Articles by " Mark Thomson"

Defence projects, jobs and economic growth

HMAS Anzac under tow as it prepares to re-enter the water from Henderson Naval Base where it spent twelve months undergoing an upgrade.

In a recent post, Andrew Davies explained how the government ignored Defence’s advice and chose the MRH90 over the Black Hawk helicopter—presumably because the former offered more for local industry.

There’s nothing intrinsically wrong with considering industry factors in defence procurement. As John Harvey reminded us, a local preference can legitimately be based on defence self-reliance and/or broader economic benefits. Consistent with this, government announcements routinely tout the economic benefits of defence projects. For example, this year’s F-35 announcement said:

The acquisition of F-35 aircraft will bring significant economic benefits to Australia, including in regional areas and for the local defence industry with more jobs and production for many locally-based skilled and technical manufacturers.

The message is clear; the more work that’s done in Australia the better. In the case of the F-35, it’s likely true. Rather than rely on offsets, Australian firms compete with foreign manufacturers to supply the global F-35 program so that only internationally competitive firms thrive. In other instances, local sourcing occurs absent foreign competition and at a sizable cost premium, such as the troubled Air Warfare Destroyer Project where we are getting three vessels for the price of four. Read more

What’s the lure of having work done locally? Apart from expectations of achieving greater self-reliance and more cost-effective through-life support (each a canard for another post), decision-makers probably believe that there’s a net economic benefit from having work done in Australia even at a premium.

The notion that local production delivers an economic benefit has been cultivated by those eager to avoid foreign competition. DefenceSA, the South Australia Government’s defence lobbying arm, has produced two glossy publications (here and here) that extol the economic and industry benefits of local shipbuilding.

The DefenceSA reports quote an economic analysis of the Anzac Ship project commissioned by the Australian Industry Group in 2000. The scanned copy of report can be found here (PDF) and its companion report on the Huon minehunter project is here (PDF). The reports employ two methodologies to estimate the economic impact of projects: input-output multiplier analysis and general equilibrium modeling.

Multiplier analysis estimates the gross economic impact of spending, and the table below summarises the key results from the Anzac and Huon reports:

Input-Output Multiplier analysis of recent major naval construction projects

Project

Cost

National output

Jobs

Anzac frigates

$5.6 billion

$10.9 billion

57,000

Huon minehunters

$1.0 billion

$1.7 billion

9,250

Impressive numbers indeed! If only the world was so simple; multiplier analysis overestimates economic impacts by ignoring (along with much else) constraints on, and alternative uses of, inputs to production. For example, multiplier analysis assumes that each and every person employed by the project would be unemployed had the project not occurred. The Productivity Commission released a paper on the uses and missuses of multiplier analysis in 2013.

Mindful of the limitations of multiplier analysis, the Anzac and Huon reports also used general equilibrium modeling to estimate the economic impact taking account of input constraints on the Australian economy as a whole.

General equilibrium modeling of recent major naval construction projects

Project

Cost

GDP increase

Jobs increase

Anzac frigates

$5.6 billion

$3 to 7.5 billion

7,850

Huon minehunters

$1.0 billion

$887 million

1,860

Unlike the input-output analysis, the estimated boosts to GDP and employment in the table above are net increases across the entire economy. How much confidence can we have in those estimates? Comparison with analogous estimates in a 1994 Industry Commission report are informative. Depending on the assumptions made—none of which were unreasonable—an increase in local defence sourcing could result in either an increase or decrease in GDP and employment. Confused yet?

As best I can tell (not being an economist) two assumptions drive the results. First, the extent to which employment is held as a fixed constraint in the model. Second, the assumed productivity enhancement arising in firms engaged in the project. Weak employment constraints and higher productivity yield greater benefits, and vice-versa.

Given ongoing strong competition for skilled labour and the low productivity of (at least) the naval shipbuilding sector, recent local purchases such as the AWD have probably not had anything like the bountiful impact claimed by the Anzac and Huon analyses—certainly nothing like what would be needed to cover the substantial premium being paid.

Nonetheless, we should be wary of definitive claims either way about the economic impact of buying defence equipment locally. But with $78 million already committed to progress a local build of frigates to replace the Anzacs (wastefully early), the government needs to get some evidence-based advice on the economic costs and benefits of local construction sooner rather than later. As I’ve suggested in the past, the Productivity Commission would be a good place to start.

Mark Thomson is senior analyst for defence economics at ASPI. Image courtesy of Department of Defence.

How to buy a submarine – part 2

The building of a replacement for Australia’s Collins class submarines will be the country’s most expensive and complex defence project to date. There are a myriad of capability, commercial and industrial issues to be managed: the expertise for the design and construction of conventional submarines resides in Europe and Asia while Navy’s preference is for American combat and weapon systems. Pulling those elements together while managing the technical risks is no easy task.

Local construction of the future submarine has been a bipartisan position for several years, and it has the support of industry and the bureaucracy. But there’s no simple or fast way to produce a unique Australian submarine. If the government decides to go down that path, it will have to do so in the knowledge that it’s a high-stakes venture.

In April 2014, ASPI held a two-day conference called ‘The Submarine Choice’. At the conclusion, we were left with three disquieting impressions. Read more

First, pursuing an entirely new design will be risky. Conference presenters drove home the message that Australia currently lacks two key prerequisites for success: ongoing collective experience and a highly-trained design, engineering and submarine-specific building workforce.

Second, there’s a worrying disconnect between Defence’s plans and the government’s thinking (to the extent that either are public knowledge).

Third, it was clear that Defence’s thinking on the submarine acquisition strategy was simultaneously prescriptive and vague— prescriptive about the sort of commercial entity it wanted to undertake the submarine project but vague about how to create it.

With those impressions in mind, we decided that it was time to revisit ASPI’s 2009 paper ‘How to buy a submarine’, written when the enterprise was formally instigated. Our paper released today is our attempt to do so.

Sorting out fact from folklore wasn’t easy. Once we thought we had a consistent picture we sent a draft out to most of the stakeholders and interested commercial entities. We received a wealth of feedback and were struck (though not entirely surprised) by the diverse views expressed. It proved impossible to include, let alone reconcile, all of the disparate and sometimes diametrically-opposed opinions.

For example, several respondents told us that a European firm wouldn’t get the permissions required to integrate sensitive US subsystems and submarine technologies onto vessels they designed, while others told us that the issue was entirely manageable. One possible explanation for the apparent disconnect is commercial interest—for a number of players circling the submarine program, it’s a convenient story. We’re not sure which version is true, but there’s little doubt that the merger of a European design and American combat system is possible under some circumstances—after all, that’s what the Collins is. Our recommendation as a sensible early step in the process would be for Australia to have government-to-government discussions with the potential players—especially in Washington—to determine what the actual constraints are, and what’s merely unsubstantiated folklore.

