Articles by " Mark Thomson"

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.

Defence efficiency: ASPI’s view

On the 22nd of October last year, the Abbott government announced a National Commission of Audit to ‘to review and report on the performance, functions and roles of the Commonwealth government’. Headed by the chairman of the Business Council of Australia, Tony Shepherd, the Commission has a remit (PDF) to examine the scope, efficiency and effectiveness of government spending. A key task for the Commission is to recommend ‘savings sufficient to deliver a surplus of 1 per cent of GDP prior to 2023-24’.

With Defence accounting for 6.5% of government outlays, it will have to attract the attention of the Commission. There’s certainly a precedent; the Howard government’s 1996 Commission of Audit recommended a 10% efficiency improvement target for government agencies and specifically said that Defence should be included. It wasn’t. Instead, the government imposed an ‘administrative savings program’ amounting to only 1.3% of the budget. This time around, the situation is made more interesting by the Government’s promise to boost defence spending to 2% of GDP within 10 years. Read more

ASPI’s submission to the Commission regarding Defence can be found here. Key messages include:

  • The cost of maintaining a modern defence force increases by between 2% and 3% above the rate of consumer inflation. Consequently, the scale and/or sophistication of the ADF will decline in the absence of long-term growth in defence funding.
  • Boosting Australia’s defence spending to 2% of GDP within a decade will demand steady real increases of about 5% each year. Based on Defence’s struggle to absorb 3% real growth in the 2000s, such a high rate of growth may prove infeasible.
  • Settling a target of 2% of GDP for defence spending makes the cardinal error of privileging inputs (money) over outputs (capability). It’s almost certain that a reasoned analysis would yield either a higher or lower figure—there’s nothing magic about 2%. Moreover, with funding fixed at a significantly higher level than the recent past, the risk is that the White Paper will degenerate into a taxpayer-funded shopping expedition for the military.
  • In the past, the unreliability of defence funding has led to substantial waste and contributed to periodic Defence budget crises. The government needs to make a realistic long-term commitment to defence funding and stick to it as far as possible.
  • To guard against the emergence of yet another underfunded plan for the ADF, the government should commission an independent audit of the affordability of the 2015 White Paper to run concurrent with its development.
  • Over the 2000s, the combination of high operational tempo and steady funding growth led to an expansion of management and command overheads in Defence. To redress this unnecessary expansion, the government should:
    • Return the top-structure of Defence to something like it was in the late 1990s and continue the process down through the hierarchy.
    • Cut 20% of funding and personnel from all headquarters and policy functions across the organisation
  • Recent reforms instil confidence that Defence’s internal business processes can be made to work efficiently. Further refinement of Defence’s shared services model should be pursued in tandem with outsourcing where it’s cost-effective. Deeper levels of private support to ADF operations should be explored.
  • There’s nothing intrinsically meritorious about high numbers of military personnel, nor are civilian personnel inherently wicked or wasteful. The Defence workforce should be built around having people with the right skills and experience to do the job at hand at least cost.
  • Although there’s scope for further improvements to the conception and execution of major defence acquisition programs, the surest way to retire risk and deliver capability quickly is to buy proven equipment off-the-shelf.
  • Performance based contracting for materiel sustainment has the potential to boost efficiency. And, while doing so with legacy platforms is difficult, the support arrangements for new platforms should be established in tandem with their acquisition.
  • The benefits sought in establishing DMO as a prescribed agency haven’t been achieved. Nonetheless, privatising DMO would be a mistake. Instead, it should be administratively reabsorbed into Defence.
  • With massive naval shipbuilding programs now taking form, critical decisions that will determine the long-term efficiency of the sector are looming. Given how deeply Defence is entangled in the issues, an independent external review of the naval construction sector is essential if the taxpayer’s interests are to be protected.
  • The business case for further estate rationalisation should be examined, even though near-term costs will likely outweigh long-term savings in the current fiscal environment.
  • There can be no greater inefficiency in Defence than having the wrong force structure. The 2015 White Paper should ensure that plans for the ADF represent a coherent and effective strategy for protecting Australia’s interests in the 21st century.

