by Telstra of all aspects of the JORN project, the JPO [Defence Department JORN Project Office] did not seek to enforce that requirement. It would have been to Defence's benefit if the JPO had have [sic] been more insistent on full compliance with the contract's risk management provisions.'(23)
The present stage of the project began in 1991, but it was not until December 1994 that the JPO prepared its first Project Risk Management Plan. Audit 'finds this delay surprising, given the high-risk nature of the project.'(24)
the JPO response was that 'it was important not to confuse awareness and intelligent management of risk with slavish management to process', but Audit remains 'unconvinced by the JPO's comments on risk management and considers that the JPO gave the JORN contract's risk management provisions a low priority.' Claims that JPO seriously tried to apply a risk management strategy 'are not supported by the evidence.'(25)

Measuring project progress

Audit has found that:

In comparison with the original 1991 schedule (six years, 72 'milestones' to pass):
the contractors are 44 months behind original schedule in completing software specifications;
they are 37 months behind original schedule in achieving all hardware development specifications;
the project seems to be at about milestone 17 regarding software and milestone 24 regarding hardware. These milestones should have been passed by June 1993.
Had these milestones been met on time, at that (June 93) time payments of $393 million would have been made; in the event, by April 1996 payments amounted to $657m - ie, an extra $264 million has been paid out, and an extra 33 months passed, to get the project to these milestones.(26)
Although 80 per cent of JORN prime contract target price (73 per cent of ceiling price) has been spent, and 80 per cent of project schedule has elapsed, less than 20 per cent of the configuration items have passed the critical design review stage.
Delivery of JORN, which the contract requires for June 1997, is likely to be three years overdue (June 2000).
On current trends JORN's fullscale development budget will be spent by June 1997 but there will still be at least two years of work to be done at that time, including some high-risk, high cost, work.
'it is therefore apparent,' writes Audit, 'that the JORN project will surpass the target price and reach the ceiling price. The contract provides that, after that latter point, additional costs will be borne by Telstra.'(27) This of course means by the taxpayer: nor will the knowledge that Telstra is carrying a large potential loss with JORN make it any easier to sell on the share market.

Project organisational problems and risk control

The JORN project is being developed by three separate organisations (in Victoria, South Australia and NSW) and two UK corporations. Audit found that this (partly unavoidable) organisational complexity inhibited the speedy resolution of technical issues and forced use of formal inter-company liaison procedures, which 'often involve cost share changes and commercial risk decisions. This can inevitably delay the resolution of technical issues and add cost to the project'.(28)

Audit found that:

there have been instances where organisational arrangements could have been greatly improved from the project's outset;
Telstra reported to the JPO as long ago as 13 March 1992 and 1 June 1992 that there were risks associated with complex work handovers from one entity to another, but it was not until 1995 that anything was done;
the Commonwealth (ie, the taxpayer) has to bear an escalation for project management costs alone of $56 million (total $130 million, as against $74 million target price).(29)

Engineering management and payments

The contract required an overall JORN system requirements analysis to be presented to Defence during a 'System Requirements Review' (SRR) scheduled for January 1992; an overall system functional design was to be presented to Defence during a 'System Design Review' (SDR) scheduled for October 1992;
Defence paid Telstra $21.9 million as a progress payment for the SRR in January 1992 and a further $10.7 million for the SDR in May 1993;
But, Defence indicated to the contractor at these times that it was dissatisfied with the SRR and SDR;

Audit therefore notes that:

It is difficult to argue, in value-for-money and contractual risk terms, that the full value of the progress payments should have been advanced to Telstra when such important reviews were incomplete.(30)
From April to August 1995 the JORN contractors conducted a JORN Technical Audit. This suggested that:
- Defence is inexperienced in the management of major contracts;
- Defence should not have approved the SRR or paid for documents which 'do not have the necessary design work to back them';
- 'the requirements data base are riddled with TBD [to be decided], TBR [to be reviewed] and TBA [to be advised]'.(31)

The suggestion that Defence is 'inexperienced' in the management of major contracts is of course incorrect: as these notes show, Defence has had much experience. It is just that for all this experience Defence still seems unable to manage some key major projects properly.

