Defence: expenditure delayed is expenditure denied

In an interview with Lyndal Curtis on ABC NEWS 24 on 22 November 2011 (see here) Defence Minister Stephen Smith commented on the need for Defence to contribute to the savings necessary for the government to bring the budget back to surplus:

LYNDAL CURTIS: If there are savings found in Defence will there be real savings or delaying spending? And could, if there is a delay in spending, could that create a capability gap?

STEPHEN SMITH: Well two things. Firstly, again I won’t get into the detail; people should wait until my MYEFO comes out or, in some respects more importantly, wait until the budget comes out next year before descending into the detail.

But in terms of capability as we know because you’re dealing with a big capability program and you’ve essentially got a capability plan which covers a span of a decade or more, there’s always movement, there’s always moving around. We’ve seen that in the past and there are no surprises there. And that always occurs not just under this Government but under previous Governments – I suspect it always will. What we don’t want to do is to do things that have an adverse impact on capability or on operations and I’ve consistently made it clear as Minister that if Defence does make a contribution to a general budget outcomes then that will not in any way adversely impact upon our operations. Firstly whether that’s Afghanistan, Solomon Islands or East Timor and secondly, we are always very conscious about capability; but there’s always movement on the capability front either as a result of action by industry or as a result of technical or other difficulties. There’s always movement at that station.

The Minister’s assurance that the savings will not have an adverse impact on operations is entirely appropriate and in the short run at least is entirely achievable, but that is only part of the story:

(1)    The corollary of the protection of expenditure required for operations is that the savings will come from a mixture of the capital equipment program and the budget for through life support (maintenance) of valuable, complex equipment, both of which are an essential part of capability.  This has an inevitable consequence for future operations and the military response options available to future governments.

(2)    As the Minister reminded us earlier in the interview:

In the course of the last budget, Defence effectively made a contribution of about four billion dollars over five years to help return the Government to surplus and that was as a result of more effective work we were able to do under our Strategic Reform Program.

(3)    The savings garnered under the Strategic Reform Program were to have funded the very ambitious re-equipment of the Australian Defence Force outlined in the 2009 Defence White Paper, but as the Minister’s remarks make clear, they have instead been harvested as savings.

(4) …The notion that savings merely “delay” defence expenditure (“slip everything to the right”) is a spurious one – in plain English, any savings represent a reduction in expenditure.  In last year’s Budget Defence had its budget reduced by an average of $800 million per annum for five years.  That sounds like real money to me.

(5)    Those savings and the prospect of more in the next Budget make a mockery of the “certainty” that the Rudd Government gave to Defence, in the context of the White Paper, that the Defence budget would increase in real terms by 3.3% until 2018 and 2.3% after that.

Some over-arching comments about the state of the Defence re-equipment program:

(1)    As noted in Defence savings: the impossible dream, I do not think the proposed savings are there.

(2)    Even if they were, nowhere does the Defence White Paper demonstrate that the combination of the $20 billion in savings plus the then projected growth of the Defence budget would be sufficient to cover the cost of the ambitious re-equipment program, let alone the increase in through-life support and personnel costs for an expanded and modernised defence force.

(3)    The reductions in Defence outlays only serve to take the re-equipment program even further from being achievable.

(4)    Delays in decision-making at the National Security Committee of Cabinet are further compromising the program.  To take just one example, as I remarked almost two years ago in Future submarine: no time to waste, the Government was even then bumping up against some severe timelines if it wishes to bring a replacement submarine into service in 2025.  In order to do that we would need to be undergoing sea trials in 2022, and working back from there we would need to be cutting metal in 2016.  That is no longer achievable, so the delays have already committed the Australian public and a future Australian Government to a multi-billion dollar refit of the Collins class submarines, in order to enable us to maintain a submarine capability at all – and that will be a 1990s submarine operating in the demanding environment of the 2020s.  These delays have real consequences.

I think we have arrived at the stage where we need to go back to the drawing board on the Defence White Paper and re-define what it is that we want the Australian Defence Force to do, what capabilities it will need in order to perform its allotted tasks, and what funds Government is prepared to commit to that end. Above all, the stated requirements must be backed up by the necessary resources, or they are just words on paper.

Defence White Paper: the numbers do not add up

Today’s Australian Financial Review contains a significant news item sparked by the annual assessment of the defence budget by Australian Strategic Policy Institute (ASPI) analyst Mark Thomson. The report begins:

The leading defence think tank has slammed the government for being excessively secretive about the defence white paper and budget spending, but warned that even on the incomplete information available there would not be enough money to fund its ambitious 20-year weapons plan.