There are of course many more things that could and perhaps should have been said. But the Commission’s scope embraces the full gamut of government expenditure—our goal was to alert them to the most important facts about defence spending and the best opportunities for further efficiency. Sometime in the next few weeks we’ll be able to see what the Commission thinks when they release their interim report in time to shape the forthcoming federal budget.

Mark Thomson is senior analyst for defence economics at ASPI.

DMO: industry’s view not accurate

An air warfare destroyer under construction at ASC's shipyard in AdelaideAccording to the Australian Industry Group (AIG), the headcount at the Defence Materiel Organisation (DMO) has grown three-fold over the past decade from 2,500 people to 7,500. Armed with this remarkable statistic, in their submission (PDF) to the National Commission of Audit they’ve called for DMO staffing to be cut ‘perhaps by half’. For a government on the lookout for budget savings that’s likely to sound attractive, especially with a Defence Minister on the record bemoaning the high number of civilians in Defence.

But before they start handing out pink slips to the folks at DMO, it’s worth pausing to check the numbers. Has the number of people in DMO really increased by 5,000 since 2004? While it’s impossible to be absolutely precise because of Defence’s habitual lack of disclosure, the answer is unequivocally ‘no’. Read more

To put the question in perspective, it’s worth tracking the evolution of Defence’s materiel acquisition and support workforce over time. Back in the mid-1990s, there were around 20,000 people employed on acquisition and logistics—mostly in the Services. By the time of the Defence Reform Program in 1997-98, outsourcing had whittled the number down to around 13,700, including 11,600 in Support Command and 2,100 in the Acquisition Program.

When the DMO was formed in June 2000, its workforce subsumed the then 1,900 people in the Acquisition Program and the bulk of the 8,500 personnel in Support Command—yielding a workforce of around 10,000.  Further outsourcing saw the DMO workforce shrink to around 6,413 in 2004-05 when it became a prescribed agency. At present, DMO is budgeted for a workforce of 7,100 but is likely to achieve a result closer to 6,500 given recent staff reductions.

Thus, not only is the claim of a three-fold increase in personnel baseless, but over the past twenty years the number of people employed by Defence on materiel acquisition and support has trended downwards as a result of outsourcing. Indeed, compared with the early 1990, there’s around a third as many people on the payroll as there used to be.

Erroneous and outrageous claims about DMO are nothing new. The organisation has long been the whipping boy of the media, defence industry and politicians. Almost always, the broader context within which DMO operates is lost in the process. Two points are worth making.

First, DMO is situated between a rock and a hard place. On one side, it’s often tasked by the military to acquire cutting-edge capabilities which inevitably involve substantial risk. And the cost and schedule estimates that emerge from the capability development process set them up for failure. On the other side, DMO has to deal with defence firms which routinely over-promise and under-deliver—one of the prime sources of the errors in the estimates DMO has to work with. Nevertheless, it’s usually DMO that gets left holding the can when things go bad—irrespective of how risky the project was to begin with, or how poorly industry performed after contract. A singular focus on DMO fails to acknowledge the chain of players who together determine the success or failure of defence acquisitions.

Second, it would be naïve to think that industry doesn’t has a vested interest in seeing DMO reduced in capacity and influence. What a lovely day in the office it would be for a defence firm if it didn’t have to deal with the onerous paperwork and multiple checks and balances imposed by DMO. While there’s every reason to try and streamline DMO processes and reduce unnecessary transactions, there’s a limit to what can (and should) be prudently done. The seemingly ponderous bureaucracy of defence procurement serves a dual purpose—to protect the taxpayer from being taken for a ride and to ensure that the ADF gets what it needs. I for one wouldn’t want to see a multi-billion dollar defence contract scribbled on the back of a restaurant napkin (or, perhaps more likely, a beer mat at a trade show).

It’s understood that the government plans to undertake a review of DMO this year, in tandem with the development of the White Paper and ‘first principles’ review of the Defence business model. On the whole, it’s a sensible program for a new government to adopt. There’s undoubtedly room for improvement in a large and complex organisation such as DMO.

But care will be needed. It’d be a grave error to ignore the critical roles played by Defence’s capability planners and defence industry in defence procurement. Equally, while the views of defence industry should be actively sought and carefully considered, it shouldn’t be forgotten that industry has a vested interest in denuding DMO’s capacity to negotiate and oversee contracts.