On the JORN Project Office (JPO), the Audit Office commented:

...the JPO is responsible for the expenditure of public funds which will probably amount to $1.1 billion. It should have at least seriously considered exercising its contractual right to withhold full payment for the SSR and SDR until it was satisfied... However, significant project management and systems engineering management problems have persisted.(32)

The pressure to spend money

Audit came across examples of a well-known bureaucratic phenomenon - the need to spend the allocated budget by the end of the financial year. Audit refers to concerned expressed to it by JPO staff 'about pressure applied to ensure actual JORN expenditure matched the actual expenditure estimates set into the Defence budget. JPO staff indicated that this sometimes conflicted with their desire to ensure expenditure was approved only when the value in the progress payment was actually earned.' Audit said that it itself saw this phenomenon at work at a meeting when the JPO 'expressed disappointment that Telstra was unable to achieve its forecast expenditure.'(33)
As Audit notes, 'this attitude to maintaining the Defence budget is not in the Commonwealth's interests either from a contractual or budgetary perspective. It does little to encourage efficiency and good performance by contractors...'(34)

Project management skills

As noted, the JORN Technical Audit run by the contractors suggested that Defence lacked experience in the management of this type of large contract. The Audit Office likewise raised this issue:

it seems clear that Defence needs to give more attention to project management skills

In fact Audit made further inquiries of Defence about the training, qualifications and experience of major capital equipment project managers, and learned that there are no formal requirements for any form of undergraduate or post-graduate study, though Defence runs some in-house courses.

Defence, significantly, did not accept 'the implication that the JPO lacked the appropriate training and experience'.(36).

Audit concluded that:

...[This] may have been achieved if the JPO had been more resolute in exercising the contract's remedies, procedures and rights in order to protect the Commonwealth's interest by:

making progress payments that reflect the value of work done...

insisting that Telstra adhere to properly tailored engineering development standards specified in the JORN contract; and

insisting that JORN's risks were managed in a thorough, timely and systematic manner.(37)

These comments will be familiar to anyone who has read these notes, or who is acquainted with Defence's project management record.

The JORN contract and legal issues

Audit contracted out to an external law firm to get an independent review of the JORN contract. Its comments in the published report are somewhat truncated, because Audit does not wish to make public weaknesses in the contract which might later be exploited by a litigant. The contract itself is classified. Nevertheless, it was able to say that there were 'particular concerns' for the Commonwealth, especially with regard to, inter alia:

protection of the Commonwealth against risks associated with delay and cost increases;
payment for value earned at particular 'milestones';
the risk of non-performance of the requirement to progressively deliver elements of the system meeting Defence requirements;
protection of Commonwealth intellectual property.(38)

Audit also noted that the contract assigned all risk from price inflation and currency movements to the Commonwealth, and said that these factors had pushed the project target price up from $685.5 million (April 1991 prices) to $814.2 million (December 1995) - an increase of $128.7 million or about 18 per cent.(39)