Conventional submarine design capability with the experience required is found in France, Germany, Japan and Sweden. The UK hasn’t designed or built a conventional submarine for decades, but the trusted nature of the ‘five eyes’ intelligence relationship and its ongoing nuclear submarine programs means that it’s also a potential partner if access to American technology is the issue some claim it to be.

Of the Europeans, France and Germany have established export markets, and have exported designs for construction elsewhere. The Swedish submarine industrial base is currently undergoing significant changes, but the close relationship between the Swedish and US Navy submarine arms makes them a credible contender. Japan’s an established builder of large conventional submarines and there’s high-level political support on both sides for a collaborative effort—and this is rapidly developing into one of the more likely options.

Then there’s the Australian end of the arrangement. The most recent public statements from officials suggest that their preferred approach is similar to the Collins project: the creation of a commercial entity specifically to execute the design and build. The advantage would be that a purposely-created Australian-based entity could manage the interplay of participating European and American firms and their intellectual property. However, having gone in this direction, the government would carry the majority of risk associated with the project from the start.

Other approaches are possible. Most simply, the government could test the market and contract an existing international submarine designer/builder to undertake the project. Not only would this result in a cleaner commercial relationship, it would also give the Commonwealth a commercial counterpart with sufficient financial depth to shoulder a share of the risk in the project.

Finally, there’s always the possibility that the government will weigh up the issues we describe in this paper and decide that it’s all too difficult. In that case it’d need to decide whether offshore procurement options are able to deliver the required capability—or find an acceptable compromise between capability and risk.

Andrew Davies is senior analyst for defence capability and director of research at ASPI. Mark Thomson is senior analyst for defence economics at ASPI. Strategic Insight ‘How to buy a submarine: part 2′ is available free to download hereImage courtesy of Flickr user n1ct4yl0r

Shipbuilding—Australian style

Anzac class frigate HMAS Perth at the International Fleet Review,  October 2013. Minister for Defence, Senator David Johnston, has announced the government would 'bring forward preliminary engineering and design work necessary to keep open the option of building the future frigate in Australia'.Last Friday, the defence minister announced no fewer than three shipbuilding initiatives.

First, to the dismay of the Australian Manufacturing Workers Union (PDF) and the indignation of the opposition, the government announced that it would seek bids from Spain and Korea to build two new replenishment vessels for the RAN. The new vessels will replace the ageing replenishment vessel HMAS Success (18,000 tonnes) and the modified commercial tanker HMAS Sirius (47,000 tonnes).

Although the vessels could’ve been built in Australia, it makes sense to go offshore. Not only would a local build require new infrastructure, but the low productivity of local yards would further drive up the cost. Given the benchmark of the AWD, where we’re getting three vessels for the price of four (and counting), the local premium would be upwards of 33%.

Nonetheless, the vessels won’t come cheap. The Spanish spent around A$350 million dollars to build SPS Cantlarbia (19,000 tonnes), while the British have ordered four Tide Class vessels (37,000 tonnes) from Korea for around A$240 million each. Defence’s 2012 estimate for the two vessels (PDF) was above $1 billion, so the taxpayer is at least a couple of hundred million dollars ahead. Read more

The government also announced plans to build more than 20 steel-hulled patrol boats in Australia. These vessels will replace the 22 boats currently operated with Australia’s assistance by 12 Pacific island states under the Pacific Patrol Boat Program. The specification of steel hulls will disappoint Australia’s highly-capable aluminum shipbuilders, but it has probably been justified by the need for robust, easily-maintained vessels.

The local sourcing of the patrol boats looks to be a sop to Australian industry; Asian shipyards could undoubtedly build the vessels much more cheaply. What’s more, the small size and simple design of the vessels will do nothing to nurture the high-end skills needed for future local projects such as the new submarines.

To make matters worse, the Minister has said the project will ‘generate additional work for yards around Australia’. Thus, rather than capturing economies of scale at a single site, work will be shared around the country, resulting in duplicated fixed costs and multiple company overheads. The only consolation is that the slug to the taxpayer from the patrol boats will likely be less than the saving on the replenishment vessels. Viewing the former as the political quid pro quo for the latter, there’s still a net gain.

Without doubt, the most interesting announcement was that the government would ‘bring forward preliminary engineering and design work necessary to keep open the option of building the future frigate in Australia’. Taken at face value, that announcement is difficult to fathom. A replacement for the Anzac frigates has long been planned for the end of the 2020s, and the prevailing assumption has always been that the vessels would be built locally. To achieve that, the 2012 Defence Capability Guide (PDF) planned on first-pass approval around 2019-20 and second-pass around 2022-23. So there’s plenty of time for a local build.

Rather, the option that’s being kept open now is a specific proposal that industry has been pushing quietly behind the scenes. The suggestion is to take the combat system and radar developed for the Anzac frigates by the Australian companies CEA Technologies Australia and SAAB Combat Systems, and to incorporate them into hulls like those currently being built by ASC for the new destroyers.

As well as leveraging the highly successful work done on the Anzac frigate upgrade, the proposal has the potential to provide continuity of work for ASC and its subcontractors. By doing so, it’s argued, hard-won productivity gains on the AWD project (assuming they eventually materialise) can be used to reduce the cost of the future frigates. What could be better—the incumbent firms each get a piece of the pie and the taxpayer saves some money?

But wait a second. On known plans, substantive work on AWD fabrication will end long before it’s necessary to start work on building the Anzac replacements. Even after the two-year delay to the AWD, fabrication will have ended by 2018 and work on the new frigates isn’t due to start until post 2022. So what’s going on?

A hint can be found in Defence’s 2013 Future Submarine Industry Skilling Plan (PDF) (subtitled A Plan for Australia’s Naval Ship Building Industry). Turn to page 170 and look at Scenario 7. There’s the solution: we can achieve continuity by retiring the Anzacs early. The previous government confirmed this when it talked about ‘bringing forward the replacement of the current Anzac Class frigates’.

There’s no way that marginal productivity gains from continuity will offset the cost of recapitalising the frigate fleet four or five years early. While other nations are looking at how to keep their vessels in service for longer, we’re doing the opposite just to keep our shipbuilders in profit for longer. I despair.

Mark Thomson is senior analyst for defence economics at ASPI. Image courtesy of Wikimedia Commons.

The cost of Defence: eighty million, two hundred & eighty-one thousand, three hundred & ninety-one dollars & seventy-eight cents per day

MarkThomson_CoDJust as humour is good provided it’s funny, promises are good provided they’re kept. This year’s defence budget was about a promise; the Prime Minister’s election promise to boost defence spending to 2% of GDP within a decade.