Lest you think I’ve become an uncritical supporter of the DMO, I’ll share my own thoughts here next week. DMO’s own response to the AIG submission is here.

Mark Thomson is senior analyst for defence economics at ASPI. Image courtesy of the Royal Australian Navy.

Graph of the week: a short history of over-programming in defence acquisition

As the new Defence Minister and his team contemplate the task in front of them, we thought it might be worth dipping into the ASPI archives for useful tips. Back in 2011 we published a paper Three views of risk: selecting and acquiring military equipment. Tucked away as an appendix was a distillation of the experience of Stephen Gumley’s seven years as the CEO of the Defence Materiel Organisation.

Gumley’s Laws were four empirically based rules of thumb for steering defence projects. In this and following posts I’m going to expand on the thoughts in that article. They were hard-won lessons, and they should be helpful when thinking about the shape of the next defence white paper and its accompanying program of new equipment acquisitions.

Read more

I’m going to start with Gumley’s law of over-programming. Simply put, over-programming means that DMO’s approved capital investment program is constructed so the planned expenditure in each year exceeds the available acquisition budget. That might not sound very clever—after all, Mr Micawber had some pretty stern words about exceeding one’s budget:

Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Not so for the projects managed by DMO; history suggests that planning to expend £20 results in an actual expenditure of just £17. To see why, let’s look at the data (see figure below). It shows Mark Thomson’s analysis of the planned and actual annual budget performance of defence projects from 1990 to 2010. The horizontal axis is the proportion of expected funds actually spent in-year. So a project that spends exactly what was planned is graphed at 1.0. A project that overspends in a year has a score greater than 1.0, and those that underspend score less. Of the 411 project years’ worth of data, the average expenditure is about 85%. The reason for that is economically explained by Gumley:

Schedule delay is a non-symmetrical distribution (work can always be deferred to a later date but can never be advanced earlier than today).

Chart showing defence project financial performace
Sources: Defence Budget papers and annual reports.

For Mr Micawber, exceeding the budget is a source of misery. For bureaucrats, underspending the budget can also be a cause of misery—especially if someone else then snaffles the funds. But that’s not the only problem with underspending. Delivery of projects by DMO results in the ADF receiving new equipment and capabilities. If there was habitual underspending, the ADF would receive less materiel each year, resulting in less military capability available to government than planned. That’s why the DMO acquisition program is usually over-programmed by about 15%—the average project underperformance is offset by the extra money nominally available, and the ADF gets the full benefit of the acquisition budget. The arithmetic application of slippage follows an arcane recipe involving the iterative reallocation of planned spending into future years, beginning with the current year.

The major acquisition program run by DMO (formally called the Approved Major Capital Investment Program or AMCIP within Defence) is only part of the story, there’s also the Defence Capability Plan (DCP). The DCP lists unapproved projects pending government approval. It has the obvious formal tittle leading to the acronym UMCIP but everyone calls it the DCP.

Because the DCP anticipates the transfer of projects to the AMCIP following approval, it presumably includes a similar degree of overprograming in the planned phasing of past-approval expenditure. But the DCP also has to contend with schedule slippage prior to approval—i.e. slippage in the date of approval. From year to year, the rate of slippage in the DCP and AMCIP are adjusted in light of recent experience and the perceived risk of delays in the portfolio of projects under management. For example, one would anticipate less slippage in a program dominated by a couple of large off-the-shelf purchases, but higher slippage in a program full of developmental projects.

Under the previous government, over-programming of the DCP and AMCIP was accepted as a fact of life until 2011:

There is also an element of over-programming built into the DCP. Over-programming is designed to provide flexibility and to ensure that best use is made of available funding in the development of individual projects.  Over-programming means that project timing does change.

That wording isn’t quite right. A better formulation would be ‘over-programming is necessary because project timing changes’.

Nonetheless, in the second half of 2011 the government announced that it’d be making efforts to tighten up the planning process and reducing over-programming:

Defence will implement improved planning to reduce over-programming in the DCP by better aligning capacity with resources and strengthening management focus.