Endnotes

Auditor-General Reports for Financial Years ending 30 Jun 1972 (p.338), 1973 (p.325), 1974 (pp.208-9), 1975 (p.219) 1976 (p.182) and 1977 (p.183). Joint Committee on Public Accounts, Report No.167, Parliamentary Paper 232/1977.
Statement by the Minister for Defence, Hansard (House), 27 September 1979, pp.1642-43.
Report of the Auditor-General for the Year ended 30 June 1979, pp.21-3.
The projects covered by this review were: Humpty Doo transmitting station; Minehunter catamarans; Fleet Underway Replenishment Ship; Medium Girder Bridge Acquisition; Mobile Radio Terminals; several air traffic control and air defence radar acquisitions; RAN oceanographic ship; Amphibious Heavy Lift Ship; Fremantle class patrol boats; and River class destroyer escort modernisation.
Report of the Auditor-General upon audits, examinations and inspections under the Audit and other Acts, September 1983, p.38.
Report of the Auditor-General upon audits, examinations and inspections under the Audit and other Acts, March 1982, pp.28-35.
Committee on Public Accounts, HMAS Tobruk, Report No.223, AGPS 1984, pp.11-17 (chronology).
HMAS Tobruk, pp.107-8.
Joint Committee on Public Accounts, Report No.243, Review of Defence Project Management - Volume 1: Report, AGPS 1986, p. (v).
Joint Committee on Public Accounts, Report No.243, Review of Defence Project Management - Volume 1: Report, AGPS 1986, p.5.
Review of Defence Project Management - Volume 1: Report, pp.16-20.
Force Structure Review, p.20.
Department of Defence, Program Performance Statements 1992-93, p.510.
Force Structure Review, p.21.
Industry Commission, Defence Procurement, Report No.41, AGPS 30 August 1994, p.42.
loc.cit.
Australian National Audit Office, Department of Defence: New Submarine Project, Audit Report No.22 1992-93, AGPS 1992.
Australian National Audit Office (ANAO), Department of Defence: New Submarine Project, Audit Report No.22 1992-93, AGPS 1992, paras 1.1.5 (profits), 1.1.12 (ASC asset funding - also Figure 1) and 1.1.18 (irrecoverability of profits). The ASC funding breakdown given adds up to 99 per cent - we assume, due to rounding effects. (Hereafter cited as ANAO, Submarine Audit).
ANAO, Submarine Audit, paras 1.1.3 (proportion of funds already paid) and 1.2.4 (ASC profits from Government money). ANAO not unreasonably wondered why the Commonwealth could not invest the funds itself and collect the returns, providing cash to ASC only when genuinely needed for legitimate contractual obligations.
ANAO, Submarine Audit, para 7.2.2 (emphasis added). Chapter six considers wider implications of the attitude revealed by this ANAO finding.
Ian McPhedran, 'How the RAN was ripped off', Canberra Times, 21 March 1996.
Ian McPhedran, 'Call on navy to scrap rusty ships', Canberra Times, 15 May 1996.
JORN Audit Report, para 2.12 (emphasis added).
JORN Audit Report, para 2.17.
JORN Audit Report, para 2.21 (emphasis added).
JORN Audit Report, para 3.17.
JORN Audit Report, para 3.21 (source for this dot and three preceding dots).
JORN Audit Report, para 4.3.
JORN Audit Report, paras 4.4.3 - 4.6.
JORN Audit Report, paras 5.4 - 5.6.
JORN Audit Report, paras 5.9 - 5.10 (quoting the JORN Technical Audit).
JORN Audit Report, para 5.13.
JORN Audit Report, paras 5.24 - 5.25 (emphasis added).
JORN Audit Report, para 5.26.
JORN Audit Report, para 5.30 (emphasis added).
JORN Audit Report, paras 5.30 - 5.35.
JORN Audit Report, paras 5.65 - 5.66 (emphasis added).
JORN Audit Report, para 6.2.
JORN Audit Report, para 6.17.

Should the Defence Budget be Cut? Arguments For and Against

Gary Brown and Derek Woolner Foreign Affairs, Defence and Trade Group

Major Government Savings Measures

Basic Overview of the Case

The Basis of Australian Defence Planning

No Argument on Strategic Grounds

An Outcome of Insufficient Funding - The Defence Record of Micro-Economic Reform

The Persistence of Financial Pressures

Little Scope for Funding Cuts

Stockholdings and the Problem of Operational Capability

Conclusion

Australia's favourable strategic environment

Enduring Geographic Factors

Improved post-Cold War situation

Efficiency and sound management

1. Early-mid 1970s: Unaccounted Mirage spare parts worth $34m

2. 1979: Failure of the Turana Target Project

3. 1983: The Audit Office on Defence Project Management

4. 1984: The HMAS Tobruk Project

5. 1986: Defence Project Management Generally

6. 1976 to 1992: The Inshore Minehunter (MHI)

7. Assessing Additional Costs ('premiums') for Local Military Construction

8. 1992: The Collins Submarine Project

9. 1994-95: The US Landing Ships Acquisition

10. The JORN (JINDALEE radar) project

Risk assessment and management

Measuring project progress

Project organisational problems and risk control

Engineering management and payments

The pressure to spend money

Project management skills

The JORN contract and legal issues

Gary Brown and Derek Woolner
Foreign Affairs, Defence and Trade Group