Articles by " Mark Thomson"

The surface fleet: the question of numbers

A question of numbersLate last month, Ben Schreer introduced ASPI’s upcoming international conference on Australia’s Future Surface Fleet. In doing so, he observed that many factors—strategic, operational, international and industrial—will shape decisions about the Navy’s future surface fleet. He could also have added politics to the mix—as the recent extraordinary machinations surrounding the role of ASC in the submarine program clearly demonstrate.

It’s a fact of life that domestic politics will play a role in shaping the backbone of the surface fleet through the future frigate program. Not just by making it highly likely that the vessels will be built in Australia, but possibly also by expanding the size of the program to facilitate the ‘continuous build’ of vessels (with a fleet of only 11 surface combatants, a continuous-build program would result in either a wastefully truncated life-of-type or an inefficiently slow rate of production).

A fleet of 20 surface combatants would plausibly support a continuous-build program; one vessel could be built every 18 months and retained for 30 years. But do we really need 20 surface combatants? For that matter, do we need 12 submarines? It’s one of the classic questions of defence planning; how much is enough? Read more

Ask Defence about planned fleet sizes and you’ll be told that periodic Force Structure Reviews use sophisticated analytic techniques to determine vessel numbers based upon their utility in specified scenarios (which are, naturally, classified). Sounds reasonable, but where do the scenarios come from? They’re derived from an overarching classified document called the Defence Planning Guide which is updated annually and approved by government. An outline of Defence’s labyrinthine internal planning processes can be found here and here.

Importantly, while the scenarios are almost certainly informed by the latest intelligence analysis, they’re not independently produced ‘intelligence products’ as such. Rather, they’re policy constructs generated via Defence’s internal risk-assessment process. That means Defence’s planners live in a closed loop where they ultimately set their own goalposts. If you control the scenarios, and the scenario testing is deterministic, you control the outcome in terms of platform numbers. There’s even a pertinent term-of-art within the military for getting the answer you want via analysis, it’s called ‘situating the appreciation’.

In case I’m not being clear, I contend that there’s precious little real analysis underpinning the size of the ADF—apart from the balancing of complementary parts of the force that rely upon each other to be effective. I expect, for example, that we sensibly plan on having enough support vessels to sustain the deployment of the remainder of the surface fleet. But as to the size of the surface fleet, it’s more an artefact of replacing what we’ve got and living within financial constraints—or taking advantage of extra money when it becomes available—than objective strategic analysis.

As critical as what I’ve said might sound, I don’t have a better proposal. In principle, we could take the formulation of scenarios out of the hands of the policy wonks and give it to the Defence Intelligence Organisation to produce free of policy influence. But that would be as flawed as the present arrangement; the implicit assignment of priorities to prospective contingencies is inherently a policy rather than intelligence function. If I were to suggest any changes to the present regime, it’d be to save some money by simplifying the bureaucratic busy-work that does little more than the old magician’s trick of telling us the number we first thought of.

There’s no way around the underlying problem. The scale of the ADF is arbitrary because we don’t have a concrete threat to plan against in terms of our stated core goal of ‘defending Australia’. With nobody on the horizon to play the role of invader, we can’t scale ourselves against the task. There are worse problems to have.

Of course, there are a range of credible but lesser contingencies that we have to worry about; deployments to the Middle East for example, or support to US maritime forces in the Pacific. But in each case, we’re inevitably going to be but a small part of a larger effort where our military impact is not decisive. The sorts of contributions we’ve made to recent coalition missions, and those we’re likely to make in the future, aren’t large enough to provide a scale for the ADF.

So where does that leave us when it comes to the size of the future surface fleet? My conclusion is this: while we need to ensure harmony between the complementary elements of the force, it’s an illusion to think that the numbers of platforms we have today, or might be planning for tomorrow, are sacred.

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

Whither 2%?

Tony Abbott visiting troops abroad in January, 2015.A lot has happened since September 2013 when Tony Abbott promised to boost defence spending to 2% of GDP ‘within a decade’. The economic outlook has deteriorated, government revenues have fallen, and the Senate—like many in the electorate—has rejected key elements of the government’s first budget. And in what feels like Groundhog Day, we’ve lost yet another defence minister and almost lost another prime minister. None of that bodes well for the 2% promise.

The government is being squeezed on two fronts. A deterioration in Australia’s terms of trade and other adverse economic developments have cut projected revenues by $37.8 billion (here and henceforth, all figures are over 4 years). To make matters worse, negotiations in the Senate have lead to $7.2 billion of additional spending and $3.4 billion of foregone savings due to delays. If that weren’t enough, there’s a further $34 billion in savings stalled in the upper house. Read more

In an attempt to rein in the burgeoning deficit, the government introduced $4.1 billion of belt-tightening measures late last year, including a $3.7 billion cut to foreign aid. The bottom line is hardly encouraging; between May and December the forecast deficit over the next four years grew by $44.3 billion. And unless the Senate promptly passes the $34 billion in stalled savings measures, further hits to the budget will follow. Add to that the increasingly gloomy economic outlook, and the prospect of returning to surplus this decade looks unlikely.