In principle, if the management of projects could be tightened to the point where schedule delays became true rarities, then over-programming wouldn’t be necessary. In practice, that’s not going to happen as long as projects contain elements of risk. Recent experience has shown that buying genuinely off-the-shelf is the only way to be confident about delivery dates. Whenever R&D is involved in a project, delays are almost inevitable; Gumley’s observation about the non-symmetrical nature of yesterday and tomorrow will ensure that. Over-programming will need to be a feature of future investment plans—the only question is how much.

Andrew Davies is senior analyst for defence capability at ASPI and executive editor of The Strategist. Mark Thomson is senior analyst for defence economics at ASPI.

Capability development—still a work in progress (2)

men at workIn last week’s post we presented a potted summary of two of the four main areas of difficulty within the Defence capability development process identified by the Australian National Audit Office (ANAO). Today we’ll finish with the other two, and offer a few thoughts of our own.

We should caution that the perspectives here are necessarily in the context of the audit office report. In fairness, we’re going to talk to our friends in Defence as well, and we’ll report later on what we find. As we mentioned last week, the ANAO’s focus is very much on compliance, and is inherently rearwards looking, and we might see a different picture when we look through a different lens. But for now, on with the overview. Read more

Improving accountability and advice during project implementation

This audit report makes the observation that ‘further work is required to improve accountability’. That’s hardly a revelation; accountability (or, more accurately, the lack of accountability) within Defence has been a recurring theme of successive reviews dating back to the Tange era. More interesting in this case is the auditor’s approach of drilling down into the implementation of previous measures intended to improve accountability.

One of the major Kinnaird recommendations from 2003, for example, was that ‘Capability Managers should have the authority and responsibility to report to government on the development of defence capability at all stages of the capability cycle’. Ten years on, the reporting that’s happening still doesn’t satisfy the ANAO, although Defence has agreed with the auditor’s recommendations for a more thorough reporting scheme. As a small insight into the Byzantine world of Defence committees, ANAO informs us that the Capability Development Reform Stream Governance Committee handed over reform activities to the Capability Development and Materiel Reform Committee in 2012. (Judean People’s Front, anyone? (video))

The ANAO concludes, perhaps a little wistfully:

In September 2013, Defence further advised that [the] Recommendation had been ‘closed by process’ (but not outcome) at a meeting of its CDMRC on 27 August 2013. However, there is no evidence of the envisaged reports having yet been produced.

Reporting on progress with reform

There’s naturally been a great deal interest in the progress of capability development and acquisition reform, and the ANAO has looked closely at DMO’s reporting on implementation of the Mortimer Review recommendations—both internally and through its evidence to parliamentary committees. As you might expect, the fun starts when the auditors compare DMO’s internal and external reporting. The following self-explanatory quote captures the thrust of the auditor’s forensics:

Defence’s August 2011 response to the Senate Committee, in which it said that it had ‘fully implemented’ 29 Mortimer recommendations, provided limited information and had the potential to give an impression of greater progress than had actually been achieved.

Once again, the issue hinges on the notions of ‘process’ versus ‘outcomes’. The Senate Committee was availed of the strides being made from a process perspective, but not told of the less favourable situation prevailing in terms of actual outcomes. Defence’s less than complete disclosure of progress wouldn’t have come as a surprise to the ANAO. In an earlier report on Defence’s implementation of audit recommendations, the ANAO exposed a worrying deficit between claimed and actual progress.

But to a point that’s not surprising. DMO’s closure framework for the Mortimer recommendations is a two-step approach. Firstly, the recommendation is implemented by introducing the appropriate process. Once the new/amended process is in place, the recommendation is considered ‘closed by process’. The next step is to gather information to ensure the process is producing the desired effect—and only when that’s available is the recommendation is ‘closed by outcome’. This is one of the difficulties of implementing and then measuring reform in a process that can be many years from end to end.

One area where DMO tries to measure and report outcomes is the extent to which projects are delivered on schedule—the message being that things have improved as a result of recent reforms. Yet here again the ANAO find fault, citing a range of issues about the metrics and benchmarks used. Fair enough, that’s their job. But the discussion misses the larger picture. To start with, it would be surprising if schedule performance wasn’t improving given the recent shift in favour of off-the-shelf purchases. More importantly, post-approval schedule performance is a poor measure of the effectiveness of reform in DMO. In most instances, schedule performance is much more a measure of (1) industry’s performance and (2) the inherent riskiness of projects, than it is a diagnostic of DMO’s performance.