I have not yet completed my study of the defence budget papers, and have not yet had the opportunity to read Mark Thomson’s assessment at all. I have high regard, however, for Mr Thomson’s analytical skills and for his annual assessments of the defence budget, and accordingly would be inclined to take his headline conclusion at face value.

Mr Thomson’s conclusion bears out my comment at paragraph 12 of Defence White Paper: an appraisal, in which I said that the discussion of how all this capability was to be financed was unconvincing, a scepticism I went on to confirm, in the light of the program’s dependence upon savings, in Defence Savings: The Strategic Reform Program. I supported this view with an example of a previous savings program that went horribly wrong and ended up costing rather than saving money.

So, regrettably, the numbers don’t add up – and don’t forget you heard it first from me.

The Defence White Paper stands in danger of being an event (its launch) rather than a strategy.

Defence White Paper: the China Syndrome

Today’s Australian Financial Review reports that Australia’s highly capable Ambassador to China, Dr Geoff Raby

...has launched a staunch defence of the Rudd Government’s defence white paper, saying Canberra did not consider China an emerging military threat.

The article goes on to say that [Dr] Raby’s comments follow uproar in China at an academic level over the government’s decision to predicate its long-term defence strategy around the unlikely prospect of a conflict involving China.

Dr Raby is entirely correct. As I commented back in April in Is China really the enemy?, the growth of China is a benign development which poses little threat to Australia’s security, and there are many other and better reasons for Australia to be spending more on defence.

This whole matter has been clumsily handled. I do not think that the White Paper is nearly as predicated on a China threat as much of the public commentary would have us believe, but the “In Fear of China” genie has been allowed to escape from the bottle, and the Government seems to have been unable to put it back in its place. More troublingly, it appears to have been uninclined to even attempt to do so, in which case it presents itself as much more thin-skinned than it ought to be about the Opposition Leader’s preposterous taunts about the Prime Minister being an apologist for China. Now that the issue is out there, the Government itself should be robust and forthright about its view of the implications for us of China’s rosy prospects. That message needs to be heard loud and clear in Australia, not just in Beijing.

Even more troublingly, there may be some influential people in defence and foreign policy circles who actually believe that China is a threat. I have heard a few cries and whispers that suggest that there is more substance to the front page story in the Weekend Australian for 11-12 April 2009 than I was giving credence to in Is China really the enemy? That story proclaimed that Defence strategists had “ignored the advice of Australia's most senior intelligence chiefs and rejected the view that China's military expansion poses little threat to the nation's long-term security”.

That is their prerogative, of course, but one version of the story I have heard is that the analysts came under a lot of pressure to change their assessments, to the point of the behaviour of the demandeur becoming quite intimidatory.

If there is one lesson to be learned from the Iraq debacle it is that we don’t need governments or senior policy officers telling the intelligence agencies how their assessments should come out. We need intelligence agencies that call it as they see it, and governments that take the trouble to listen. What government then decides to do, having listened, is entirely a matter for the government of the day, and entirely the responsibility of the government decision makers.

Defence White Paper: an appraisal

The aim of this post is to provide some high-level or overview comments on the recently released Defence White Paper. In subsequent posts I will go into more detail on some specific issues.

For now:

(1) The Government is to be congratulated on bringing out this first Defence White Paper in nine years. It is long overdue; the Howard Government brought out the last one in 2000, and while Defence Updates were published from time to time, it really is necessary to go back to the drawing board every few years and take a fresh look.

(2) For this reason, the Government’s commitment to publish a new Defence White Paper every five years is to be welcomed. Five years is about the right cycle. More frequently than that and the world is likely to be similar enough to the previous iteration for each White Paper to be an incremental update of its predecessor. The world can change a lot in five years, however, and a periodicity longer than five years can result in some major investment decisions being based on analysis and thinking that is getting a bit long in the tooth.

(3) Apart from the benefits the preparation of the White Paper brings to the coherence and settlement of defence planning within Government, the White Paper is a welcome exercise in public education about Defence, and for that reason alone the clear and forthright language of the document is to be welcomed. There is far too little informed public debate about defence, and a major exposition by Government of what needs to be done and how the parts hang together is to be welcomed.

(4) The Department is to be congratulated on the resources that it committed to the task (very large indeed).

(5) The Department is to be congratulated also on setting up a suite of Companion Studies to examine the supporting and enabling resources that different front line capabilities would require. This gave the project a degree of depth that it would otherwise lack.

(6) No-one should underestimate the magnitude of the task involved in project managing an exercise like this and bringing it to a coherent outcome in a finite time. Any worthwhile examination of Australia’s strategic outlook must attempt to come to grips with a range of plausible developments in geopolitics, economics, social development, technology and a vast array of specialised military domains. This means that there are many stakeholders within and without the Australian Defence Organisation who must be consulted and whose views must somehow be accommodated without compromising the integrity of the final product.