I reported the headline figures for Defence the morning after the budget. Briefly, defence spending will increase by $2.3 billion next financial year to an all-time high of $29.3 billion amounting to 1.8% of GDP. On current plans, spending will remain more or less at that level in real terms for the next three years before increasing in the fourth. In a federal budget dominated by fiscal consolidation, it was as good an outcome for defence as could have been expected. Read more

There’s no doubt the government demonstrated a strong commitment to defence in this budget. Although much of the year-on-year increase reflects a combination of pre-existing funding programmed by the previous government and foreign exchange supplementation, it was always open to the government to add Defence to the list of portfolios reeling under cuts. But aside from a $75 million efficiency dividend spread over four years, the promise of no further cuts to the defence budget was kept.

Apart from helping to alleviate near-term budget pressures, the funding granted to Defence provides a credible path to achieving 2% of GDP in 2023-24 as promised. The path isn’t an easy one; to meet the target on the basis of the funding disclosed for the next four years, expenditure will have to increase at a rate of 5.3% above inflation for the six years after that. But with three to four years to plan and prepare, it would be learned helplessness to suggest that it can’t be done.

In the meantime, there are some serious challenges for Defence to surmount. To start with, the recovery in defence spending next year will deliver a surge in major equipment investment (because that’s the part of the budget that accommodated most of the cuts of the past few years). Equipment investment will grow from around $3.5 billion this year to $6.1 billion next year.

Normally, such a massive year-on-year increase would be unachievable but the high number of off-the-shelf purchases will help make it manageable. And even if money ends up being handed back, it will have been worth the risk to regain momentum in the investment program.

At the same time, Defence needs to get its workforce numbers into better health. There’s no point buying equipment if there are insufficient people to crew the assets. For three years in a row, permanent numbers in the ADF have fallen despite plans to the contrary. Numbers for this year stand at around 56,400, with a target of 59,600 four years hence.

Assuming that those near-term hurdles can be surmounted, the path to spending 2% of GDP is clear—provided the government makes good on its promise. Sometime in the next several years the imperative to return the federal budget to surplus has the potential to perturb but not necessary derail progress. If the government wants to spend 2% of GDP on defence, there’s no fundamental economic reason it can’t. From a fiscal perspective, however, it’ll have to find a way to convince taxpayers to accept the higher taxes and/or reduced services necessary to fund the venture.

If it can, the question is where the path leads in terms of the future development of the ADF. 2% of projected GDP in 2023-24 is a lot of money; around $42 billion in today’s terms. Extrapolating current trends in personnel and operating costs, there’ll be around $112 billion available for capital investment in the forthcoming decade as a consequence, compared with only $66 billion for the decade just past (both measured in today’s dollars). It appears, therefore, that the ADF will need to grow to accommodate the additional money that’s been promised.

If capital investment is capped at 30% of the budget (compared with a historical average of 27%) there’ll be enough money in 2023-24 to increase the size of the ADF by around 10,000 people.

The risk in providing such generous funding to Defence is that proposals of progressively diminishing merit will be brought forward in coming years—for both new equipment and personnel. The challenge for the government will be to ensure that generous funding doesn’t translate into wasteful spending.

Our first insight into what the government has in mind is likely to be the 2015 Defence White Paper, which hopefully will tell us why it’s necessary to spend so much money, and explain what sort of defence force it will buy.

You can read the Cost of Defence here.

Mark Thomson is senior analyst for defence economics at ASPI. Image (c) ASPI 2014.

The 2014 Defence budget—as good as it gets!

Defence Budget 2014In two weeks’ time, ASPI’s annual Cost of Defence will hit the streets, detailing the ins and outs of the 2014 Defence budget. For those who can’t wait, here’s a preliminary analysis of the key points.

In the current fiscal environment, it was a surprisingly good budget for Defence. Spending will rise to $29.3 billion next financial year, a nominal increase of $2.3 billion on what was spent this year and a real (corrected for inflation) increase of 6.1%. As a share of GDP, defence spending will rise from 1.7% this financial year to 1.8% next year.

The key initiatives in this year’s defence budget was the reprogramming of $2 billion from 2017–18 which resulted in an additional $500 million this year (2013–14) and an additional $300 million, $550 million and $150 million respectively across the next three years. Yes, that’s right; despite the government’s fiscal consolidation, Defence will get extra money four years in a row. Read more

On the savings front, there’s $1.2 billion to be saved over the next four years from ‘back office’ reforms, all of which will be available for reinvestment in capability—ie Defence will retain the money generated. Consistent with this, the number of civilians employed will fall from 20,900 today to 18,600 in four years’ time.

Over the next three years, defence spending is slated to remain largely static in real terms before rising to $30.6 billion in 2017–18. Beyond that, we don’t have visibility of what’s planned. But for the government to make good on its promise to boost defence spending to 2% of GDP by 2023–24, they would need to increase defence spending by around 5.3% every year for the six years following the forward estimates period.

On past experience, a sustained 5.3% rate of growth will be challenging to achieve. During the 2000s, when defence spending was growing at around 3% a year, Defence and defence industry had trouble absorbing the increase—to the extent that substantial sums of money were handed back. However, this time, there are 3–4 years available to prepare for the ramp-up so we can perhaps be more optimistic. Moreover, there’s nothing to stop the government from using future budgets to ease the task by commencing growth towards 2% of GDP prior to 2017–18. Indeed, one of the critical decisions for the forthcoming white paper will be the funding envelope from 2015 onwards.

A potential complication is that the government plans to return the Commonwealth to surplus around 2018–19, just after it looks as though defence spending will take off. If the government’s fiscal projections turn out to be overly optimistic, there’ll be pressure for further savings in order to preserve the surplus. If this happens, defence spending can’t expect to be immune.

Notwithstanding that risk, this year’s defence budget is about as good as it gets in an environment dominated by fiscal concerns. Not only has Defence received more money in the near term, but a credible path to 2% of GDP has been established.

Mark Thomson is senior analyst for defence economics at ASPI. Graph (c) ASPI 2014.

Defence reform after the National Commission of Audit

Aerial photograph of Russell Offices. Mark Thomson writes that while it might be politically expedient to quarantine military personnel from scrutiny, they represent more than three-quarters of the Defence workforce and are the most expensive on a per-capita basis. The multiple military headquarters maintained by the ADF are likely to be every bit as overstaffed as those on Russell Hill.

The National Commission of Audit’s report created quite a stir last week; pension ages to rise, family payment to fall, and a new model for federation. For those who lack the time to study the Commission’s five volumes, a summary of recommendations for Defence is here. The recommendations fall into three categories:

First, in the politest way possible, the Commission recommends that the government base defence spending on an analysis of capability options and strategic risks rather than adhere to its commitment to spend 2% of GDP. This is a sound recommendation, but it’s not one that the government is likely to embrace publicly given the politics of promises.