Postscript

We hope that the result of this audit will be positive. It’s always possible that the result of ‘reform’ is the addition of even more layers of review and reporting to an already process-heavy system. This will make it even harder for the no-doubt dedicated staff of Capability Development Group to focus on outcomes; more process and documentation is the last thing they need. In fact, where we are today in many ways reflects the response to past reviews of Defence decision making and capability development—which has been to add even more complexity to the process and more stakeholders to the committees (thus increasing the diffusion of accountability).

We note that the Capability Development Group in Defence is now well into its own Capability Development Improvement Program, which began during the ANAO audit and is aimed to address many of the points raised, as well as some self-identified problems. Between the audit recommendations and Defence’s own initiatives, hopefully we’ll begin to see better cost and schedule estimates, and better capability outcomes—which is what we really care about. To the extent that we can with limited public data, we’ll be watching the metrics for any such improvements.

Andrew Davies is senior analyst for defence capability at ASPI and executive editor of The Strategist. Mark Thomson is senior analyst for defence economics at ASPI. Image courtesy of Flickr user Red~Cyan.

Capability development—still a work in progress (1)

microscopeAlthough it went largely unnoticed, at the end of October the Australian National Audit Office (ANAO) released its performance audit of Capability Development Reform in Defence. It has all the weaknesses, strengths and charm we’ve come to expect from the fine folks at the audit office.

Its major weakness is a focus on compliance at the expense of outcomes, but that reflects the nature of performance audits rather than an error on the behalf of the authors. And, by testing Defence’s implementation of the 2003 Kinnaird and 2008 Mortimer reviews of acquisition, much of what matters is covered in any case.

As with prior ANAO audits, the report’s strength comes from the systematic examination of evidence. Time and time again, the audit office has shown that some of the most damning indictments of Defence can be found sitting in that organisation’s own filing cabinets, or by comparing its public pronouncements to its actual performance. Read more

As for charm, this particular report outdoes its predecessors in terms of carefully measured understatement and the tongue in cheek disclosure of facts that speak for themselves. Who’d have thought, for example, that the ANAO would tabulate two pages worth of damning extracts from inter-ministerial correspondence regarding tardy advice from Defence on delays and changes to the scope of projects? It contains such gems as this Ministerial notation: ‘No advice on the progress of this project has been brought to government attention since it was approved over 10 years ago’—on paperwork for a project that was 70 months late.

So what did the auditors conclude? The report is organised around four themes that have recurred in successive reviews of Defence’s capability development activities. At the risk of oversimplifying the report’s 15 chapters and 325 pages, the more interesting conclusions grouped by theme are:

Capability development – organisation and processes

The good news is that Defence has documented its capability development processes and improved its record keeping. That’s nice. The bad news is that Defence’s capability development group continues to be staffed by predominately military personnel with short tenures and limited experience in capability development—despite successive recommendations to the contrary. So long as multi-million dollar projects are conceived and managed by people whose professional training and future careers lie elsewhere, there’s a limit on what can be achieved. Some military expertise on the operational realities of using defence systems is essential, but it’s time we recognised that conceiving, costing and developing defence acquisition proposals are skills in their own right.

There’s also been slow progress in reforming two critical aspects of the capability development process; the entry of projects into the Defence Capability Plan (DCP), and the estimation of personnel and operating costs associated with new capability. Until these matters are resolved we can have no confidence that the multi-billion dollar plans for developing the defence force are either strategically valid or affordable. And there’s a good case to be made that these are related problems—by allowing projects without accurate costings into the DCP (thereby gaining organisational momentum that makes it hard to kill them off later), there’s no reason to expect the plan to represent cost-effective capability planning later.

Improving advice to government when seeking approval

Again, there’s some good news to report. The ANAO found that the assessment of technical risks in projects has improved since the 2009 Pappas Review (PDF), and that the Defence Science and Technology Organisation is providing advice through a mature and well-documented process. Of course, ‘well-documented’ and ‘accurate’ are two different things, and only post mortem reviews of the outcome of projects approved under the new risk assessment process will tell us how successful it has been—something that won’t be possible for some time given the typical timescale of the more complex major projects.

