The Cost of Defence The Cost of Defence ASPI Defence Budget Brief 2011–2012 ASPI Defence Budget Brief 2011–2012 The Cost of Defence of Defence The Cost ASPI Defence Budget Brief 2011–2012 ASPI Defence $72,766,619.18 $72,766,619.18 $72,766,619.18 $72,766,619.18 $72,766,619.18 $72,766,619.18 $72,766,619.18 $72,766,619.18 Seventy-two million, seven hundred & sixty-six thousand, six hundred & nineteen dollars & eighteen cents per day RRP $15.00 The Cost of Defence ASPI Defence Budget Brief 2011-12 Seventy-two million, seven hundred & sixty-six thousand, six hundred & nineteen dollars & eighteen cents per day. Prepared by: Mark Thomson Program Director Budget and Management Selected Major Projects edited by Andrew Davies and compiled by: Gregor Ferguson Tom Muir Editor and senior writers at Australian Defence Magazine Cover graphic; HMAS Sirius in turbulent seas. Photo courtesy of Department of Defence. © The Australian Strategic Policy Institute Limited 2011 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 2011 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 $72,766,619.18 represents one three-hundred-and-sixty-fifth of reported Total Defence Funding for financial year 2011–12. 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 Executive Director’s Introduction v Executive Summary vi Chapter 1 – Background 1 1.1 Economic Context for the Budget 1 1.2 Defence Organisation and Management 4 1.3 National Security Spending 8 1.4 Measuring Defence Spending 10 Chapter 2 – Defence Budget 2011–12 PBS Explained 15 2.1 Strategic direction 16 2.2 Resourcing 16 2.3 Funding from Government 20 2.4 Capital Investment Program 23 2.5 People 27 2.6 Outcomes and Planned Performance 46 2.7 Financial Statements 87 2.8 Defence Materiel Organisation 87 Chapter 3 – Delivering the 2009 White Paper 97 Chapter 4 – Strategic Reform Program 119 Chapter 5 – International Defence Economics 131 Chapter 6 – The Cost of War 157 Chapter 7 – Military Burden Sharing and Australia 163 Chapter 8 – Defence Transparency 183 Chapter 9 – Selected Major Projects (edited by Andrew Davies) 195 Chapter 10 – Australia’s Foreign Aid 249 About the Australian Strategic Policy Institute 257 Glossary 259 iii iv EXECUTIVE DIRECTOR’S INTRODUCTION This is ASPI’s tenth 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. A chapter on International Burden Sharing has been added, and we’ve resurrected the issue of Defence Transparency to take account of recent developments. In addition, the material dealing with Defence Outputs has been refined to better cover the Defence Programs. The chapter we introduced two years ago entitled Selected Major Projects makes a return with the assistance of our colleagues at the Australian Defence Magazine, Gregor Ferguson and Tom Muir. This section has once again been capably edited by ASPI’s Andrew Davies. Finally, the not inconsiderable task of preparing the document for publication has been ably taken care of by Janice Johnson. 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, five hundred and eighty-three dollars and fifty-six cents ($7,583.56) per day. Details can be found in our 2009-10 Annual Report. Peter Abigail Executive Director v EXECUTIVE SUMMARY In 2009 the government did something Defence Budget 2011 that had never been done before. They Defence spending 2011-12: $26.5 billion simultaneously launched a Defence Share of GDP: 1.8% White Paper, Force 2030, and a major Share of Commonwealth spend: 7.3% defence reform program, the Strategic Real growth on prior year: 4.2% Reform Program (SRP). This was not a Four-year past trend: 4.0% pa coincidence. The two were inextricably Four-year future trend: 0.1% pa linked; the ambitious modernisation of the defence force in Force 2030 was Expenditure shares Personnel: $10.1 billion (38.1%) explicitly contingent on the SRP Operating: $9.4 billion (35.4%) delivering savings of $20.6 billion over Investment: $7.0 billion (26.6%) the forthcoming decade. Cost of deployments This year’s budget provides an Afghanistan: $1.7 b ($7.0 b since 2001) opportunity to assess progress on both East Timor: $160 m ($1.6 b since 1999) fronts. To understand what’s happening, Solomon Islands: $43 m ($0.3 b since 2003) here are the key developments from the May budget. Key budget measures ↓ $4.3 billion cut from budget to 2019 Defence will hand back $1.5 billion of ↓ $2.4 billion in investment deferred to past 2014 funding this financial year, including Adjustments and supplementation $1.1 billion of investment funds and ↓ $2.4 billion returned due to appreciation in A$ $400 million from recurrent spending. In ↑ $1.3 billion in supplementation for deployments light of this dual underspend; a further $1.3 billion of previously planned investment has been deferred to beyond 2014, and $3.9 billion of recurrent funding planned for the next decade has been returned to the government. By themselves, these facts are hardly revealing. Indeed, on the surface it might be concluded that the government is simply taking money from Defence to ensure it can deliver a surplus in 2013. But this is certainly not the case—especially given that the cuts and deferrals are not centred on that year. Instead, the steps taken in this year’s budget are symptoms of serious problems with Defence’s financial management and capability development planning. These are examined below. The Defence Capability Plan and Force 2030 Since 2000, the development of the defence force has been based around a long-term program of planned investment in new equipment; the Defence Capability Plan (DCP). The latest public version of the plan was released in December 2010 and covers the decade to 2019. It tells us about the acquisition projects which Defence plans over the next decade in pursuit of Force 2030, the defence force envisaged in the 2009 White Paper. Given the inherently extended time needed to deliver defence projects, the current ten-year plan probably contains 75% of the additional equipment that will form the force structure in 2030. Defence’s incoming government brief from late last year said that the ‘implementation of Force 2030 is on track but under pressure’. No such claim appears anywhere in this year’s budget paraphernalia. Nor, however, is there any concession vi of the contrary. Instead, Defence distributed a brief on Budget Night that said that the ‘majority of adjustments to funding for Force 2030 projects in the Budget involve projects commenced before the 2009 Defence White Paper’. And lest anyone be confused, they reiterate the same point four times on the one page. As if only the handful of projects commenced after the 2009 White Paper count towards Force 2030. They can change the goalposts all they want, but the fact remains that implementation of Force 2030 has fallen steadily behind schedule over the past two years. First-pass approvals—the lead indicators of future activity—are most telling. Over the past 24 months, a mere ten projects have been given the nod, whereas more than three times that number was planned. And it is set to get worse. According to the latest revision of the public DCP, around 58 first-pass approvals are going to be required over the next 25 months to meet the current schedule as updated in this year’s budget. While the situation with second-pass approvals is not quite as bad, it is hardly more encouraging (especially given that a great many future second-pass approvals are contingent on the mounting back-log of first-pass approvals). Even taking the disruption due to the election into account (which should not have come unexpected) the rate of approvals has been disappointing. However, it is not surprising. Since the adoption of the two-pass process in 2004, approvals have taken significantly longer to achieve than in the past. Defence is taking steps to respond to the situation by expanding, diversifying and up-skilling its capability development workforce.