Second, there’s a series of discrete recommendations about a grab-bag of issues, including budget processes, ministerial directives, reintegrating DMO into Defence, professionalisation of Capability Development Group, new performance indicators, sale of ASC Pty Ltd, privatisation of Defence Housing Australia, closing the Military Superannuation and Benefits Scheme, ceasing the Skilling Australia Defence Industry Program, and assessing the potential of the Defence Science and Technology Organisation for outsourcing. Read more

The pros and cons of the various recommendations will be explored in the forthcoming ASPI Defence Budget Brief. For the moment, it’s sufficient to observe that they are mostly secondary matters in the broader landscape of defence reform—despite being of vital interest to those affected.

Third, and most importantly, the Commission recommends two further reviews of Defence in addition to the government’s already planned ‘first principles’ review of structures and processes. The first is a Portfolio Agency Audit designed ‘to comprehensively assess efficiency and effectiveness across all aspects of an agency’s operations, programmes and administration’. The second is a report from the Secretary ‘on current management structures and spans of control, and opportunities for improvement’. Defence has been selected to go first, but other agencies will eventually come under similar scrutiny.

The two proposed reviews supersede several specific recommendations from the Commission about Defence’s staffing and structure. It would make no sense, for example, to ‘reduce the staffing size of Defence headquarters in Canberra, including senior staff, to 1998 levels’ while reviews of Defence’s structure and staffing are underway. For the moment, Defence has been given a reprieve.

So what comes next? Surely it’s time to start the ball rolling on the next round of defence reform.

The first step should be to combine the three proposed reviews of Defence into one. It would be ludicrous to have clipboard-wielding consultants bumping into each other in the hallways of Russell Offices on overlapping missions. With the Audit Commission report done and dusted, there’s no excuse for further delay; set the terms of reference, appoint a team, set a deadline, and get on with it.

Key issues for that combined Review to cover would include:

  • Defence’s structure, processes and staffing, including all aspects of the civilian and military workforce. While it might be politically expedient to quarantine military positions from scrutiny, they represent more than three-quarters of the Defence workforce and are the most expensive on a per-capita basis. The multiple military headquarters maintained by the ADF are likely to be every bit as overstaffed as those on Russell Hill.
  • The future of Defence’s shared services business model and the role of the Service Chiefs. There’s an inherent tension between the efficiencies delivered by organisation-wide shared services (such as information technology, communications, and facilities maintenance) and the clearer accountability of having the three Services manage their own support in-house. Given the progress made in recent years, I think the best option is to further exploit the existing model. Others believe that returning control to the Services is imperative—particularly in the case of materiel sustainment. This issue must be resolved.
  • The future of the Defence Materiel Organisation (DMO). Increasingly more radical schemes for revamping DMO have been doing the rounds in the media. The government needs to develop a plan for DMO, either within the forthcoming broader review of Defence or as an ancillary exercise. In doing so, it’ll be important to consult closely with industry (while remembering that they have a vested interest in creating a pliant and weak commercial counter-party).

Once the Review is underway, the government can have a look at some of the Commission’s discrete recommendations—there’s plenty that’s not contingent on matters to be covered by the Review—and try to get some early runs on the board. The Abbott government came to power with a strong defence reform agenda; it’s time to get on with the task. The sooner they make a start, the better the prospects for meaningful reform in this term of government.

Mark Thomson is senior analyst for defence economics at ASPI. Image courtesy of Department of Defence.

The JSF and the issue of ‘new money’

The Chief of Air Force, Air Marshal Geoff Brown, AO gives the Prime Minister, The Hon. Tony Abbott MP, a tour of the cockpit of the 'mock-up' of an  F-35A Lightning II aircraft at Defence Establishment Fairbairn.

Last Wednesday, the Prime Minister and Defence Minister travelled to Fairbairn airbase to announce Cabinet had approved the purchase of a further 58 F-35 Joint Strike Fighters at a cost of $12.4 billion. It should have been a red-letter day for the Abbott government; an election promise fulfilled, Australia’s defences strengthened, and work aplenty for local industry. But it didn’t quite work out that way.

To start with, confusion abounded at the press conference about where the money was going to come from. An increasingly perplexed media tried to make sense of statements like

…this is not new money, it’s money which successive governments have carefully put aside to ensure that our nation’s defences are strong.

 We have been putting the money away, a line item called ‘air combat capability’ and it’s been there, it’s been building up and it’s in the Budget.

 So, this is not new spending today, in the context of a tough Budget, this is spending money that we need to spend that has been sensibly put aside in the past to ensure that our nation’s defences remain strong.

The successive quotes (there are more I could’ve used) reflect persistent questioning by incredulous journalists. You can read the transcript for yourself here.

Read more

As best I can tell, the Prime Minister and Defence Minister were forthright and honest in their answers. For anyone versed in the arcane world of government finance and its curious terms-of-art, the responses make perfect sense. Trouble is, few people are initiated into that club—hence the confusion. More importantly, the media were actually onto something. Let me explain.

There’s no escrow account or trust fund designated ‘air combat capability’. Rather, the notion of money ‘put aside in the past’ refers to a planning provision made in prior years. That is, Defence’s forward financial plan has for many years included a provision to acquire the F-35 around the latter half of this decade. No actual funds have been deposited anywhere, but within the overall funding promised to Defence an allowance has been made for the purchase of the F-35.

Moreover, there’s nothing special about planning provision for the F-35 acquisition. There are similar provisions made in Defence’s financial plan for personnel expenses, fuel, ammunition, gold braid etc., just as there are provisions in the government’s broader financial plan for pensions, hospitals and schools in the years ahead.

By saying ‘this is not new money’, all that’s meant is that the aircraft will be purchased from within the existing funding planned for Defence.

So far so good. But the iron rule of government spending is that each dollar can be spent only once. Every dollar spent on defence is unavailable for spending on health or education or pensions. And on this count, the journalists’ instincts were on target. The money to pay for the F-35 aircraft is yet to be raised by taxes—in fact it’s yet to be earned by taxpayers. Just because someone entered some numbers into a spreadsheet a couple of years ago doesn’t erase the hard fact that the F-35 purchase will impose an opportunity cost in terms of either higher taxes/debt or reduced government spending elsewhere.

Which brings me to the second complication surrounding last Wednesday’s announcement; everybody knew the Treasurer was scheduled to give a speech that evening to make the case for a hard budget—and he delivered in trumps. The result was a bonanza for cartoonists , with Alan Moir, Andrew Dyson, and Ron Tandberg all having a go, and with David Pope weighing in twice (here and here). (My favorite was John ‘Polly’ Farmer’s effort for the Hobart Mercury, but it’s not available online.)