Just as fiscal pressures have grown, so to have political pressures. The electorate is restive and volatile. The extraordinary success of minor parties in the 2013 election reflected diminishing faith in and allegiance to the major parties. Consistent with that, voters at the state and federal level have been willing to redirect their support dramatically in recent times. Consider Queensland, in 2012 the Bligh government suffered a swing against it of 15.6%, three years later the Newman government suffered an adverse swing of 8.2%.

While there’s no escaping the conclusion that the electorate is responding to the performance of government (as it should), other factors are at play. For example, technology and commercial pressures have created a 24-hours news cycle of unprecedented ferocity. A larger problem—in my view—is that the electorate is yet to adjust to the new economic reality.

During the latter years of the Howard government the resource boom provided the government with windfall revenues year after year. The government was in the happy position of dividing up an expanding pie to grateful voters. Income tax fell, transfer payments grew, and Defence got so much money that they literally handed some of it back unspent. Even when the financial crisis hit, Keynesian ‘pump priming’ ensured that few people felt hard done by.

Fast-forward to 2015, and the bill has arrived. While the Howard government had the happy task of spreading joy, the sombre responsibility of government today is to share pain. While there’s more to be done to boost productivity and enhance the efficiency of service delivery, the books won’t be balanced without substantive belt-tightening. With the electorate barely weaned off the resource boom, it’s a hard sell.

So what does this have to do with the plan to boost defence spending to 2% of GDP? Put simply, every extra dollar spent on defence requires some combination of higher taxes, increased debt and diminished government services. With the fiscal outlook deteriorating and the electorate voicing its impatience, the task of elevating defence spending to 2% of GDP is getting harder by the day.

Absent an international crisis to demonstrate the risks Australia faces, sustained increases to defence spending will be feasible only if the government makes the case. To date, that’s not occurred. Indeed, even during the election campaign the 2% target was used as little more than a totem.

Others have explained why 2% of GDP is a poor basis for defence funding, but it would indeed be a wondrous coincidence if the risks Australia faces could be efficiently mitigated with 2% of GDP—not one cent more or one cent less. Nonetheless, there’s one sense in which the 2% promise matters a lot: in terms of being taken seriously by other countries and in particular our ally the United States.

The Rudd government’s 2009 Defence White Paper set out an expansive vision of a larger and more capable ADF, but successive cuts to defence funding made the plan laughable. Regrettably, the 2013 White paper did nothing to rectify the sorry situation. We talked big and then failed to deliver. Here’s the problem. If the Abbott government ditches the 2% promise, we’ll once again look like blowhards who don’t take national defence seriously.

Mark Thomson is senior analyst for defence economics at ASPI. Image courtesy of Twitter user @TonyAbbottMHR

AWD: time for Plan B

DeckchairsYesterday the government made two announcements about naval shipbuilding. The first was its plan to fix the ailing Air Warfare Destroyer program. What emerged wasn’t the approach foreshadowed in the press a few months ago, in which a single commercial entity—BAE was the hot favourite—would take control. We explained the pros and cons of that approach here on The Strategist.

Putting the project under a single company would’ve resolved the distributed responsibility under the current alliance framework and removed the government from being on both sides of the contract. It certainly looked headed that way, with the government appointing merger and acquisition specialists as advisors on the project. But in the end that wasn’t the approach chosen. Instead, bets have been redoubled, in that the parties that collectively brought the AWD program to its current point will continue in a revamped management model. According to the media, the Finance department (owner of ASC) put the kybosh on bringing in outside management.

There are three components to the AWD remediation plan. First, the Spanish design house Navantia—which inexplicably was left out of the alliance when it was created—will take on an enlarged role. This ought to help streamline the communication between designers, production engineers and the shopfloor. The second component is insertion of more shipbuilding experience into the project by involving BAE, which was formerly only a subcontractor for modules, in project management. Third, existing alliance member Raytheon will take on an expanded role in supply chain and corporate management. Read more

It’d be strictly inaccurate to describe the plan as simply rearranging the deckchairs, but it’s not far from it. If anything, this latest initiative further clouds the already diffuse governance arrangements inherent in the alliance. And there’s only a handful of new people being brought in: 20 from Raytheon, 11 from Navantia and only 8 from BAE.

The government describes this as an ‘interim arrangement’ and says ‘no decisions have yet been made about the long term arrangements for the Air Warfare Destroyer program’. A lot is at stake. Aside from the $8.5 billion project itself, further domestic naval shipbuilding projects depend upon improved performance. Basically, the government has said that if the project can’t get up to speed by the middle of next year, it won’t guarantee further work.

And although we noted earlier that there’s been apparent improvements to shipyard productivity (and to submarine support), yesterday’s announcement slipped the delivery dates for the vessels by another nine months. The first two vessels will now be 30 months late and the third a full 3 years. So while we’re told that productivity is improving, the AWD schedule is moving in the opposite direction.

The second of yesterday’s announcements was a plan for the creation of a ‘sustainable shipbuilding industry that supports shipbuilding jobs‘. The plan has three parts, fix the AWD project, create a shipbuilding industry around the future frigate (contingent on productivity improvements), and create a ‘sovereign submarine industry’.

What’s a sovereign submarine industry? Not unreasonably, one might assume that it has something to do with building submarines in Australia. So the media asked the question—repeatedly—but to no avail. The exchange is available in transcript and on video. The best the fourth estate could get from the Minister was that specific announcements would be made in due course. It was left to the Prime Minister to clarify the matter later in the day (pay wall) in terms of submarine fit-out and maintenance being done in South Australia.

