The Cost of Defence ASPI Defence Budget Brief 2008-09 Sixty-one million, nine hundred & ninety-five thousand, four hundred and twenty-eight dollars & ninety-six cents per day. Prepared by: Mark Thomson Program Director Budget and Management Twenty Selected Defence Project Briefs compiled by: Gregor Ferguson Tom Muir Senior writers at Australian Defence Magazine Cover graphic courtesy of Geoff Pryor ¤ The Australian Strategic Policy Institute Limited 2008 This publication is subject to copyright. Except as permitted under the Copyright Act 1968, no part of it may in any form or by any means (electronic, mechanical, microcopying, photocopying, recording or otherwise) be reproduced, stored in a retrieval system or transmitted without prior written permission. Enquires should be addressed to the publishers. First published May 2008 Published in Australia by: Australian Strategic Policy Institute (ASPI) Level 2, Arts House, 40 Macquarie Street Barton ACT 2600 Australia Tel: + 61 (2) 6270 5100 Fax: + 61 (2) 6273 9566 Email: [email protected] Web: http://www.aspi.org.au Note on title: The figure of $61,995,428.96 represents one three-hundred-and-sixty-fifth of reported Total Defence Funding for financial year 2008–09. This does not include funds appropriated to the Defence Housing Authority, those administered by Defence for military superannuation schemes and housing support services, nor the additional funds provided directly to the Defence Materiel Organisation. CONTENTS Director’s Introduction v Executive Summary vi Section 1 – Background 1 1.1 Strategic Context for the Budget 1 1.2 Economic Context for the Budget 4 1.3 Defence Organisation and Management 7 1.4 National Security Spending 12 1.5 Measuring Defence Spending 17 Section 2 – Defence Budget 2007–08 PBS Explained 21 2.1 Overview [PBS Chapter 1] 22 2.2 Resourcing [PBS Chapter 2] 22 2.3 Defence Reform [PBS Chapter 3] 33 2.4 Capital Investment Program [PBS Chapter 4] 34 2.5 People [PBS Chapter 5] 39 2.6 Outcomes and Performance [PBS Chapter 6] 52 2.7 Financial Statements [PBS Chapter 7] 91 2.8 Defence Materiel Organisation [PBS Part 2] 92 Section 3 – Defence Efficiency 101 Section 4 – Defence Funding 125 Section 5 – Australian Defence Economics 141 Section 6 – The Cost of War 147 Section 7 – Delivering Capability 153 Section 8 – 20 Selected Major Projects 165 Section 9 – The Financial Statements Explained 213 About the Australian Strategic Policy Institute 230 Glossary 232 iii iv EXECUTIVE DIRECTOR’S INTRODUCTION This is ASPI’s seventh annual Defence Budget Brief. Our aim remains to inform discussion and scrutiny of the Defence budget and the policy choices it entails. As has been the custom in the past, we explore new areas in this year’s Brief. Two new sections have been added; Delivering Capability, which explores Defence’s capability planning and acquisition activities, and Defence Funding, which looks at the short and long term funding issues facing Defence. In addition, we have expanded the usually short discussion of Defence management and efficiency into a larger one focused entirely on efficiency. A number of people have contributed to the preparation of this Brief including ASPI interns Ross Allen and Brendan Johansen, and staff members Andrew Davies, Justin Tim and Raspal Khosa. Fortunately, Ms Karla Bogart once again provided invaluable assistance by preparing the explanation of Defence’s financial statements – a task of some complexity. The not inconsiderable task of preparing the document for publication has been ably taken care of by Janice Johnson and Renee Kirkham. And our colleagues from the Australian Defence Magazine have again done a great job of capturing informative snapshots of twenty selected Defence projects. Many others have helped by providing comments, offering advice, and checking facts. Our thanks go out to them all. Also, Defence was kind enough to look over a preliminary draft of this Brief and provide valuable comments. This helped clarify some important points and resulted in improved accuracy in many areas. Of course this does not in any way imply that Defence endorses this document or even supports its conclusions. My colleague Dr Mark Thomson, who is the Manager of ASPI’s Budget and Management Program, has once again pulled together the Brief in the short time available. For this I extend my sincere thanks. As always, responsibility for the judgements contained herein lie with Dr Thomson and me alone. Lastly we should acknowledge that we at ASPI are not disinterested observers of the Defence budget. Our funding from government is provided through Defence at the rate of seven thousand two hundred and twenty six dollars and twenty-three cents ($7926.23) per day. Details can be found in our 2006-07 Annual Report. Peter Abigail Executive Director v EXECUTIVE SUMMARY Defence awoke from