I expect that the government will think twice in future before it announces a multi-billion defence acquisition immediately prior to the Treasurer giving a speech with such choice quotes as ‘we are spending money we don’t have’ and ‘we must learn to live within our means’. But from my viewpoint it was the right thing to do—defence spending and the opportunity cost it imposes on society shouldn’t be sheltered from scrutiny.

On the contrary, just as the Treasurer presented a reasoned and evidence-based case for a hard budget, the government needs to take the same approach to explaining why Australia needs a strong defence. Unless they do, the promise of spending 2% of GDP on defence will prove to be as unsustainable as the budget position the Treasurer described last week.

Mark Thomson is senior analyst for defence economics at ASPI. Image courtesy of the Department of Defence.

Submarines by the dozen?

Dozen?

The press has made much of a perceived backing down from a plan to build 12 submarines. We say ‘perceived’ because no-one has actually said that. But it’s true there’s been some very careful language choices around submarine numbers, including by the Defence Minister, here in his speech:

… my primary focus is not on numbers but on the capability and availability of boats required to meet the tasks set by government.

And here in a doorstop:

To [put] a number on submarines is a distraction. What we want is a long term capability that can be sustained as an enterprise, as an asset that can go long into the future building submarines.

Read more

It’s true that the focus ought to be on the delivery of defence capability that’s well-matched to strategy and to the budget. But talk at the conference, both from government and from the bureaucracy, has been about the need for an enduring industrial capability for submarines. While no-one has said so in as many words, an enduring submarine design and build capability all but mandates moving to a continuous build program—the case for which was laid out in detail in DMO’s Future Submarine Industry Skills Plan last year. Another criterion is avoiding any capability gap that might otherwise occur at the end of the Collins-class lifetime.

We think meeting both of those criteria is only really feasible if the fleet constitutes around 12 boats. We’ll explain why below, but first observe that France has 10 boats (and exports others), and still has management challenges in keeping its industrial capability intact. The UK’s fleet of 11 submarines (and no exports) has barely provided enough continuous work. By general consensus, Japan sustains its industrial submarine capacity pretty well through a rolling production model, but it has 16 in service and is expanding to over 20. Maybe we could come up with a model that works with fewer than 12 boats, but clearly we’d have our work cut out.

Other numbers here aren’t especially promising either. As we pointed out in our 2012 Mind the gap paper (PDF), a Collins life extension will take them out to 2030 (and beyond that for a few boats). By then they’ll be around 30 years old—not unusual for naval platforms.

The recent success in improving Collins sustainability has seen a move to a ’10 years on, 2 years in maintenance’ operating cycle (it was previously 8 + 2), allowing more efficient use of those expensive assets. Future boats could thus serve for 22 years as a minimum, and 34 if they do three cycles as the Collins class will come close to.

So if we had 12 submarines and kept them for the minimum 22 years, we’d need a new one every couple of years. If the number fell below 12, we’d have to slow down further, raising the question of what constitutes an efficient use of the investment required to sustain shipyard and design capacity. Such a slow production rate wouldn’t replace the six Collins boats in the right timeframe; we’d have to produce a batch of four to six fairly quickly and then slow down—but then it’d be hard to avoid having 10–12 boats at some stage.

Of course, 22 years is a remarkably short life-of-type for a submarine. So the question is whether the benefits of an ‘enduring capability’ justify the additional cost of replacing vessels more frequently?

A quick estimate isn’t encouraging; moving from a 34 to 22-year lifespan increases the capital cost of maintaining the fleet by more than 50%. Even with potentially higher productivity and potential savings from avoiding mid-life upgrades, it’s likely there’d be a substantial cost premium. Then there’d be the added costs of maintaining administrative and managerial overheads continuously, within both industry and Defence.

A continuous build program of ships and submarines would also lock the government into maintaining the size of the submarine and maybe surface fleets. Navy might see that as an added benefit; no need to make the case for the next generation at replacement time. But from a broader defence perspective it would fix the minimum size of a large and expensive part of the force structure. And from a public policy perspective it would lock in a substantial chunk of what was previously discretionary spending.

Call it what you want—an enduring capability or a continuous build program—it means that we’d be creating either a private or publicly-owned monopoly submarine production entity. As the bad old days of government-owned shipyards demonstrated, ensuring productivity from a monopoly supplier is a far from easy task.

Finally, it’s worth noting that the main rationale for an enduring capability is a desire to meet some ambitious and uniquely Australian requirements—the prime source of cost and schedule overruns in other defence equipment over the years.

Andrew Davies is senior analyst for defence capability and director of research at ASPI and Mark Thomson is senior analyst for defence economics at ASPI. Image courtesy of Flickr user sir chalky.

Thinking about submarines

Royal Australian Navy Collins Class submarines exercising off the West Australian coast.

Three presumptions underlie current planning for Australia’s future submarine capability—three ‘musts’. First, the Collins class must be replaced when it reaches its life-of-type. Second, the replacement boats must be built in South Australia. Third, the new boats must have conventional (ie non-nuclear) propulsion.

On Wednesday and Thursday, ASPI’s ‘Submarine Choice’ conference will explore Australia’s future submarine in line with these stipulations. To do otherwise would cause confusion and dismay among the assembled insiders, such is the abiding belief in the need for a conventionally-powered, locally-built replacement for the Collins.

Elsewhere, true believers are harder to find. Among many people I talk to, there’s cynicism about the future submarine—hardly surprising given the twin debacles of the Collins and Air Warfare Destroyer programs. We may be approaching the point where taxpayers think they’re being asked to throw good money after bad. Read more

Yet future policies should be informed by more than past failures. A domestic diesel-electric submarine program should be judged on its merits, taking into account the costs, risks, benefits and alternatives. And while there has been a lot of discussion of large boats in comparison to small boats, and new designs as opposed to existing designs, somewhat less time has been spent examining—or at least explaining—the underlying ‘musts’ that have so far fixed the broad parameters of the program.

When I began preparing for the submarine conference more than a month ago, I found myself drawn to re-examine the underlying presumptions upon which the submarine program rests. My original plan was to produce three short blog posts for The Strategist on the three ‘musts’. I rapidly found myself working through difficult, and often subtle, questions raised by them. Paragraphs morphed into pages, days into weeks. The result is this extended essay (PDF).

Taking the time to re-examine issues already decided might be viewed as an unwelcome diversion from the real job of getting on with replacing the Collins. It isn’t. With so much at stake, each and every aspect of this multi-billion dollar program needs to be continuously examined to ensure that we get it right.