Yesterday’s confusion adds little to what we know about the government’s thinking about the way ahead. Rather, it continues a pattern whereby even the options under consideration are kept secret. While that’s perhaps understandable given the highly charged politics surrounding future naval acquisitions, it’s unlikely to deliver good policy.

There are many difficult policy choices ahead; choices that will shape the navy out to mid-century at a cost of tens of billions of dollars to the taxpayer, and we need to have an informed debate on those issues. At the moment, the policy debate is being overshadowed by parochial politics and handicapped by an acute absence of information. Yesterday’s announced ‘plan that will create a sustainable naval shipbuilding industry’ amounted to a mere 153 words.

Specific matters are easy to identify. Apart from fragmentary and unverified leaks, we don’t know what the White-Winter report recommended for fixing the AWD program, and we don’t know the range of options and acquisition strategies under consideration for either the future submarine or future frigate. Similarly, we don’t know the benchmark against which AWD productivity will be measured in deciding the future of local naval shipbuilding.

There’s not time for a green paper let alone an independent review to sort things out, but there’s no reason why next year couldn’t begin with a full ministerial statement on naval shipbuilding that fills in the many blanks.

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

The costs of cutting steel

A young woman arc welding part of an anti-tank gun in a munitions factory in South Australia in 1943.

In 2013, the early replacement of the Anzac frigates was proposed as a way to bridge the shipbuilding ‘valley of death’. The idea was to continue building AWD hulls and equip them with a combat system based on the Anzac upgrade now underway.

Even starting tomorrow, it’s doubtful that such a scheme would preserve more than a subset of white-collar jobs at the shipyards. Yet the idea survives, and has grown into an ambition for a continuous-build program involving as many as twenty vessels. The number of hulls has grown because a continuous-build program has to be fed by the taxpayer, either by routinely retiring vessels before their economic life or by building a larger fleet than the RAN needs.

But the imperative for domestic shipbuilding is weak and the costs would be high, so why does the idea persist? Two factors are at play: lobbying by incumbent firms and the politics of South Australian jobs. The latter is especially potent given the likely foreign build of the Collins replacement. As for the expense of jettisoning recently-upgraded Anzacs, the consoling thought is that we could bolster regional maritime capabilities by gifting vessels to Indonesia and potentially selling others to New Zealand. Read more

What would the proposal cost? That depends on many factors, including the reduced life and/or increased number of the surface combatants. Then there’s the competiveness of local shipyards.

The head of DMO recently testified to a Senate inquiry that ‘a productive yard, building continuously’ could have built the first AWD in 3 million work-hours, and that 4.7 million had been allowed for the local build’s cold start, yet the current estimate for the first vessel stood at 9.3 million. Using the per-capita annual cost of labour at ASC ($132k) and the estimate of 2,000 annual hours per worker from 2013 Submarine Skill Plan, the additional cost of the first vessel can be estimated (excluding shipyard overheads and material costs for rework):

Work-hours Labour cost
Continuous production 3.0 million $198 million
Originally planned 4.7 million $310 million
Now expected 9.3 million $615 million

Thus, on the basis of labour costs alone, we’ve spent at least $305 million more than planned, and $417 million more than best-practice for the first vessel. I say ‘at least’ because Australia has high wages. The US Bureau of Labor Statistics ranks Australia 6th out of 34 OECD countries in hourly compensation for manufacturing, and 7th out of 16 for the sub-category including shipbuilding.

It’s hoped that a continuous-build program would lift Australia’s shipyard productivity. Although higher productivity won’t reduce wage rates (and will do the opposite if wages are linked to productivity), it’s still worth asking how much improvement is realistically possible.

The Anzac program is often held up as a paragon of efficiency, with ten vessels delivered for $9.3 billion in 2012–13 dollars. Lacking better data, labour use can be estimated by multiplying its 125-month duration by the reported 1,223 prime contractor and 1,337 subcontractor personnel in 1994–95. Using the former as a minimum, this implies between 2.5 and 5.3 million hours per vessel. Noting that an Anzac is only 60% the displacement of an AWD, this is hardly impressive if a ‘productive yard’ can build an AWD in 3 million hours.

In comparison, Denmark has recently built three frigates at a cost of US$325 million per vessel (PDF) or around US$383 million including the value of reused equipment from retired vessels. Labour use was 700,000 hours per hull. As the table below shows, the contrast with the cost of our AWD and Anzac programs is startling.

And the Danes didn’t cut corners; their vessels are larger and better equipped than our Anzacs—including with SM-2 missiles.

  Unit cost ($A million) Displacement
Cost per kg ($A/kg) Labour (hours) Crew
Danish Frigate 435 5,452 80 700,000 101
Anzac Frigate 932 3,600 259 >2,500,000 163
AWD 2,700 6,250 432 *6,200,000 202

*Average figure assuming that the second two vessels are each built using half the labour of the first.

How did they do it? To start with, the vessels were built in an efficient civil yard by an established workforce. In addition, lessons from civil design were adopted to make the vessels easy to build and cost-effective to maintain—hence the relatively small crew. And Denmark has access to low-wage module construction on the other side of the Baltic.

