Defence acquisition: kicking the can down the road
14 Feb 2018|

For over 15 years now, there’s been an ASPI presentation on the defence budget at the Australian Defence Magazine’s annual defence industry conference. Mark Thomson did the lion’s share of them, but I’ve been the bunny in the headlights for the last couple of them—including this year’s. Mark retired from ASPI a couple of weeks ago, and I’m on a countdown to next month, so today’s appearance was in many ways a valedictory defence industry talk.

It’s an interesting time to be reflecting on the defence budget and the state of Australia’s defence industry policy settings. To paraphrase the prime minister, there’s never been a more exciting time to be in local defence industry. In stark distinction to the disappointments that followed the 2009 defence white paper (and the only marginal improvement after the 2013 white paper), the past two federal budgets have fully delivered on the fiscal promises of the 2016 paper. While the big ramp up of investment in new equipment is just getting underway, defence got a 6.5% real budget increase this financial year. Australian wage earners should be so lucky.

For those who care (and you really shouldn’t), the defence budget this year is 1.9% of GDP. On current projections of the defence budget and GDP growth, it will hit the ‘magic’ figure of 2% sometime around 2020. Nothing significant will happen when it does.

The mid-year economic and fiscal outlook (MYEFO, PDF) was fairly neutral for the defence budget, just bringing forward a little money from the last two years of the forward estimates into the next couple of years. (Note that ‘little’ is relative here—it amounts to a billion dollars.) The broader economic outlook in the MYEFO contained a slight downgrading of projected GDP growth for this year (from 2.75% to 2.5%) but predicts 3% growth in the three subsequent years. Recent history suggests that those projections will prove to be slightly optimistic, and we can never rule out a major shock in the world economy—that’s really what cruelled the 2009 defence white paper, which was prepared before the full impact of the GFC was apparent. But failing a major downturn, the money will be there for defence if government priorities don’t shift.

The one danger lurking in the wings for defence is actually good news on the economic front: the budget deficit is shrinking, and doing so faster than previously predicted. The MYEFO projects a deficit of $23.6 billion this year (down from $29.4 billion at budget time) and $20.5 billion next year. And it might be still better than that, as recent Department of Finance data shows. Mark Thomson has written extensively about the tendency for governments to grab money back from the budget to reach surplus a year earlier if the difference is small enough. The most egregious cases—at least as far as defence is concerned—were the Swan/Gillard budgets, when a narrow surplus seemed possible (how innocent we all were back then), but there are precedents from both sides of politics. With an election set for 2019, the narrowing of the deficit might portend some ‘borrowing’ from the outer years.

Not that all of the challenges facing Defence are from the government’s control of the purse strings. If all the money gets delivered, Defence has to be able to spend it. And there’ll be a lot to spend. Five years ago, the defence capital investment program amounted to $5.7 billion and represented just 22.4% of the overall budget. This year it is $11.6 billion and 33.4% of the pie. By the middle of the next decade it will be $19.2 billion (in this year’s money)—fully 40% of a substantially larger budget.

In my ADM talk last year I fretted about the implausibility of getting enough project approvals through the National Security Committee of the cabinet to keep the white paper program on track. It seemed like a very big ask. The average number of approvals (both first and second pass) over the preceding 15 years (i.e. after the Kinnaird reforms) was 22, while at least 44 were required in 2016–17 to keep on track. Even the biggest years saw just 27 approvals. I couldn’t see how it was all going to work.

I was wrong. The 2016–17 Defence annual report cites no fewer than 15 first pass, 31 second pass and 15 ‘other types of IIP project approvals’. I wish I could tell you how they did it—and how robust those numbers are—but there simply isn’t enough information in the public domain to tell. For reasons best known to itself, the government has decided that it will be highly selective in the approvals it announces.

Nonetheless, that’s good news, right? I wish I could be so sure. Of the approvals that have been announced, several of them have big unanswered questions about project fundamentals. Mark Thomson and I wrote about some of them late last year, and nothing I’ve heard since has made me any more confident that the technical specifications and industrial arrangements have been sorted.

That matters. There’s abundant data that shows the bad outcomes that ensue from rushing into complex projects. (See my earlier piece here and the GAO report linked to therein.) And that was, of course, the rationale for the Kinnaird two-pass process in the first place—to spend time and money before final approval to reduce risk and improve project outcomes. As near as I can tell, the Kinnaird reforms had a positive impact on project cost and schedule estimates (with the effect most noticeable on costs), but effectively acted to slow down the number of approvals by requiring more upfront effort.

So the sudden flurry of approvals, accompanied by apparent confusion in some big projects, makes me think that everything old is new again. It’s possible that the can has just been kicked down the road and that rapid approvals today will be tomorrow’s projects of concerns. Time will tell.