We’re not as convinced as the ANAO about the ability of the Department of Finance to verify Defence’s cost estimates. So while it’s probably a good thing that the provision of information to Finance has improved, we wouldn’t expect it to fix the chronic underestimation of final costs (and schedules, which also have a financial impact) that has long been the hallmark of Defence projects. For complex financial calculations, arm’s length is too far away.

Not for the first time, Defence is seen to be falling short of the recommendations of previous reviews to include a rigorous cost-benefit analysis of its developmental projects against a genuine off-the-shelf (OTS) option. The ANAO observe that the inclusion of an OTS option was met in ‘process terms’ but not in ‘outcome terms’. Simply put—in our words, not the Audit Office’s—Defence too often pays lip service to OTS while pursuing expensive and risky bespoke solutions.

We’ll come back in a later post to discuss the remaining two themes; ‘improving accountability and advice during project implementation’ and ‘reporting on progress with reform’.

Andrew Davies is senior analyst for defence capability at ASPI and executive editor of The Strategist. Mark Thomson is senior analyst for defence economics at ASPI. Image courtesy of Flickr user BWJones.

A folly of strategic proportions

The Wonderful Barn, a famine folly built in 1743 on the Castletown House Estate in County Kildare, Ireland.  With a new government taking charge, the proposal to build a fourth Air Warfare Destroyer (AWD) has re-emerged. Unsurprisingly, the loudest voices are those with a vested interest, including shipbuilders and shipyard unions. So far, the public debate has focused on avoiding a shipbuilding ‘valley of death’ when the last AWD is delivered in 2019—without any serious discussion of whether a fourth AWD is a worthwhile investment. Much like the often-whimsical famine follies build around the time of the Irish Potato Famine, the goal seems to be to keep people in work irrespective of the intrinsic merit of the project.

When complete, the three Hobart-class AWDs currently in build will reinstate the broad area air defence capability lost when the last of the Navy’s DDG destroyers was decommissioned in 2001. At the risk of undermining the supposed analytic rigour of Defence’s force planning processes, the most likely reason we are building three AWDs is that we once had three DDGs. So it’s fair to ask what a fourth vessel would give us.

Hugh White has long argued that the utility of surface combatant has been eclipsed by anti-shipping missile technology, and Andrew Davies has questioned the protection of shipping argument often used to justify the AWD program. I have sympathy with both views, but let’s stipulate for argument’s sake that AWD are useful things.

All other things being equal, more capability is better than less. A fourth AWD would give us 33% more capability than a fleet of three. Given an effective and well-managed sustainment arrangement (which admittedly can’t be taken for granted given recent experience with other fleets), it would effectively assure the continuous availability of at least 2 ships and would make 3 ships available most of the time. While this would be a good thing, it would come at a cost.

Every dollar spent on a fourth AWD can’t be spent on other capability options. For example, why not expand the planned fleet of LHD amphibious vessels from two to three rather than increase the AWD fleet from three to four? A 50% increase to the LHD fleet might well be better than a 33% increase to the AWD fleet. As things stand, there’ll be extended periods when only one amphibious ship is available for tasking. But with the lion’s share of the amphibious ships being built in Spain rather than Australia, don’t hold your breath waiting for someone to make the case.

My point isn’t that we should build a third LHD. Rather, it’s an example of how a multi-billion dollar investment such as an extra AWD should be carefully considered in terms of the opportunity cost it imposes on potentially more cost-effective alternatives.

The ambitions surrounding a fourth AWD go beyond boosting the capacity of the currently planned fleet. It’s been put to me on several occasions that a fourth AWD provides a perfect opportunity for Australia to develop a Ballistic Missile Defence (BMD) capability by fitting the final vessel with the Aegis BMD system employing the SM-3 missile. While a single such vessel would inevitably be unavailable some of the time due to maintenance, it would allow Australia to ‘get into the game’ of BMD alongside the United States and Japan.