Australia’s naval shipyards would undoubtedly benefit from more efficient designs and construction techniques—and the Danes are already working with Canadian shipyards to help them to this end. Nonetheless, we’ll never have a commercial steel shipbuilding sector to leverage. And we’re poorly placed to access low-wage yards for module construction. If we build ships in Australia, we’ll pay a premium.

A practical alternative would be to build frigate hulls offshore and fit them out locally (as with the Canberra-class LHD). Doing so would allow us to focus on strategically relevant, high value-add areas such as systems integration rather than cutting steel.

Mark Thomson is senior analyst for defence economics at ASPI. Image courtesy of Flickr user State Library of South Australia.

On economics and submarines

A lesson for submarines

According to the South Australian government, the Australian economy will be better off by $21 bn if our next generation of submarines is built in-country rather than purchased from overseas. With the Abbott government likely to make a decision about the submarines soon, the claim deserves close examination.

The underlying analysis is set out in a paper from the SA Economic Development Board  based upon commissioned work done by the official-sounding National Institute of Economic and Industry Research. It’s a short paper, running to only nine pages, and sparse in detail. Read more

The paper compares two options:

  • purchasing 12 submarines from overseas and performing only light maintenance on the boats in Australia;
  • building 12 submarines in Australia and performing both light and heavy maintenance in Australia.

The options posited immediately skew the analysis by assuming that with the foreign build option, heavy maintenance would be done offshore. It fact it would be feasible and advantageous to perform heavy maintenance in-country. In case there’s any doubt, we successfully executed an extensive mid-life upgrade of the British-built Oberon class boats.

As a starting point, the paper assumes that it would cost $20 bn to acquire 12 boats irrespective of where they are built at the baseline exchange rate of 92c to the US dollar. Thus, at today’s exchange rate of 88c, we already face a $900 million premium for a foreign build.

But recent experience demonstrates that there’s a substantial premium associated with building ships in-country (albeit one that depends on the prevailing exchange rate). As Andrew Davies put it, in the case of the $8.1 bn Air Warfare Destroyer (AWD) project, we’re getting three ships for the price of four, not counting recent cost blowouts and the lost value of increasingly delayed delivery. Estimates of the effective rate of assistance for the Landing Helicopter Dock and AWD programs come in at 70% and 33% respectively.

Not only is the higher up-front cost of local construction ignored, but the analysis unreasonably privileges future spending by omitting a net-present-value calculation of costs—which matters a lot given the unrealistic assumption about off-shore heavy maintenance and the 40-year time-horizon of the model.

The SA paper also ignores the ‘agency’ problems of local build. First, it can be desperately hard to get acceptable productivity from a domestic monopoly—as our sorry experience with submarine maintenance shows. Second, and as we’ve seen, an incumbent local supplier will form a natural alliance with unions and the state government to shift risk and cost increases back to taxpayers.

The SA paper then makes matters worse by modelling the economic impact via an input–output model. One of us has already blogged about the shortcomings, but the essential features are easy to recount.

The problem’s best explained by thinking of a ship built in Australia. The workers and local subcontractors will receive income, which they will largely spend on other locally-produced goods. By using data on the inputs and outputs of Australian producers of those goods, it’s possible to trace the direct and ‘multiplier’ effects of the spending on GDP and tax revenue.

That’s fine, but such an analysis ignores the alternative use of the labour and other inputs—it assumes they’ll sit idle if our hypothetical ship isn’t built. In reality, market forces will redeploy them elsewhere in the economy where they will contribute to GDP and pay taxes. That’s especially true in any long-run scenario—and this modelling stretches over 40 years.

The unreality of input–output modelling is well understood, so more sophisticated general equilibrium modelling is the standard approach for addressing long-run ‘what if’ questions about policy. The SA paper rejects general equilibrium modelling on the grounds that ‘no capacity constraints are anticipated in the labour market’. That is, it assumes that there will be a pool of unemployed in Australia for the next 40 years who, but for the opportunity, have the aptitude to become highly skilled engineers and trades persons. Indeed, as there are no ‘ramp up’ costs in the model, it assumes all these skills and resources already exist—in obvious contrast to the findings of the RAND study.

If the economy really was as static and unresponsive as assumed in input–output modelling, we could never have absorbed the resource boom. Nor would we ever have recovered from the removal of tariffs on cars, footwear and clothing. But we did, and the economy responded with new jobs in new areas. More importantly, consumers came to enjoy cheaper prices. There’s a lesson here about buying submarines. The economic argument for mandating local construction is ultimately no different to the neo-mercantilist arguments which sought to hold back productivity-boosting reforms of the 1980s and 90s. Then as now, the focus should be on the overall benefits rather than those concentrated in the hands of a few.

Henry Ergas is a senior economic adviser, Deloitte Access Economics, and professor of Infrastructure Economics, University of Wollongong. Mark Thomson is senior analyst for defence economics at ASPI. Image courtesy of Flickr user sea turtle.

Graph of the week: ADF pay

Graph - salary increase comparatorsThe government’s offer of a 1.5% p.a. pay rise for each of the next three years in exchange for a reduction in leave entitlements and other allowances has been met with dismay. This is one of those issues where the facts speak for themselves. So here are some facts:

According to the government’s own figures, inflation is projected to be 2.25% in 2014-15 and 2.5% for the three years after. With a little arithmetic, this means that the government’s offer of 1.5% per annum would result in a cumulative reduction of 2.66% in real terms over the next 36 months. Compared with the remainder of the labour force, the picture is worse still. The government projects that the Wage Price Index will run at 3% over the next two years.

