Budget 2011: Budget sign post to a new business environment | ADM June 2011
Derek Woolner | Canberra
This year’s defence budget looks like a low-key document, but its long term implications are profound. The financial basis for budget planning has changed fundamentally: the SRP is the new source of Defence’s 3 per cent budget growth.
The government’s intentions for the 2011¬12 Defence Budget are expressed simply but with brutal starkness in one short paragraph early in the Defence Portfolio Budget Statements:
Apart from the conduct of current operations, the Government’s key initiative in 2011-12 will be implementing the Strategic Reform Program (SRP).
The normal range of defence activities are presented and funded but this is not a budget that is justified in terms of maintaining overseas deployments of the Australian Defence Force or reinvigorating the capital investment program to develop future defence capabilities. Instead, the priorities that have dominated defence financial planning since 1999 have become somewhat moribund, coming to a position that begs serious questions about the future nature of Australia’s defence activities.
The end of the security decade
On the surface, this budget appears inconsequential. Total Defence Funding for 2011¬12 is close to $26.6 billion, an increase of
2.9 per cent over the previous calculations at the time of the Additional estimates. Adding to the account the other resources the Defence Organisation administers (but which are not considered as part of the defence of the nation) total resourcing should be close to $30.5 billion. Most of the $741 million increase in Defence Funding is attributable to $1.1 billion of supplementation for the costs of ongoing military operations in Afghanistan, east Timor and the Solomon Islands and $70 million of capital expenditure reprogrammed from earlier years. This is offset by savings, of which the most important are $227 million garnered from efficiencies and a $210 million reduction in defence costs because of the appreciating value of the Australian dollar.
If these figures suggest the purchasing power of the defence budget may be going backwards against inflation Australia, running a $50 billion deficit for 2010-11, is not divorced from global trends. Last year’s British Defence Review cut the UK’s defence budget by 7 per cent and left the Ministry to find from internal savings a further 9 percent for long-term unfunded obligations. With the UK’s public debt a major political issue, its armed forces were less severely treated than many other public activities. Ironically, Britain’s problems have provided the opportunity for Australia to make one of the few military acquisitions covered in the budget.
Contending with similar problems, in January US Defence Secretary Robert Gates proposed cutting US$78 billion from the US$550 billion US defence budget over the next 5 years. Operating against the background of a US$1.3 trillion national government deficit, Gates enunciated the new collective wisdom by hoping that “what had been a culture of endless money will become a culture of savings and restraint”.
Changing Australia’s defence culture
The 2011-12 defence budget is no less aimed at a cultural change in Australia and a close reading of the papers confirms the suspicions of a changed environment hinted at in the 2010-11 version. The security fears of the first decade of the 21st century have been overwhelmed by the economic preoccupations of the second. Gone are any traces of the Howard government’s promise to pass on the benefits of economic growth to defence by guaranteeing annual real budget increases averaging 3 percent. Instead, the government’s two-year-old decision that the development of ADF capability would require the SRP to achieve savings of $20.6 billion over the decade from 2009-10 is further promoted as “constraining the call on national resources”.
And, should anyone miss the message, the Minister’s budget statement proclaimed, “reform in Defence is necessary, achievable and sustainable” and that “Defence can and should do more to reform.”
As if to emphasize a deliberated dourness, initiatives normally promoted on budget night were announced in the days on either side. On the Friday before the budget the government approved joint projects for battle space communications and for defence personnel systems (JP 2072 Phase 2B and JP 2080 Phase 2B.1, respectively). The day after the budget the Minister announced that Australia had signed a letter of intent to purchase the former RN Bay Class amphibious transport ship Largs Bay and had paid two thirds of her $100 million purchase cost.
This story might have been quarantined from budget night scrutiny because it coincided with news that RAN management of its existing amphibious fleet had been so poor that the government was simultaneously chartering the Antarctic support ship Aurora Australis, from the weekend before the budget to the end of June, to cover a hole in the Navy’s transport capability. No such inhibition could have delayed the announcement made yet a further day later; that an additional 101 Bushmaster protected troop carriers would be purchased. This was a typical “good news” story that not only spoke to the quality of the product but ended concerns about employment continuity in a marginal government electorate -normally the stuff of the budget night spotlight.
Pulling back the cash
The message that the government wanted this budget to send was also rehearsed the Friday before the papers’ release. It was that defence reform mean not just finding savings in the way the organisation operated but “constraint” on national resources also meant returning funding to the Commonwealth’s bottom line.
