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Is Defence turning money into capability fast enough?

Posted By on February 15, 2022 @ 10:30

It’s a brutal time to be a Commonwealth public servant working on the budget. Portfolio additional estimates statements—the mid-year budget update for portfolio agencies—were tabled on Friday, yet with the 2022–23 budget brought forward to late March to clear the decks for the election, we’re only a month and a half away from budget night. In essence, the worker bees have been working on the PAES and next year’s budget simultaneously.

So, what can we learn from their hard work? First of all, as we have now become accustomed to seeing, the government has delivered the growing defence funding promised in its strategic documents such as the 2016 white paper and the 2020 strategic update. The issue that we’ll come to is whether Defence can spend it—and spend it in ways that deal with our strategic environment.

The main changes in Defence’s funding are a $463.1 million no-win, no-loss foreign exchange adjustment to maintain buying power in the face of a declining Australian dollar and $91.8 million more for Operation Covid-19 Assist. Defence is also transferring a further $56.5 million to the Office of the Special Investigator next year. Coming on top of the initial $116.5 million moved from Defence to fund the OSI in last year’s mid-year update, it suggests that the investigation of potential war crimes in Afghanistan still has a long way to go.

There’s some good news. There are signs that the long trajectory of de-skilling of the public service and outsourcing of core capabilities has finally bottomed out. There’s provision for an additional 540 public servants—190 this year and a further 350 next year—to implement crucial new programs such as the sovereign guided weapons enterprise and AUKUS. Hopefully the government has acknowledged that you can’t double the size of your capital investment program while gutting your in-house expertise and still hope to be a ‘smart buyer’, to use Defence’s own term. The continuing sorry narrative of project cancellations shows that Defence is far from it.

That gets us to Defence’s capital investment program. If we cast our minds back to the 2021–22 budget, the key question there was whether Defence could spend the substantially increased capital budget the government was providing it with. In 2020–21 Defence did well in the face of Covid-19 to set spending records in its acquisition programs, but it still fell about $1 billion short of the target. With a further increase of around $3 billion planned for this year, there was always going to be a question mark over Defence and its industry partners’ ability to turn that money into capability.

At a high level, the PAES indicate Defence will fall short again. The acquisition program is predicted to come in $815 million under the original budget target. When we consider that the acquisition program should also be spending a big chunk of the $463.1 million foreign exchange adjustment, it looks like it will again fall around $1 billion short.

But it’s when we look under the bonnet that things get interesting—and troubling. The military equipment acquisition program looks like it’s doing very well, actually passing its $11.2 billion target by $120.6 million (noting that it needs to overspend to address the foreign exchange adjustment). But there’s a clear pattern in the top 30 spenders for the year; the big projects are falling well short of their spending goals, and one of the iron laws of project management is when you don’t spend, you don’t get the capability on schedule.

The F-35A project is missing by $175 million, with only 54 aircraft delivered instead of 56 by the end of 2021–22. Two fewer aircraft may not seem like much, but with the classic Hornet fleet now fully retired, the air force needs every plane it can get. The Triton high-altitude UAV program is $98 million short between equipment and infrastructure.

Spending on the Hawkei protected mobility vehicle is $207 million short, due to a delay caused by a problem with its brakes and supply-chain woes. That means it will spend less than last year even though it’s meant to be entering full-rate production. The Boxer combat reconnaissance vehicle similarly is nearly $300 million short of its target and spending less this year than last. Somewhat depressingly, by the end of this financial year the project will still have spent more than $1.8 billion with only the first block of 25 overseas-built vehicles delivered and local construction of the remainder not due to start until 2023.

The list goes on. The troubled Hunter frigate program is $123 million under and will barely spend more this year than last. It’s not the trajectory you’d want to see as design activity ramps up and purchases of long-lead-time items such as combat-system and propulsion-train elements start. And while the government has made a lot of announcements about long-range missiles, they haven’t transformed into spending; the navy’s guided weapons subprogram is falling well short of its planned outlay (from $210 million down to $74 million) and is another big program spending less than last year ($190 million). Even a project that is spending and delivering broadly on schedule, the Arafura offshore patrol vessel, isn’t delivering lethal capability. A vessel that was massively undergunned in the first place is now being delivered virtually unarmed.

And true to form, the MRH-90 helicopter failed to achieve one final time, missing its target by $106 million ‘due to delay in its delivery schedule’. Its cancellation did not come soon enough.

Ironically, one of the few big projects that’s still forecast to hit its spending target for the year is the future submarine program that was cancelled less than a quarter of the way into the financial year. It’s hard to know what to make of that. The PAES says that funds are being transferred to the nuclear-powered submarine taskforce and to cover costs ‘associated with transitioning out of contractual arrangements’, but will that really use up $981 million this year? In any event, we’re still some way from knowing the final cost of the Attack-class saga. If that full amount is actually used up, it will get us perilously close to $3 billion.

The top 30 projects are a combined $1.9 billion under their planned budget for the year. No doubt the pandemic is playing a major role, but overall it’s not the sort of narrative that’s consistent with the one laid out in the government’s 2020 defence strategic update of evaporating warning times and a pressing need for new capabilities delivered faster, not slower than previously planned.

That huge shortfall is offset by some degree by an $860 million increase in spending in the rest of the military equipment program (those projects outside the top 30). That would suggest a significant amount of opportunity spending, but there’s nothing in the PAES to say what we’re getting for that sum. Is it new stuff like additional Seahawk Romeo helicopters, or is it simply bringing forward spending on things that were already in the plan like tanks? Or something else entirely?

A final admission of my inability to make sense of the document. Table 9 states that the estate and infrastructure program will underachieve by $682.5 million. Yet when one looks at the program in more detail in table 66, it appears to be spending $593.7 million more on individual infrastructure projects than planned in the budget. A large part of that is flowing into the Northern Territory, no doubt providing a welcome Covid-19 stimulus. Defence hasn’t responded to my request for an explanation on how you can spend nearly $600 million more than planned but end up nearly $700 million short of what you planned. Perhaps at estimates hearings this week senators can elicit a plain-English explanation.

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[1] changes in Defence’s funding: https://defence.gov.au/Budget/21-22/PAES.asp

[2] virtually unarmed: https://www.anao.gov.au/sites/default/files/Auditor-General_Report_2021-22_13_a_0.pdf

[3] cancellation: https://www.minister.defence.gov.au/minister/peter-dutton/media-releases/strengthening-armys-helicopter-capability

[4] Seahawk Romeo helicopters: https://www.dsca.mil/press-media/major-arms-sales/australia-mh-60r-multi-mission-helicopters-and-related-defense

[5] tanks: https://www.minister.defence.gov.au/minister/peter-dutton/media-releases/enhancing-adfs-armoured-combat-capability