Two things are noteworthy in this regard. First, the Defence budget is indexed at 2.5% per annum to take account of inflation. Second, the ADF workforce has been quarantined from efficiency dividends under the current and previous governments. It follows that an inflation-matching salary increase of 2.5% per annum could be afforded from within existing funding without redirection from other programs (consistent with the government’s 2014 Public Sector Workplace Bargaining Policy). Read more

Current ADF salary rates and allowances can be found here. For those without the time to work through the labyrinth of numbers, a benchmark is as a follows. The salary plus service allowance for a sergeant in the army roughly equates with average adult full-time earnings in Australia (~$78,000). Higher ranks get paid more, lower ranks less—though specialist skills can make a significant difference.

Looking over time (see chart above), ADF salary increases have consistently outpaced inflation; and growth in average weekly full-time ordinary earnings has done the same, but by a wider margin. The latter is presumably a reflection of a structural shift in the Australian economy to higher productivity jobs.  Defence APS salaries and ADF salaries are bootstrapped onto each other, thereby explaining their overlapping trajectories.

Finally some context is worth taking into account. The government has frozen the pay of parliamentarians and senior public servants as of July 1 2014, so they’ll experience an even higher percentage real loss of salary than ADF members if the present offer goes through. However, this needs to be seen in the context of the 31% pay increase awarded to parliamentarians in 2012 (along with the 27% increase in remuneration awarded to the Chief and the Defence Force and a similar rise for departmental secretaries over the period 2012 to 2014).

As I said, the facts speak for themselves.

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

Submarines: the value of Option B


Brendan Nelson will be remembered as the defence minister who pushed through the Super Hornet purchase as a hedge against further delays in the long-troubled F-35 Joint Strike Fighter program. While Air Force held tight to the increasingly forlorn hope that the F-35 would be delivered on schedule—resisting any suggestion of a 4th-generation interim fighter lest it become the final capability—Nelson moved decisively to mitigate the risk of a capability gap. In doing so, he saved the RAAF from itself.

Fast-forward eight years, and another capability gap looms. This time it’s Australia’s submarine capability. It’s now widely known that the Abbott government is working hard to secure a submarine deal with Japan. A great many concerns have been raised about so-called Option J, from the suitability of the Soryu-class boats to the difficulty of dealing with a first-time exporter. Perhaps most vocally, Australia’s shipbuilders are crying foul that the longstanding promise of a local build has been broken. Read more

Even without my ambivalence to local shipbuilding, I’d have sympathy for the government’s approach. Upon coming to power last year, they inherited a risky DIY scheme to design and build an ab initio Australian-designed submarine (cue: stirring speech about nation building and the Snowy Mountains Scheme). So they grasped Option J as a realistic alternative and they’ve been running hard with it ever since.

Good on them. It’s easy to raise legitimate questions about the suitability of the Soryu-class. Nonetheless, in broad terms, it appears to be the closest thing to what we need that’s available off the shelf. But what happens if, upon closer examination, our engineers and submariners conclude that the Soryu won’t cut it? Or what if the difficulties of working with a first-time exporter prove too daunting? There are surely significant cultural, language and commercial differences to be carefully weighed.

Perhaps most importantly, there’s the question of how achievable and durable a deal with the current Japanese government will be. For the moment, there appears to a real willingness at the highest level in Tokyo. But like any democracy, the Abe administration’s ability to do a deal depends on Japan’s parliament, the Diet, and thereby on Japanese public support. And make no mistake; the sale of subs to Australia would be a substantial strategic move for Japan which would quite properly elicit domestic debate.

So if things don’t work out, what’s Option B? As with the F-35, there are inherent risks to putting all your eggs in one basket—especially when time is running out to get production underway. The Collins isn’t going to last forever.

There are at least three other credible partners who could help us maintain our submarine capability—France, Germany, and Sweden—and perhaps a fourth in Spain. I’ve argued previously, as have others, that we should run a design competition to select the best supplier and secure the best deal. The benefits of doing so are many and obvious—and akin to why most people shop around rather than grab the first item that catches their eye.

Setting aside the myriad intrinsic advantages of competition, in our current situation a competition would allow Option J to be progressed in tandem with one or more alternatives. Thus, not only would we be able to secure the best deal the market can offer, but we’d be mitigating the risk inherent with pursuing a single source. Better still, and in contrast to the Super Hornet purchase, rather than shouldering the cost of an interim capability we’d be able to proceed expediently with a long-term solution.

Of course, it would take a little extra time to run a contest. But the delay wouldn’t have to be extensive. Everything that a competition would ask of potential suppliers would need to be asked of Japan before a sole source deal could be struck. Activity would be concurrent rather than sequential. Alternatively, if Option J is the only option being developed, we’ll have to start over if things don’t work out.

Perhaps it’s time for Defence to return the favour they owe Brendan Nelson and take forward a submarine acquisition strategy to the Abbott government that builds in an Option B to ensure no submarine capability gap emerges.