The Minister revealed that $300 million would be saved over the next three years by reducing the planned growth of defence civilian employees from 1655 to only 655. Joint Operations Command, the capability development group and the RAN would be excluded from this measure. The savings are to be returned to general government revenue to help reduce the Commonwealth fiscal deficit. They will be treated as additional to the SRP and not be part of the funding of future defence capabilities.
It is not unusual for the government to recover funding from Defence. Common practice is to not provide an appropriation for a budget initiative and have Defence find the money from within its total appropriations. In 2008-09 government considered that the inflation indices then used had so over- compensated defence for price rises that almost $1.1 billion was taken from within its total appropriation to fund the cost of overseas deployments. In 2010-11 Defence had to absorb $912 million spent on improving protection for ADF personnel in Afghanistan. This procedure continues, with $272 million and $368 million being taken from within the 2010-11 and 2011-12 appropriations, respectively, to help fund the costs of overseas deployments.
The change introduced in the 2011-12 budget is to withdraw finance altogether from the Defence Portfolio and to program this into an ongoing process of reducing earlier calculations establishing the quantum of the Forward Estimates. Thus, this initiative is not simply a measure affecting a comparatively small part of the cash movements in the 2011-12 budget but a process with greater impact on years beyond 2011-12.
Over the period of the Forward Estimates (2011-12 to 2014-15) the value of savings returned to the government increases from an initial $227 million to $319 million in 2014-15, for a total reduction in the defence allocation of almost $1.19 billion. To this has to be added a further $135 million withdrawn due to the decision to increase the efficiency dividend levied on all Commonwealth departments.
The imminent conclusion of the era of interventionist overseas deployments by the ADF will further reduce the scope of defence appropriations and fundamentally change their nature. For more than a decade, following the intervention of the ADF in East Timor as part of INTERFET in 1999, the additional supplementation to cover the costs of overseas deployments has been a major feature of the budget. The funding to cover the costs of these operations has always been derived differently from normal budget procedures and, over time, has became considerable. Including the $1.9 billion allocated in this budget, a total of $13,674 million will have been spent in operations covering East Timor, Afghanistan, Iraq and the Solomon Islands, together with large humanitarian missions to Sumatra and Pakistan.
While the $1.135 billion allocated to cover the costs of the Afghanistan deployment in 2011-12 will be replicated for another few years, operations in other areas are coming to an end. The last Australian troops in Iraq, the security detachment guarding the Australian embassy, are being replaced by private security contractors, with funding for the purpose transferred to the Department of Foreign Affairs and Trade in 2011¬
12. Barring unexpected developments, the deployments in East Timor and the Solomon Islands will conclude by the end of the 2011-12 Financial Year.
A significant consequence of these changes is that the parameters traditionally used for evaluating the effectiveness of defence financing are becoming increasingly irrelevant. The fact is that the way that the Defence Organisation does business is changing its purchasing power within the financial quantum. This makes the comparison of year-on-year budget outlays somewhat futile and specific evaluation of the ways defence does its work an increasingly important performance indicator. Ironically, as a consequence of this new age of financial management, observers will have fewer indications of the effectiveness of defence in reaching its objectives until review agencies, such as the Commonwealth auditor, develop procedures for public evaluation.
There is one certainty. The government is no longer pretending, as it did in May 2010, that it remains committed to a real growth figure in calculating each Defence Budget, with something of a pause in that year just because of economic circumstances. From 2011-12 the SRP is the new 3 per cent real growth.
The perpetual problem of capital acquisition
In any case, simply following the appropriations over past years would have hidden a view of the opportunities lost beneath the finance flows, particularly the persistent difficulties that Defence experiences in acquiring advanced military equipment. Once again, the inability of the Defence Organisation to manage the progress of its acquisition program dominates the 2011-12 budget papers. It has the greatest impact on the finance available and the most significant implications for the future of Defence.
Late deliveries affecting a number of major acquisition projects have left Defence unable to spend $1.1 billion of its major capital investment program during 2010-11. Although $100 million will be reallocated to buying the Largs Bay and another $200 million to purchasing a fifth C-17 aircraft, Defence will under spend its 2010-11 appropriation by $1.6 billion. The recurrent nature of this problem has led the government to conclude that Defence cannot utilise the funding previously allocated and, consequently, it has reduced the major capital program by an additional $1.3 billion over the four years to 2014¬15. These allocations will be returned to government, bringing the total reduction of planned Defence funding by $2.7 billion over the period to 2014-15.