(7) In a large institutional environment like the Australian Government there are powerful institutional constraints to dealing with such broad subject matter in as full and imaginative a manner as the task requires. It is inevitable that agencies outside Defence will be reactive or defensive, rather than imaginative or innovative, in the subject matter domains for which they have authority; they will be more inclined to defend their existing orthodoxies than to make new intellectual contributions through the medium of a document to be issued by another portfolio, no matter how “whole of government” the exercise attempts to be. It would be a bit much to expect a Defence White Paper to reveal ground-breaking thinking about the possible evolution of international politics or the consequences of the Global Financial Crisis, yet these are fundamental drivers of Australia’s strategic outlook.

Two other important constraints in dealing openly with the subject matter of defence are the fact that much of the subject matter is highly classified, and the necessity to consider the reactions of other countries to the way in which they are discussed.

(9) The varied subject matter noted in (6) above means that the strategic outlook is characterised by complexity or “non-linearity” in the genuine mathematical sense of those terms: everything connects to everything else, and there is acute sensitivity to initial conditions and/or minute changes in a single variable.

To take an example of the latter from the recent past, in the United States Presidential election of 2000 a few thousand votes in the right places in Florida, or a different Supreme Court verdict, would have resulted in Al Gore rather than George W. Bush becoming President of the United States. That would presumably have spared us the folly of the invasion of Iraq, and other fantasies of the Project for the New American Century crowd, and the world would be in a different place as far as climate change policy is concerned. History would have followed a very different trajectory.

An example of the inter-connectedness of everything is the fact that recovery of the world economy will produce substantially higher oil and gas prices, which will significantly enhance the options of a number of countries that are problematical to the United States – Russia, Iran, Venezuela and in our own region Burma – and thereby complicate the defence environment of the major ally that is so fundamental to our own defence planning. Recovery will also bring with it a substantial increase in interest rates, which will make it much more difficult for our much-indebted major ally to finance its desired defence posture.

(9) Perhaps for some of the above reasons, the Strategic Outlook section of the paper is a bit thin, a bit linear. The fact that we are heading towards a more multi-polar world is noted, but the consequences of that are not really analysed; the world of the future is pretty much an extrapolation of the world of the present.

This results in some missed opportunities. For example, in the two paragraphs devoted to Indonesia, we express relief that various developments have reduced certain traditional worries, but we don’t really think about the opportunities that a democratic and relatively prosperous Indonesia might present by 2030 – we are still too preoccupied by thinking about defence from Indonesia to give much thought to the prospects of defence by Indonesia.

There is also a disappointing lack of consideration of some of the more “joined up” issues. For example:

- In Climate change and nuclear proliferation I canvassed the consequences of a major global investment in nuclear electricity in response to climate change, in particular the fact that we will be living in a much more nuclear-capable world and region, and suggested that this is an issue that our defence planners should address.

- In Debt and sovereignty: another issue for the White Paper I noted some important consequences of the Global Financial Crisis, in particular, the loss of freedom of decision making (aka sovereignty) which results from a country being weighed down by excessive debt. Vladimir Putin had been acutely conscious of this when he came to office and acted to correct Russia’s problem. The West needs to stop and think about it too.

- An odd consequence of the current economic situation is that we seem to be looking ahead to a world which will be characterised by strategic competition between the greatest military power on earth (the United States) and that nation’s principal banker (China). Add in the fact that the banker depends upon the competitor to maintain its (the banker’s) domestic employment levels and social harmony, and holds most of its wealth in the currency of the competitor, and you have a situation that really warrants some deep thought.

- Another subject that warrants attention in a description of Australia’s strategic outlook is the uneasy co-existence at the present time of three notions of sovereignty, which are referred to by Philip Bobbitt in his recent book Terror and Consent (Knopf, 2008). These are what Bobbitt calls opaque sovereignty, translucent sovereignty and transparent sovereignty.

: The traditional (opaque) notion of sovereignty holds that a sovereign, being sovereign, is not accountable for anything it chooses to do either within its own territory or for its own defence.

: The weighted average view among states at the present time would be closer to the notion of translucent sovereignty: states are sovereign in their own domain, but need to account to other states for actions which have or are likely to have impacts on other sovereigns.

: Problems like Darfur, which raise the question of the duty to protect or prevent, give rise to notions of transparent sovereignty, in which states are accountable to the international community for how they treat their own citizens and indeed their territory itself – as do various international conventions in the human rights, environmental and other fields.