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

Defence and the diarchy

The diarchy: butting heads on occasion

If the First Principles Review of Defence goes back to first principles, it’ll have to examine the diarchy wherein Defence is jointly headed by the Secretary and CDF. That’s likely to occur given that one Review panel member—retired Army chief Peter Leahy—is on the record arguing that the Minister should ‘ask himself why Defence is the only department or agency in the country run by a diarchy’.

In a speech in 2000, then departmental secretary Allan Hawke said that the diarchy was ‘about bringing together the responsibilities and complementary abilities of public servants and military officials’. In terms of responsibilities this is undoubtedly true, but only in a circular sense because legislation has been drafted consistent with a diarchy. The fact that the Australian Federal Police (AFP) is headed by a uniformed commissioner shows that there’s no underlying legal impediment to putting the CDF in sole charge. Read more

What about complementary abilities? Is Defence really so large and complex that it requires two leaders with different backgrounds to manage the enterprise effectively? Of course not; the largest of corporations and even entire countries get by with a single head. Where specialist advice is needed, specialists can provide it. Whatever expertise a departmental secretary has could easily be relegated to a subordinate reporting to the CDF—as effectively occurs in the AFP.

So why have a diarchy? Although such an arrangement is almost unheard of in the business world, Australia’s defence diarchy isn’t unique; the United Kingdom for one has a similar arrangement. Other countries, such as Canada and New Zealand, maintain civilian defence departments in parallel with their defence forces. The common and essential element is that the government has dual sources of advice on military affairs. In its own way, the United States achieves the same thing within its system.

The involvement of civilian officials in defence matters is an essential part of the elected government maintaining effective control of the military. The risk is not of insubordination; the ADF’s obedience to the government of the day is beyond reproach—as tends to be the case wherever the rule of law prevails. Rather, civilian involvement is needed to ensure a level of objectivity in defence administration that can’t realistically be expected from the military.

The Army, Navy and Air Force, and the ADF as a whole, are institutions with strongly ingrained identities. That’s as it should be; the fighting coherence of our forces is as dependent on their distinct institutional characteristics as it is on their equipment. But with ingrained identities come ingrained aspirations that can put institutional desires above the needs of Australia’s defence. In a classic RAND study from the 1980s, Carl Builder captured the idiosyncratic ways that the US Army, Navy and Air Force each approach the problem of force planning—all largely divorced from strategy. The three Australian military services are little different today.

Moreover, the senior ADF leadership have dual responsibilities: upward to the minister, and downward to its members and to the institution(s). What service chief doesn’t argue for the best equipment, best facilities and best conditions of service for their members? I don’t expect them to do otherwise, but neither do I want an inefficient and gold-plated defence force. As in any other area of government activity, spending should be disciplined by the cold, dispassionate balancing of costs and benefits.

For exactly the same reasons that the Australian Medical Association wouldn’t be given control of health administration, or teachers control over education administration, neither should the military be the government’s sole source of advice about itself. The diarchy (or something like it) is needed to temper the institutional introspection of the military in favour of the objective interests of Australia’s defence and the taxpayer.

How can that best be done? The pros and cons of having a diarchy, as opposed to having a separate defence department and defence force, have been discussed by Derek Quigley (ex-NZ MINDEF) and Neil James (ADA Executive Director). However, the differences between the two options are ultimately of practicality rather than principle. For what it’s worth, I’m firmly in favour retaining the diarchy. When it comes to civilian involvement in military matters, the closer and more integrated the better.

While civilian bureaucratic involvement in Defence is desirable, its present implementation remains imperfect. Today’s plans for the ADF are little more than the sum total of single-service wish-lists, and defence efficiency remains a distant hope. The diarchy may be necessary but it’s manifestly insufficient. Otherwise why would the government have turned—yet again—to external advisors to tell them how to fix Defence?

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

First principles review: one more round of external oversight

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.On 5 August, eleven months after coming to office, the government finally announced its long-promised First Principles Review of Defence. Although the review’s terms of reference have not been formally released, the minister effectively outlined them in a recent speech saying that the review would make recommendations to:

  • ensure that the Department of Defence’s business structures support the ADF’s principal tasks, as determined by the 2015 Defence White Paper, and other whole of government responsibilities out to 2030
  • ensure a commercially astute, focused and accountable materiel acquisition and sustainment capability
  • improve the efficiency and effectiveness of Defence
  • guide the implementation of recommendations from the Commission of Audit not otherwise covered above, and
  • ensure the ongoing delivery and reporting of agreed recommendations

It’s probably not wise to read too much into the points above. For example, it’s hardly likely that the Review will uncritically accept the recommendations of the National Commission of Audit (or let’s hope not). Nevertheless, the government’s goals are clear: make Defence efficient and effective, reform the Defence Materiel Organisation, and ensure that any recommendations are carried out. Read more

The review will be headed by David Peever, ex-managing director of mining powerhouse Rio Tinto Australia (and newly appointed Cricket Australia Deputy Chairman). Assisting him will be ex-chief of army Peter Leahy, BAE Systems executive Jim McDowell, ex-defence minister Robert Hill and ex-finance minister Lindsay Tanner.

In the weeks ahead, I will post on many of the issues that fall within the terms of reference (along with a few that don’t). With a major review underway, it would be good to see a public discussion about how best to structure and manage the multi-billion dollar Defence enterprise. In the remainder of this post, however, I want to reflect on the practice of having external reviews of Defence and provide some background.