It is difficult not to feel that such action is long overdue. By as early as 2005-06, only the fourth financial year to receive the additional funding arising from the 2000 White Paper, expenditure on major military equipment had fallen around $3 billion behind schedule. The acquisition program had to be extended by three years and projects worth $2.2 billion were deferred to 2008 and later years. Planning in 2007 for the 2008-09 budget projected a 27 percent increase in that document’s allocations for military equipment to allow the deferred projects to be reabsorbed. Instead, the problem reoccurred. Another serious under spend occurred during 2007¬08 and objectives for the next financial year had to be slashed. The problem was exacerbated, with projects worth $7.4 billion deferred for two or more years.
The first of this reprogramming comes through with $70 million in 2011-12, only to be swamped by the consequences of the significant capital equipment under spend in the previous year. These include a hiatus on spending in the major capital investment program, which sees a decline of $884 million in 2012-13 from the $5.1 billion allocated the previous year. Projected outlays do not rise significantly until the $6.4 billion projected for 2014-15. However, the history of the capital equipment program since the 2000 White Paper is that such sharp increases in expenditure are never attained. Seemingly, the Defence Organisation is limited to processing a capital program costing somewhere between $5 - 6 billion.
If anything, projections for the capital facilities program are more dismal. Allocations fall consistently from the $1.2 billion allocated in 2011-12 to be estimated at only $603 million by the end of the Forward Estimates period.
Implications for a different future?
Questioned a few days after the delivery of the budget, Defence Minister Stephen Smith argued that the reductions of capital equipment expenditure would have no long-term effect on the development of the ADF. He observed that under spending due to developmental problems would not be fatal to the delayed programs, whilst planning would continue for major projects that would not, in any case, be acquired until between 2020 and 2040.
To some degree this is true. The problem is that in many areas planning development is already too late to ensure that the ADF will receive equipment as programmed. The acquisition of the F-35 (under Project Air 6000) and of a new submarine (under Sea 1000) are areas where there are, for different reasons, already serious concerns. What the Minister probably doesn’t realize (as a comparatively recent appointment) is that he – with some of his colleagues – has to be part of the solution to over-long planning procedures.
Gaining Cabinet approval at various stages of the equipment acquisition process has been notoriously slow under both the current and previous governments. The 2011-12 Portfolio Budget Statements list 87 projects of the Defence Capability Plan that require either first or second pass approval from government over a period to 2015-16. Of these, 40 will require approval during the forthcoming financial year. It seems unlikely that the National Security Committee of Cabinet will be able to find time to receive, let alone consider, advice on all of these.
The unlikely nature of Ministers performing in this scenario means that 2020– 2040 is closer than Smith expects. It in turn raises questions about the continued validity of the 2009 White Paper. While many equipment projects can suffer delays and still be considered essential, for others there will be a time where extended inactivity leads to questioning of their continued relevance. This, in turn, requires the White Paper guidance underlying the defence equipment program to be revisited.
One way to possibly avoid this would be to accelerate the acquisition cycle. Included amongst the Minister’s pre-budget announcements was the approval of new rules for the implementation of the last of the Kinnaird and Mortimer Review recommendations. (See p. 32) The important aspect of this decision for managing the development of ADF capability is the implementation of procedures to ensure more serious consideration of off-the-shelf options for defence acquisition.
A more concerted move to promote off-the-shelf acquisition within Defence could be the most important of the cultural changes that the 2011-12 budget seems designed to encourage. The Minister has identified the 20-25 percent improvement in schedule performance that has resulted from application of the Kinnaird and Mortimer reforms as a source of the improvement that he expects to see in future acquisition programs. The extension of the two pass approval system and a broader examination of off-the-shelf options appeared likely to be implemented with some rigour.
The 2011-12 Defence Budget is an almost deliberately unexciting document that cloaks some serious consequences for the future conduct of Australia’s defence activities. There can be little complaint should it become the vehicle that brings some degree of financial efficiency to the heretofore ponderous Defence machinery. This is, however, a budget that brings little comfort to those used to working within the more affluent circumstances of the previous decade. The challenge that the Minister has issued with this document is to use it as a vehicle for change. It remains to be seen whether he and his colleagues will be able to play their part.