Given that the Aegis BMD system is only designed to intercept short to intermediate range ballistic missile threats, the argument for acquiring a naval BMD capability would most likely be based on protecting deployed Australian troops. Let’s hope our troops remain close to the beach, so that the intermittently available BMD-equipped AWD can be brought into an intercept position relative to the threat. Or, better still, let’s acquire the ground-based Patriot PAC-3 system, so that our troops have a measure of protection wherever they go. Of course, if we were really serious about BMD for deployed troops we’d want the PAC-3 system in any case, to create the layered protection intrinsic to an effective system even if geography allowed an Aegis BMD component to come into play.

To be honest, I don’t think that there’s a high priority for either a sea-based or ground-based BMD capability to protect deployed troops. If such a capability was halfway worthy of consideration it would’ve been seriously developed years ago. Instead, we’ve made do with a short-range air defence system employing the shoulder-launched RBS 70, which has zero capability against ballistic missiles and only a very limited capability against fast moving aircraft. Moreover, the latest Defence Capability Plan contains no projects to either improve our ground-based air defences or establish ground-based missile defences.

Of course, a fourth AWD with Aegis BMD would be a valuable contribution to a US-led coalition mission in North Asia—it’s no accident that Japan is the only country apart from the United States to have the system. But do we really want to structure our forces for fighting in North Asia? For a long time our strategy has been to use assets acquired for our own defence as the basis of contributions to coalition missions. What message would we send by changing course and explicitly developing capabilities for the sole purpose of fighting in North Asia?

Those points are open to further debate, and they have pros and cons in terms of capability and military options the ADF can provide to government. But so far, none of these issues have so much as seen the light of day in the debate over a fourth AWD. Instead, we’re being asked to spend something in excess of $2 billion in order to avoid the ‘valley of death’ between the end of the AWD program in 2019 and the commencement of the new submarine and/or Anzac frigate replacement program. But we don’t have a start date for either program, and a life-of-type extension looks to be on the cards for at least the submarines.  As for the Anzacs, which are presently undergoing a major anti-shipping missile defence upgrade, a life-of-type extension warrants close examination to determine the most cost-effective way ahead—even if it’s not the preferred option of industry or Navy. Until plans firm up on the future frigate and submarine fronts, we don’t even know if a fourth AWD would be sufficient to close the gap in shipyard work.

More importantly, even if we had strong confidence that a fourth vessel would enable continuity of production, there’s no indication that the scale of savings would justify the additional cost of a fourth vessel. A recent paper from ASC Ltd says only around 20% of the cost of a warship is due to shipyard labour, which means that only 20% of the cost of producing a vessel can be impacted by the ‘learning curve’ and skills maintenance that continuity of production promises to deliver. So, even if continuity generated a 30% reduction in labour costs (being very generous), the resulting saving would only be a 30% x 20% = 6% reduction in cost of the initial replacement frigates. And for this we’re asked to build an entire extra vessel and then crew and support it throughout its decades of service.

In the absence of either a clear strategic rationale or plausible business case, a fourth AWD would be a folly of strategic proportions.

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

Correction: an earlier version of this post linked to the potato famine of the 1840s rather than the earlier famine during which the folly in the illustration was built. The error was by the contributor.

In the market for a naval shipbuilding plan

The first Air Warfare Destroyer block to arrive in Adelaide was successfully rolled off the barge at the Government of South Australia’s Common User Facility wharf and into the ASC’s AWD shipyard.

In the first week of October, the 2013 Pacific Maritime Congress and Exposition will be held in Sydney’s Darling Harbour. It’ll be a massive event. More than 400 companies from 17 countries will take part in the Exposition, expected to attract around 10,000 people from Australia and around the world, including ‘numerous senior commercial, military and government delegations from some 30 countries’. Keeping with the scale and importance of the event, the (invitation only) opening ceremony next Monday will see speeches by no less than the new Defence Minister, the Chief of Navy and the NSW Premier.

The unashamed focus of the event is business. Suppliers of maritime and naval equipment will be there show off their wares. Private buyers and government officials will be looking to see what the market has to offer. Deals will be done.