By necessity, the essay is more an exploration of issues than an argument for one course of action over another—I honestly don’t have a firm prescription for how to proceed. All I have to offer is the series of observations summarised below.

  1. No weapons system is worth having at any price. As the cost of weapons systems change, and as the amount of money available for our defence changes, so too does the optimal force structure. Submarines aren’t worth having if they impose too high an opportunity cost on the remainder of the ADF. Depending on the cost of replacing the Collins and the size of the defence budget looking forward, the submarine might need to join the aircraft carrier and long-range bomber as an extinct species in the evolutionary tree of the ADF.
  2. On the basis of existing strategic policy, the strongest argument for retaining conventional submarines rests on the unilateral ability to deter or defeat a South East Asian adversary in a situation where the United States is unable or unwilling to support us. If this conclusion is accepted, two corollaries follow. First, a submarine of more modest ambitions than that outlined in the 2009 White Paper will be adequate for our purposes. Second, the less than existential consequence of such a scenario erodes the imperative of retaining submarines.
  3. The practical, economic and strategic augments for mandating that the next generation of submarines must be built in Australia are unpersuasive. However, the potential benefits to extant players are so concentrated, and the prospective costs imposed on taxpayers are so dispersed, that the political momentum for a domestic build is likely to be unstoppable.
  4. In theory at least, many of the technical and logistical challenges of moving to nuclear propulsion in the next generation of Australian submarines could be surmounted by leasing or buying boats from the US. And while there would remain serious questions about independence of action in some situations, it appears feasible for Australia to operate US boats provided they’re willing to support us in the venture. There’s no reason to think that this would be cheap.
  5. A move to operate US-built nuclear submarines would entail a fundamental shift in Australian strategic policy—from a policy focused on continental defence, to one directly supporting and encouraging a strong US role in the region. The result would be a qualitatively different sort of alliance between Australia and the US with significant repercussions across the region. Ultimately, it’s upon those strategic consequences that the option should be judged, rather than upon the technicalities of nuclear propulsion.

An expanded discussion of each of these points can be found in the essay (PDF) along with much more. I hope readers will have the time to at least take a look.

Mark Thomson is senior analyst for defence economics at ASPI. Image courtesy of Department of Defence.

Free financial advice

Financial planning?

Over the past two decades, Defence has staggered from one budget crisis to the next, trying to afford the unaffordable.

Of the five White Papers issued between 1976 and 2009 for which ex post fact evidence is available, only the Howard Government’s 2000 effort was funded as planned. All the rest ended up delivering substantially less money than promised. To make matters worse, for most of the period in question, Defence was planning beyond its means anyway, by systematically underestimating both its acquisition and recurrent costs. Thus, even if promised funding had been forthcoming it would’ve been inadequate for the task. Defence’s plans were damned twice over. Read more

In practice, there’s little that can be done to force governments to keep their commitments; politicians routinely break promises. On the other hand, it should be possible to curtail the habit of underestimating costs. With a new White Paper underway, now’s a good time to start.

The problem is hardly unique to Australia; one of the ‘key drivers’ of the UK’s 2010 Levene inquiry into structure and management of the Ministry of Defence was ‘the Department’s over-extended programme’. It was no mistake that Lord Levene mentioned ‘affordable’ or ‘affordability’ 32 times in his report. Overly optimistic planning leads to wasteful cycles of overinvestment followed by underinvestment as financial reality overtakes military fantasy.

Levene’s solutions for the United Kingdom are largely built around improved governance and accountability. But while such approaches are likely to be valuable to Australia in the longer term, the clock is already running on the 2015 White Paper; we need practical measures now to ensure that the resulting plan for the ADF is affordable.

The good news is that we aren’t starting with a blank spread sheet. Over the past decade, Defence has made steady progress in understanding its current and future costs. The sorts of egregious underestimates of acquisition costs that appeared back in the 2001 Defence Capability Plan (DCP) are much rarer today. At the same time, the ongoing refinement of Defence’s budget has led to a better understanding of recurrent costs than in the past. These are firm bases upon which to build.

Nonetheless, the government should treat Defence’s cost estimates with great caution. Two interplaying factors predispose the organisation to systematically underestimate its costs.

Firstly, Defence’s civilian and military leaders are positive ‘can-do’ optimists. Nothing out of the ordinary there—most large organisations are led by similarly incautious souls who got to where they are by doing rather than naysaying (helped by a survivorship bias towards those who are lucky enough not to fail at a prior point in their career and are hence unjustifiably confident).

Second, and more importantly, moral hazard comes into play within Defence. Proponents of individual projects—for example the RAAF seeking a new fleet of aircraft—have an incentive to underestimate costs so as to get the project on the books irrespective of whether it’s affordable. Once a project is in the DCP it’s difficult to dislodge without political cost, and the problem of funding it becomes the taxpayer’s rather than the Air Force’s. For exactly the same reasons, industry has equally strong incentives to systematically underestimate future acquisition and support costs when answering initial queries from Defence.

The government needs to protect the taxpayer’s interests against the twin onslaught of self-delusion and deception. And it’s not simply a matter of worrying about the cost of projects in the DCP. To be affordable, the next White paper will need to take into account the cost of not just acquiring but of crewing and operating all of military capabilities in the ADF, along with their attendant administrative overheads, now and into the future. This means building a detailed model of the Defence budget.

An effective model of the defence budget would combine bottom-up estimates of the cost of individual activities—such as maintenance programs and acquisition projects—with projected trends in key cost drivers such as personnel expenses, foreign exchange rates, equipment and facilities maintenance costs. Critically, the model shouldn’t be designed to deliver a single estimate but rather to capture the spread of possible future costs given the inherent uncertainties and credible ranges for economic trends.

In some way or form, Defence will already have many of the building blocks of such a model—if only to support the annual budgeting process. But to guard against a conspiracy of optimism again delivering an unaffordable plan for the ADF, the government should ensure that the model is comprehensive and credible. There’s no shortage of consulting/accounting firms which could both assist Defence with the development of the model and warrant its robustness to the government.

Defence could also benefit from external help to understand the cost of its major programs. One way to do this would be to get independent cost estimates for the top 30 projects by value in the DCP, including the personnel and operating costs associated with new capabilities—an area that the 2011 Rizzo Report found wanting. Apart from helping to guard against conscious and unconscious internal biases, independent advice would inject additional technical rigour into the process. Estimating the cost of major projects (defence or otherwise) is a technical exercise, so outside help would certainly come in handy. To get a feel for the complexities, have a look at this 2005 study by the RAND Corporation on the UK government’s carrier project or this 2008 NASA Cost Estimating Handbook.