As the following timeline shows, successive governments have brought in outsiders to assist in the quest to create a more efficient and effective Department of Defence.

In 1989, Kim Beazley tasked ex-ASIO head Alan Wrigley to review civil support to the defence force. The result was the Commercial Support Program (CSP), which saw thousands of uniformed and civilian positions outsourced from Defence through the 1990s.

In 1996, Ian MacLauchlan initiated the Defence Efficiency Review (DER) chaired by CSIRO head Sir Malcolm McIntosh. The result was the Defence Efficiency Program (DRP) which accelerated the outsourcing of jobs, rationalised the defence estate, and established the current ‘shared services’ business model within Defence. The goal was to generate $1 billion dollars a year in savings.

In 2007, Brendan Nelson launched the Defence Management Review in the wake of the failed repatriation of Pte Jacob Kovco from Iraq. Headed by ex-state government bureaucrat and businesswoman Elizabeth Proust, the Review led to some additional deputy-secretary positions but not much more.

In 2008, Joel Fitzgibbon hired management consultant George Pappas to undertake the Defence Budget Audit (DBA). The result was the Strategic Reform Program (SRP), which made widespread but largely incremental reforms to Defence from 2009 to 2012 in an attempt to generate more than $20 billion in savings over a decade.

In 2011, Stephen Smith commissioned a raft of ‘cultural reviews’ following the Skype scandal at the Australian Defence Force Academy, all but one of which was headed by an external party. In the same year, Smith also commissioned a Review of the Defence Accountability Framework headed by ‘ethicist, theologian and strategic advisor’ Rufus Black.

Why has government after government felt it necessary to use external people to recommend changes to Defence? It’s not that the organisation lacks high-paid talent; on the contrary, the past decade has seen strong growth in civilian and military executive positions. More importantly, Defence often impresses; it routinely executes complex military operations at short notice, and is capable of formulating innovative policies such as the recently announced enhanced workforce model. So why doesn’t the government rely upon its principal advisors—the Secretary and Chief of the Defence Force—to sort things out.

To start with, there’s inherent value in seeking outside perspectives. The specialised nature of the work means that many people in Defence—especially in the military—have limited experience of the world beyond. External reviews bring external perspectives unavailable from within the organisation.

But to my mind the real advantage of an outside review is that it brings a degree of objectivity impossible for those engaged in the internecine politics of Defence. Everyone, by position or past, has a vested interest in protecting their part of the organisation. More generally, when it comes time to trim the accumulated fat from the body bureaucratic, there’s no point handing the scalpel to the patient. Let’s hope the newly appointed review team has a steady hand.

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

The British are coming

The British are coming!

Last week, The Australian broke the story of BAE Systems potentially being brought in to fix the troubled Air Warfare Destroyer project. The three-ship build is already well underway in Adelaide, and the project is currently managed through an industrial alliance contract involving government-owned ASC Pty Ltd, Raytheon Australia and Defence.

Approved at a cost of $8.5 billion dollars in 2007, the project has accumulated nearly two years of delays and $300 million in additional costs. A government-initiated review of the project by ex-US Secretary of the Navy Don Winter and former Transfield boss John White recommended a range of measures, including ‘the urgent insertion of an experienced shipbuilding management team into ASC’.

But while the summary of the Winter/White report was announced by government just two months ago, the AWD Alliance had taken steps before that to remedy some of the project’s shortcomings. One of us (Andrew) visited the site at Osborne last week, and it was clear that some good work has been done. Read more

When the Australian National Audit Office reported on the project in March, many of the identified problems related to the transfer of the design from Spain to Australia, and the inexperience of the Australian workforce after more than a decade without a build project. Those factors contributed to a poor start to the project. Low productivity was the inevitable result, due to reworking of both the design and often the hardware. As a result, the first-of-class HMAS Hobart took shape fitfully and inefficiently.

A critical question is whether the existing project management and workforce can retrieve the situation. The answer seems to be a ‘qualified yes’. The Alliance has recruited some experience in production engineering and is seeing positive results. Visits to the yard at about the same stage of progress on ships 1 and 2 revealed a huge difference between the two. The blocks for ship 2 in the yard are more complete (with internal piping, painting, insulation etc) and are constructed to tighter tolerances than the first. For example, when the upper blocks were first lowered into position on ship 1, a substantial gap resulted. On ship 2, the parts fitted neatly together. The already in situ features in the modules mean there’s less need for work in tight and cramped spaces (in particular, the need for difficult overhead work is greatly reduced). The reduction in labour hours required from the first to second of class will be well over 20%, with further improvements expected for ship 3.

The ‘yes’ has to be qualified because there’s still substantial work to be done before a functional warship is delivered. In particular, the capability of the vessels will depend critically on how the Aegis combat system and other sensors and weapons function together. The job of building integrated systems into the hulls is yet to come, although land-based integration is well advanced.

Perhaps because of those improvements, news of BAE’s putative role has taken many by surprise, even though the government showed its cards by appointing a team of corporate lawyers and investment bankers as strategic advisors back in June. By seeking out mergers and acquisition specialists (rather than shipbuilders), the government revealed its inclinations.