A debt of thanks is owed to the non-profit organizers of the exposition, Maritime Australia Limited. By bringing together buyers and sellers, they help create an efficient market for maritime and naval goods and services. And the taxpayer can rest assured that the Defence will take full advantage of the event—not just by informing itself about the latest in naval technology, but by updating industry on its future acquisition requirements. Read more

Of course, it’s naïve to think of Pacific 2013 as just a marketplace operating along the lines of the vibrant Paddy’s Market down the other end of Darling Harbour. Rather than looking to do commercial deals, many of the attendees will arrive with a very different agenda; influencing government policy. This will be most acute in naval shipbuilding. Private firms and state governments will all be vying to shape government policy to secure a larger slice of the multi-billion naval acquisition program.

Among the strongest voices are the South Australian government’s defence industry lobbying agency DefenceSA and the Australian government-owned ASC Pty Ltd, which built the Collins Class submarines and is presently involved in the $8 billion Air Warfare Destroyer project. The main thrust of industry lobbying advocates a move away from periodic ‘boom and bust’ naval construction projects to a collaborative continuous-build model that would see naval ships (including submarines) built at a steady rate.

The argument was set out in some detail in DefenceSA’s 2009 publication Naval Shipbuilding: Australia’s $250 billion Nation Building Opportunity. While the model has some benefits in terms of preserving skills and accumulating expertise, it comes at the cost of blocking foreign competition and creating a monopoly domestic shipbuilder. But even if such an outcome is the least of available evils—and that’s far from clear on the basis of what we know today—we should be very careful about being pushed in that direction by vested interests.

In the shorter term, the agenda is to secure more work to avoid the so-called ‘valley of death’ following the conclusion of the troubled Air Warfare Destroyer project. In a classic case of the tail wagging the dog, entirely new naval projects are being proposed for no better reason than to preserve some measure of work in local shipyards.

Make no mistake; the industry lobbying effort is slick and high powered. In an echo of Eisenhower’s final televised speech warning of the emergence of a military-industrial complex, it’s increasingly common for retired senior Defence officials to find common cause with defence industry. The DefenceSA Advisory Council, for example, counts among its numbers two retired Chiefs of the Defence Force, two ex-Service chiefs and two retired senior Defence officials. With credentials like that, access to the highest levels of government is assured.

What makes the present situation especially troubling is that Defence is either incapable or unwilling to help the government work rationally though the many complex issues surrounding naval shipbuilding. Last year the Defence Materiel Organisation (DMO) released a publication entitled Future Submarine Industry Skills Plan: A Plan for the Naval Shipbuilding Sector. A discussion of the documents myriad shortcomings can be found here and references therein. Suffice to say it does a dismal job of taking account of the taxpayer’s interests but it was no doubt warmly received by parts of industry. Perhaps it’s to be expected, given the conflicting expectations placed on DMO to simultaneously keep local industry happy and deliver value for money.

With decisions looming on the future submarine and some firms facing acute commercial pressures, lobbying efforts are set to reach fever pitch. Pacific 2013 will be the first opportunity for industry heavyweights to argue their case to the newly-elected government in earnest. But the taxpayer, and indeed the Navy, deserve better. Rather than live with deals hatched over complimentary bottles of Coopers ale on the floor of the main exhibition hall at Darling Harbour, the future of the naval shipbuilding sector should be built on sound objective analysis.

With Defence having so far dealt itself out as a source of evidence-based advice on naval shipbuilding, the government should lose no time and commission an independent external review of the future of the naval shipbuilding and repair sector, including arrangements for the future submarine in particular. There is no point stumbling on hoping for the best and making decisions on a project by project basis.

The first and critical question to be answered concerns the naval industrial capacity Australia needs. Then comes the fiendishly difficult task of designing an efficient approach to achieve that goal. Key questions will include the future ownership of ASC, the role of competition, the demarcation between assembly and maintenance, and the contractual framework(s) to be used.

Although stakeholders in industry and the states would naturally need to be closely involved in any review of the naval sector, the government should look broadly for expertise and views. This is too important an issue to be left to the usual suspects and vested interests. The government could do a lot worse than engage some of the world-class people behind Australia’s multi-billion dollar resources sector.

Mark Thomson is senior analyst for defence economics at ASPI. Image courtesy of the Royal Australian Navy.