Amid the heady discussion of defending Australia against the myriad uncertainties of the Asian century, the question of reliable costing can easily be dismissed as a sideline. Who can be bothered with financial niceties when there’re issues of grand strategy to be discussed? Let’s hope the government can be bothered. As the Levene Report observed, reliable financial planning ‘is not a distraction from providing the capability the country needs; it is an essential enabler to it’.

Mark Thomson is senior analyst for defence economics at ASPI. Image courtesy of Flickr user Images Money.

Should we worry about China’s defence spending?

Cadets of the Peoples LIberation Army Armored Forces Academy listen to Secretary of Defense Leon E. Panetta speak in Beijing China, Sept. 19, 2012. Panetta visited Tokyo, Japan before continuing to Beijing and traveling to Auckland, New Zealand on a week long trip to the Pacific. DoD photo by Erin A. Kirk-CuomoChina has once again raised its defence spending by a double digit percentage. There’s nothing new about that; the average rate of growth since 2002 has been 14.6% according to official figures. Usually, the annual announcement of yet another hike is met with mild interest here in Australia. This year was a little different.

ASPI’s executive director (my boss) Peter Jennings reckons that this ‘presents a challenge for Australia around making sure that we’ve got our defence policy settings right, and that we’ve got the right amount of defence expenditure, and we’re not being complacent’. Neil James, Executive Director of the Australian Defence Association, said we need to ‘upgrade navy and air force capabilities—whose contribution would be most important in any regional conflict’, though not at the expense of the army. Read more

When Neil James (lead proponent of the professional military judgement school of strategy) and Peter Jennings (card carrying member of the academic-bureaucrat policy cabal) agree, perhaps it’s time to take notice. So let’s think it through; does this year’s (entirely expected) increase in Chinese defence spending demand that we up the ante on our own?

Of course, context is important. Back in the early 2000s, China was increasing its defence budget by double figures and nobody batted an eyelid. Not only were we distracted by Iraq, but the dulcet tones of China’s diplomacy had us content with the Middle Kingdom’s ‘peaceful rise’. Fast forward to 2014, and we’ve had half a decade of assertiveness bordering on recalcitrance from China. From the South China Sea to the East China Sea, China’s been flexing its muscles and making its neighbours nervous.

It seems a no brainer; if a rising power starts building up its military and causing ructions, we’d better not sit on our hands—especially when it’s a one-party state with a lousy human rights record, a well-oiled propaganda apparatus and a manic fixation on historical grievances. After all, we had a rough time with such entities last century. Best to be wary.

Instinctive as it might be to spend money on defence in the face of China’s military build-up, it’s worth pausing for a moment to ask why? What will be achieved?

The first step is to be clear about the problem. That’s usefully done by elimination. Nobody has even hinted that China has either the capability or intent to attack Australia, so we can discount the usual focus on Australia’s continental defence. Of course there’s the argument beloved of admirals and shipbuilders that we need to protect our sea lines of communication. But I’m doubtful of that canard at the best of times, and in the case of China it stretches credibility; what’s China going to do, block our exports to them? Finally there’s the vague but comfortably diplomatic suggestion that China’s rise doesn’t constitute a threat per se but that it might destabilise the region, leading to a threat to Australia from an unspecified third party. Sorry, but that sort of ethereal reasoning doesn’t pass muster with me when there are billions of dollars at stake.

With the usual suspects discounted, what’s left? Well, a boost in Chinese spending could rationally elicit an increase in our spending if we thought it necessary to buy into the increasingly fraught arena of Asian strategic affairs. The argument for doing so is straightforward; unless the United States and its friends and allies stand firm in the face Chinese provocation, the norms upon which our security and prosperity are built will slowly be eroded by creeping Chinese hegemony.

While it’s clear that Australia has a strong interest in maintaining norms (which is double speak for limiting China’s strategic influence), it’s not clear how a boost to our defence spending—to say 2% of GDP as is proposed—would make a material difference to the balance of power in today’s Asia. In short, we face the free rider’s dilemma: we can increase our costs by spending more but it won’t deliver us any more security than we would get by doing less. There’s nothing new about this; we’ve been free-riding on US efforts for the past 60 years, it’s just that the nature of the risks have changed.

Nonetheless, an argument for Australia spending more on defence can perhaps still be made even if doing so makes no material difference to the raw balance of power. In a paper I presented in Tokyo at the National Institute of Defence studies last week, I discuss the impact of China’s economic rise and its even more rapid escalation in defence spending. To cut a long story short, I reach the conclusion that the critical factor in the years ahead won’t be the extent to which the United States and its allies can maintain and convey resolve in the face of Chinese attempts to gain the upper hand.

It seems to me that US-allied ability to prevail hasn’t changed in most circumstances—the combined forces of Japan and the United States will remain formidable for a long time yet. Rather, the situation is that China will be able to impose increasingly high costs on the United States as time goes on, even if they can’t win outright. It’s that ability to impose increasingly higher costs that raises the question of American credibility and resolve. If the point is reached where China concludes that the United States is unwilling to take risks in support of its Asian allies, or if those regional allies and partners allow themselves to be hived off and neutered due to high potential costs, the game will have changed fundamentally in China’s favour. There’s no doubt that the US understands this, and it’s the reason why it launched its ‘pivot’ or ‘rebalance’ to Asia; to both reassure friends and allies and send a message of continued resolve to China.

If the name of the game is resolve, what’s the implication for Australia? Simply this; even if we can’t materially tip the balance of power, we might nonetheless be able to make a difference by demonstrating resolve and thereby, in turn, encourage stronger resolve in others, including the United States. One way to do this would be to spend more on defence.

To be honest, I’m not sure that this amounts to a strong argument for diverting billions of taxpayer dollars away from health, education and social spending in favour of enhanced military capability. But it certainly amounts to an important caveat to my previous advocacy of relatively modest defence spending for Australia.

If it’s resolve that ultimately matters, there are many other ways to achieve that goal. Higher levels of defence spending are unlikely to be sufficient on their own, and they mightn’t even be necessary. The United States, for example, is working hard to show resolve through a variety of means while making substantial cuts to its defence budget.

One thing is clear; if resolve is the critical factor, then a clear and consistent approach is essential. On this count we must despair, in recent years our diplomatic approach to both China and the US alliance has been confused and opaque—as the chopping and changing in the last two defence white papers amply demonstrates. Let’s hope the forthcoming White Paper presents a clear and sustainable explanation of the role Australia plans to play in the years ahead.