So what might we expect if BAE is brought in? At a minimum, BAE could provide individuals with shipbuilding expertise to assist ASC. More likely, BAE would be asked effectively to take charge of the project. It’s even possible that BAE would take an equity stake in ASC’s shipbuilding arm—perhaps contingent on completing the AWD project. (There are good reasons to retain ASC’s submarine maintenance role in government hands, at least for the time being.)

BAE taking charge of the AWD project—if that’s indeed what’s to happen—would bring benefits and risks. On the positive side, BAE could reach back to the UK for help. Of course, BAE’s own problems with module construction for the AWD, and their trials and tribulations with the LHD project, show that they’re capable of overestimating their own abilities. If nothing else, however, BAE would bring the commercial focus that the government-owned ASC lacked. And they’d have every incentive to do so; not only will their reputation be on the line, but success with the AWD would likely secure them the massive eight-vessel Future Frigate Anzac replacement next decade.

On the other hand, the disruption that’s an inevitable result of a change of management would have to be carefully handled. While BAE has experience as a subcontractor, there’d still be a lot for them to learn about the project. The challenge would be to ensure continuity of effort concurrent with the introduction of new blood. As we’ve seen, ASC hasn’t been sitting on its hands. A lot would depend on the attitudes taken by the parties involved and cooperation will be critical. If it happens, let’s hope that the intervention adds more than it subtracts from the project’s likelihood of success.

As ever, the devil’s in the details, and another post will discuss the intricacies of third-party intervention and what the alternatives might look like.

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

The elephant in the conference room

Is that an elephant in the room?

The worst-kept secret at the DMO Defence and Industry conference this week was the government’s active consideration of buying submarines from Japan. Although it was never mentioned in any presentation, Option J, as it has come to be known, was discussed in every corner and corridor of the Adelaide convention centre.

Good policy rarely results from secret deliberations shielded from public scrutiny, so I think it’s time to discuss Option J directly, at a level beyond passing media speculation.

As recently as a month ago, the Abbott–Abe strategic cozying up seemed likely to deliver little more than access to Japanese submarine technologies—in particular, the propulsion system. But today it appears that the government is actually considering having replacements for the Collins built in Japan. Read more

Before going any further, it’s worth noting that would be a move laden with geopolitical consequences. The export of Japanese submarines to Australia would represent a much more rapid normalisation of Japan’s defence posture than anyone has anticipated so far. It would alarm China and heighten Beijing’s fears of containment by the United States and its US allies. Those are serious first-order strategic considerations not to be dismissed lightly or as somehow secondary to the reasons for acquiring submarines in the first place.

But for the moment, at least, I’ll leave it to others to argue the strategic merits and risks of the proposal and focus instead on the question of whether Option J represents a credible path to the cost-effective delivery of submarines to meet Australia’s needs.

It’s commonly believed that Japan builds and operates capable submarines of a displacement commensurate with Australia’s needs. Moreover, they do so through a mature industrial arrangement that exploits dual sourcing to deliver efficient construction and maintenance. So far, so good. The trouble is that, at least in the public domain, we know little about the range, endurance, sensor effectiveness and acoustic properties of the vessels.

Even on the basis of what we do know, if Japan is willing to sell us submarines, we should be looking closely at what they have to offer to see if it meets our needs, or might meet our needs with some modification. For example, we’d almost certainly want to equip the vessels with US weapons and combat systems.

The option of building submarines offshore will alarm Australia’s domestic shipbuilders who have been waiting patiently to play a role in what was long promised to be a domestic program. I’m largely agnostic about building offshore, provided that appropriate steps are taken to ensure the availability of cost-effective and strategically necessary in-country support the fleet will need.

The fear among many people I’ve spoken to, and which I share, is that Option J is being driven at the political level in the absence of the due diligence needed for a multi-billion dollar critical defence acquisition. Japan isn’t the only country that builds submarines. France, Germany and Sweden all have credible products and a declared interest in helping Australia fulfill its submarine needs.

We need something more than a beauty contest—which appears to be all that’s currently planned—that rushes to a decision. With three or four credible contenders we need to see what’s on offer and use competitive mechanisms to secure the best possible deal for the Australia taxpayers.

The bare bones of what we should do is straightforward:

Step One would be to seek formal expressions of interest from prospective suppliers for both in-country and foreign-build boats, based around a clear statement of what Australia wants in terms of platform performance, US-system compatibility and, critically, efficient through-life support in Australia.

Step Two would be to select the two best contenders, or three if absolutely necessary, and conduct funded preliminary design studies. Preliminary design studies would allow decisions to be made on the basis of reasonable estimates of the cost and capability available from the selected firms.

Of course, the conduct of the second stage would be more complex than the simple picture I’ve painted. For example, for domestic construction, the involvement of local firms complicates matters somewhat. But the principle underlying my proposal is simple: in the absence of competitive pressure to contain costs and negotiate affordable through-life support we’ll find ourselves at the mercy of the supplier for the next thirty years.

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

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



National output


Anzac frigates

$5.6 billion

$10.9 billion


Huon minehunters

$1.0 billion

$1.7 billion


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



GDP increase

Jobs increase

Anzac frigates

$5.6 billion

$3 to 7.5 billion


Huon minehunters

$1.0 billion

$887 million


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.