- Why these coexist uneasily is that the different views of different sovereigns can lead to significant tensions between leading players. The United States feels entitled to demand that China explain its military expenditure, but China holds closer to an opaque sovereignty view and is offended by this, as well as by international commentary on its human rights record. China’s attitude here leads also to its opposition to intervention in the Darfur situation, or anything that can be described as an “internal matter”.

(10) Notwithstanding these shortcomings, the Paper arrives at a forthright and appropriate view about the Australian defence task:

The Government has decided that Australia's defence policy should continue to be founded on the principle of self-reliance in the direct defence of Australia and in relation to our unique strategic interests, but with a capacity to do more when required, consistent with those strategic interests that we might share with others, and within the limits of our resources....

In terms of military strategy, it means the ability to conduct independent military operations in the defence of Australia by way of controlling the air and sea approaches to Australia, and denying an adversary the ability to operate with disruption, our immediate neighbourhood, to the extent required to ensure the security of our territory and people.

Equally importantly, the Paper makes some forthright statements about what the Australian defence task is not:

The Government has decided that it is not a principal task for the ADF to be generally prepared to deploy to the Middle East, or regions such as Central and South Asia or Africa, in circumstances where it has to engage in ground operations against heavily armed adversaries located in crowded urban environments.

(11) The force structure derived from the analysis of Australia’s strategic interests and strategic outlook is by no means an ambit claim. Australia’s defence task is to establish decisive military control over about 10% of the earth’s surface; we have jurisdictional responsibility of one kind or another for 5% of it. So while the White Paper presents us with a picture of a much larger and more capable defence force, this represents a refreshing dose of realism about the scale of the task rather than some unwarranted outbreak of militarism. Accordingly, it needs to be fully funded.

(12) I find the discussion of funding unconvincing. Much of it is to be funded by yet-to-be-found savings, although the White Paper does give some indication of how it is intended to find them. Reasons why the proposed savings of $20 billion over the 20 years will be difficult to find include:

- There are major gaps in the support of the existing equipment inventory, not to mention our ability to man various platforms such as submarines, so as matters stand Defence is underfunded for its capital inventory and manpower.

- The requirement is to find a net $20 billion of savings within the period in question.

- Many of the savings require the design or rationalisation of systems, which means that they will require an investment of resources ahead of any savings. Every time you read that processes will be rationalised, reformed, enhanced or improved, or see that someone is going to ensure that something is done in a particular way, you are reading about an intention to invest money in system design, process improvement, introduction of new software and reporting systems, and rollout of the above through an organisation employing in excess of 90,000 people.

- The time that development and rollout of these improvements will take means a delay in the realisation of any savings, which means that higher annual levels of savings will have to be achieved in the later years.

- Similarly, savings that depend upon cultural change will take years to bear fruit, and are even more uncertain.

(13) The Government’s planning guidance is also unconvincing as a means of achieving a major transformation of Australia’s defence capability.

- The commitment to 3% real growth in the defence budget is a prescription for spending a declining share of GDP on defence; the trend rate of growth of the Australian economy from 1997 to 2007 was 3.5%.

- The reduction to 2.2% from 2018-19 only accelerates the rate of decline.

- While the abandonment of the Non Farm GDP Implicit Price Deflator as the determinant of what is “real” expenditure growth is welcome, its replacement by the Reserve Bank’s 2.5% will prove to be an unsatisfactory alternative. Now that the United States and the United Kingdom have had to resort to “fiscal easing” (aka printing money, aka the Zimbabwean option) I think we might be hearing a lot more of that old 1970s word “stagflation”. Economic recovery will be choked off by rising interest rates and rising oil prices, the liquidity that has been pumped into the system will have to be brought under control by some pretty hard application of monetary policy, and the higher interest rates will add to the costs of working capital and commercial risks for the private constructors of long lead-time capital equipment.

(14) While the treatment of defence workforce issues is a good start, I think that much more needs to be done. A framework for recruiting and retaining, on an all-volunteer basis, the very bright and capable people that are required for the 21^st century Australian Defence Force will need to start from an examination of what will be an acceptable lifestyle for these people. This is not just about remuneration or conventional “conditions of service” issues like standards of housing or free medical and dental treatment. The people we need will not be prepared to endure petty humiliations on a daily basis and they will insist, in circumstances short of purposeful military operations, on having a sustainable family life, which means not only spending enough time at home, but also spending predictable time at home so that family activities can be planned and delivered. And the ones we most need will be the ones who can most easily say “I am out of here”.

This means that there will need to be more personnel redundancy in our defence force, and that will be extremely costly; but so is having three $1 billion submarines tied up because we cannot crew them. I have touched on this issue in Managing the submarine workforce; while the problem is perhaps most acute in relation to submariners, it cuts across the whole of the ADF.