Even on the issue of defence spending—which we thought was unambiguous under the new government—there are already signs of backsliding. The rock solid commitment to build twelve submarines has now ‘never been justified‘. More importantly, the promise of no more cuts to defence spending—which the Minister repeated as recently as last week—is hard to reconcile with what the government did to the defence budget back in December. At that time, a total of $1.1 billion was cut from 2015–16 and 2016–17, allowing $663 million to be brought forward across this year and the next, leaving a deficit of $426 million compared with prior aggregate funding. Then there was, yet another, ‘temporary increase in the rate’ of the euphemistically titled ‘efficiency dividend’ which returned another $202 million to the Treasury. So much for resolve.

Note: The government’s adjustments to the defence budget are detailed in table 7 on page 15 of the 2013–14 Defence Portfolio Additional Estimates Statement (PDF). Although Defence was also provided with an additional $1.6 billion over four years for foreign exchange supplementation (to cover the rising cost of foreign purchases) the net result was a reduction in the buying power available to Defence. 

Mark Thomson is senior analyst for defence economics at ASPI. Image courtesy of Flickr user Secretary of Defense.

Power sharing and risk management in Hugh White’s ‘China Choice’

Can the US and China share power?

Hugh White argues in his book China Choice that the United States should share power with China. Perhaps the starkest aspect of his proposal is that it requires real and substantive concessions to be negotiated with the Middle Kingdom. There’s no wishful thinking about China being happy as a ‘responsible stakeholder’ in Hugh’s view, and there’s no place at the table for middle powers such as Australia either. His is a security architecture built around olde worlde great power politics.

As an example of what that might look like, Hugh sketches out a ‘concert of Asia’ involving America, China, Japan, India and perhaps Indonesia. In doing so, he outlines seven ‘understandings’, with which the members of the concert would probably have to agree, including ‘fully accept[ing] the legitimacy of the political systems of all the others’. What’s more, he identifies Japan’s re-emergence as a great power in its own right (i.e. independent of the United States) as a likely precondition for a concert to be workable. None of this would be easy; in fact it might not even be possible. Read more

If power sharing can be achieved, it certainly won’t be pretty. The fundamental basis of Hugh’s scheme entails compromises in favour of Chinese interests. Indeed, the term ‘power sharing’ is at best incomplete and potentially misleading in this context. In a previous generation, prior to the taint of history, the word ‘appeasement’ would have arisen in the discussion.

What exactly China might demand is hard to anticipate, and Hugh is imprecise on the limits to be imposed on concessions. Although he mentions the UN Charter with its restraint on the use of force—at least between those sharing power—he also says that small and middle powers would be ‘vulnerable to the predations of the great powers’. In any case, it’d be hard to be optimistic about continued Taiwanese independence under a power sharing arrangement with China.

So we have a proposal which would be both difficult to achieve and worrying in its consequences. To his credit, Hugh doesn’t pretend otherwise. Instead, he argues that we should work towards what he calls power sharing because it’s vastly preferable to what he sees as the alternatives: US withdrawal from the region or escalating US-Sino rivalry with an attendant risk of catastrophic war.

I think that it’s fair to say that Hugh’s analysis of the strategic environment has been proven prescient by recent events. Nonetheless, and despite wide exposure, it’s equally fair to say that his proposal is yet to garner serious policy traction in Australia or the United States. But the game isn’t over; Hugh will undoubtedly continue trying to convince US audiences of the imperative to share power with China.

The question of what Australia should do naturally arises. The answer depends on how convincing you find Hugh’s argument. I’m unconvinced, but that’s a story for another day. Instead, I want to explore an issue in risk management that arises for Australia from Hugh’s proposal for the United States. (His prescription for Australia is set out in his Quarterly Essay Power Shift.) If musing about risk seems an esoteric diversion, forgive me, but I think it’s central to any serious discussion of strategy. Here goes…

Let’s stipulate for the purpose of argument that power sharing is the best option in the sense that it reduces anticipated future costs compared with the alternatives—ie on average it’s less bad then the alternatives. I say ‘on average’ because there’s always uncertainty about how the future will play out. We get to choose a course of action but we have to accept that the consequences are uncertain—we control our actions but not ultimate outcomes.

In a world where power sharing is the least costly option for the United States, they’d presumably try to achieve that outcome, provided that they realise what’s in their best interest. After all, they’d have nothing to lose. If their offer to share power was rebuffed or proved too difficult or unpalatable, they could always change track and pursue another option.

But what happens if, as Hugh argues, the United States lacks the wisdom to realise what’s best for them? How should Australia respond then? Should we urge the US to share power with China and position ourselves to make this more likely by, for example, limiting our support to the US rebalance to Asia and adopting a more independent position between China and the United States? The answer depends on how likely we judge it to be that the United States will take our advice.

If the prospects of persuading the United States to share power are low, all we gain is a small increase in the probability of the least costly outcome (and a commensurately small decrease in the probability of more costly alternatives). But we’ll incur an opportunity cost; specifically, we won’t be able to shape the course of action the United States is actually undertaking and, more importantly, we’ll limit our options for mitigating the risks associated with it. Most critically, by failing to support the US strategy with respect to China, we’ll undermine the prospects of receiving US support subsequently.

My judgement is that by advocating US–China power sharing and positioning ourselves accordingly, we’re only likely to marginally increase the already small probability of that occurring. That’s because power sharing would require the United States to abandon the liberal democratic project it embraced following the end of WWII. As Hugh himself puts it: ‘sharing power with China runs counter to America’s vision of itself and its role in the world…’. I’d put it even more strongly; the United States and China have such incompatible conceptions of power as to make power sharing between them the equivalent of a vegetarian and a carnivore attempting to share a meal.

The critical point is that we can’t have it both ways. We can’t support the US pivot and not support the US pivot. We can’t host US troops in Darwin and not host US troops in Darwin. We can’t draw closer to other US allies in the region and distance ourselves from them at the same time. Most importantly, we can’t undermine US strategy and expect US protection. By all means, Australian leaders should have frank and full discussions with their US counterparts about how to best handle the challenges we face, but at some point—sooner rather then later—a decision has to be made. In this sense, there is a China choice for Australia to make.

It’s about playing the odds. Sound strategy demands a focus on the practical differences that we can make to the probabilities and consequences of the risks that we face, rather then a fixation on achieving the theoretical best possible outcome. It would make no sense for Australia to expend its limited alliance capital in a quixotic quest to reverse US policy. Like it or not, Australia only has a marginal capacity to shape the strategic landscape of the Asia–Pacific region in the 21st century. We have to accept the realities we face and work diligently to mitigate identified risks where we can.

Where does this leave us? My conclusion is that even if a power sharing arrangement is the best option for the United States to pursue in theory (a topic for another day), the best strategy for Australia will almost always be to work with the United States in executing the strategy it chooses for itself.

Mark Thomson is senior analyst for defence economics at ASPI. Image courtesy of Flickr Ronnie Meijer.