the Howard years with a throbbing hangover. Despite eight years of very generous funding, the like of which had not been seen since the 1960s, Defence’s medium to longer term budget situation looked dire. Billions of dollars worth of new equipment was soon to arrive without the funding to crew and operate it, and future equipment purchases were going to cost billions of dollars more than initially projected. Unless more money was found—lots more money—the defence force would have to be cut. Such was the situation when, earlier this year, Defence embarked on a savings program to free up $10 billion over the forthcoming decade to help make means and ends meet. Then a very different picture emerged with the budget. To start with, any suggestion of near-term financial pressure was swept away when Defence revealed a projected underspend for this financial year of $812 million (on top of $440 million worth of capital investment that was deferred back in February). At the same time, the arcane economic parameter used to maintain the buying power of the Defence dollar—the implicit non-farm GDP deflator—spiked to 6.25% and delivered an additional $11.6 billion to Defence across the forthcoming decade, including $939 million for next year. Given that there is no reason to think that the cost of delivering defence capability has risen as precipitously as the index, Defence had received a massive windfall. Defence, or rather the government, now faced a tricky problem. Irrespective of whether the chronic longer-term funding situation was fixed or not; unless something was done immediately, Defence would have an acute case of overfunding next year. The radical surgery set out in the budget is as follows; next year Defence has to cover the $1 billion cost of operational deployments from within its own resources, deliver $77 million worth of unfunded new initiatives and defer $191 million of spending until next decade. For details of how these aggregate chunks of the budget come together, see Section 2.2.2 of this Brief. In addition, due to mounting delays in major acquisition projects, $2.3 billion of planned investment has been deferred into the future from the next four years, including $1 billion that was planned for next year. It is important to recognise that this latter move was a response to project underperformance rather than government penny-pinching. If it had been thought possible for the money to be spent and the equipment delivered, the funding would have remained. In any case, the impact on the budget bottom line is the same. Defence will contribute more than $2 billion to the government’s surplus next year as a result of deferred spending and absorbed costs announced in this budget. As a result of the additions and subtractions in funding for 2008-09, Defence will have had to find $477 million worth of savings to cover the absorbed costs and deferrals planned for next year. Of this, $191 million of delayed spending will be achieved by deferring purchases of various sorts to beyond next year (not including major investment items). Of the remainder, as near as we can estimate, around $196 vi million will come from improved efficiency in how Defence does its business, while $91 million represents cuts in areas like minor acquisitions, IT projects, capital facilities and sustainment spending that will not be made up for in the future. As best we can judge, once the unspent funds and generous indexation are taken into account, it looks as though Defence will not be under too much duress next year. A detailed analysis of the funding situation appears in Section 4, including a proposal for a more realistic regime of future indexation. How much money will Defence get? As a result of the budget, Defence funding for 2008-09 will be… well, that’s a good question that takes some answering. Lets begin with what Defence describes as the ‘most common way of presenting the Defence budget’; Total Defence Funding. In 2008-09 this will amount to $22.7 billion, an increase of $1.5 billion on the figure for 2007-08 but representing a real increase of only 0.8%. Nonetheless, across the next four years Total Defence Funding will rise by an average of 4% per annum. Unfortunately Total Defence Funding is a very poor surrogate for how much money is being spent on defence, or even by Defence. For one thing, it includes around $300 million which Defence transfers to its acquisition agency, the Defence Material Organisation (DMO), which DMO dutifully transfers back to Defence to pay for, among other things, the military personnel it uses. This practice is harmless enough, except that this double shuffle ends up being counted twice in Total Defence Funding. Then there are the unspent funds from the payments that Defence makes to DMO that have been accumulating in what’s called the DMO ‘special account’.