Defence requirements must be clear as Covid-19 puts budgets under pressure
29 Jun 2020|

As the Australian government’s finances come under increasing pressure from the effects of Covid-19, so too might the scope for some forms of Defence investment in new capital equipment. That could pose difficult challenges for the department, centring on the issues of cost–benefit analysis and industry protection.

More intense competition for many forms of public funding, new investment priorities for defence and rising equipment sustainment costs raise some vexing questions for defence industry policymakers. In future, what level of price premium should be paid for preferring domestic over foreign supply of traditional weapons platforms as well as a new generation of weapons systems? And how much assistance should be provided to ensure the domestic availability of strategically important industrial capabilities?

In recent years, answers to those questions have frequently been based on four arguments. First, Australian defence industry is already internationally competitive or can readily become so through a combination of exports and a continuous flow of orders from Defence. The industry’s main problem is being denied a reasonable opportunity to bid for Defence work.

Second, as Australia enters a period of profound strategic disruption, almost all the materiel we require must be manufactured here to safeguard our national security—in what amounts to a form of industrial autarchy.

Third, as a source of advanced manufacturing, the industry can help the Australian economy avoid an over-reliance on the mining, agricultural and service sectors.

And finally, Defence’s capital equipment projects are promising sources of technological innovation and labour skills. When they ‘spill over’ into other areas, those sources provide a net boost to the economy.

Those four arguments have vociferous advocates. They also have staunch critics, whose concerns have surfaced on numerous fronts (for example, here, here, here, here, here and here).

However, the level of scrutiny given to these arguments is well below what it should be.

As Australia enters a period in which the opportunity cost of investing in any form of defence capital equipment or defence industry assistance could be magnified—not only for Defence but for the rest of the country—a more rigorous approach to assessing the social costs and benefits is required. If all that sounds overdrawn, consider the following.

More than four years on from the release of the defence industry policy and after the delivery of more than 500 pages of associated policy documentation and a similar number of government press releases on all manner of defence industry issues, there is still no clear picture of what industrial capabilities are critical for Australia to hold in-country for military-strategic reasons. Nor is there a useful indication of where, when, why and to what extent Defence’s demand might exceed the industry’s capacity to supply any of the 10 industrial capabilities already assigned broader sovereign status.

Defence has released a discernible plan to collect the relevant demand and supply data—as distinct from the collection itself—for only one capability. And broader development strategies for relevant areas of the defence industry are being set before that data emerges. How industrial sovereignty can be achieved when the Australian content of many major equipment acquisitions is 60% or less—and most components are imported—has yet to be explained. None of those factors are mentioned in the public version of last year’s defence mobilisation review.

In recent years, government media releases covering the effects of major capital equipment acquisitions have emphasised ‘jobs and growth’—to the exclusion of relevant military-strategic issues. And those statements provide little or no insight into the factors that tend to determine economic impact: the price premium, the level of Australian industry content, and knowledge spillovers from domestic assembly that might help reduce the cost of equipment sustainment.

For higher profile projects, like the F-35 fighter jets and naval shipbuilding, the economic data proffered in public statements—and in much of the analysis that underpins it—is difficult to interpret from a cost–benefit perspective. Opaque job figures for the F-35 are still being used. The government has yet to release its economic cost–benefit data for assembling the $50 billion-plus future submarines and $26 billion future frigates.

The economic perspective provided by official statements for military vehicles isn’t much better. Although poor public reporting of the economic impact of assembling the Hawkei light protected mobility vehicles has attracted much attention, there are other vehicle projects to consider.

For example, a headline figure of 1,450 new Australian jobs has been used for the recent acquisition of combat reconnaissance vehicles for nearly $5 billion. Not disclosed is that the 1,450 is a peak employment figure for only one year of a 34-year assembly and sustainment program. The corresponding annual average number of jobs created, made publicly available only through a freedom of information request, is 740.

That figure of 740 is dominated by jobs for vehicle sustainment, which appear to be double-counted. The number of jobs remaining is based on the implicit assumption of a price premium of zero for vehicle assembly—noting that the actual size of any premium hasn’t been disclosed publicly. No supporting evidence is provided relating to job creation or other benefits from spillovers or to the economic importance of the project at a regional level.

These gaps are difficult to reconcile with Department of Finance reporting guidelines for economic benefit. Nor do they appear consistent with two interim findings from the Covid-19 Manufacturing Taskforce: the importance of ‘core sovereign need’ to Defence, and an overarching policy requirement to drive national growth in advanced manufacturing through ‘rigorous implementation and measurement of impact’.