Budget 2011: The 2011-2012 Budget: A dry exercise | ADM June 2011
Katherine Ziesing | Canberra
While some cuts to Defence were to be expected given the government’s promise to return to surplus next financial year (an election year), the cuts were larger than many had anticipated. But there is some light in the finer detail.
The previous Rudd Government committed to average real increases of three per cent over the years through to 2017-2018 for the Defence budget. The key word here is average. Average assumes that some years will be bigger than others and some subsequently smaller, with hopefully a fairly even spread throughout the cycle. These forward estimates are of the smaller variety. The peaks and troughs that plague defence and its planners are most definitely in play in the current Gillard government. Treasurer Wayne Swan in his budget speech on May 10 did not even mention defence.
Total defence wide funding is marginally up from $25.25 billion to $26.559 billion, a negligible 2.9 per cent change year on year. But this headline figure fails to illuminate the finer detail of what industry can expect in the years to come. The Defence Materiel Organisation (DMO) and approved major capital investment program (AMCIP) figures are much more interesting in this regard (figure 1) as is their breakdown of how the DMO’s $11.127 billion in 2011-2012 will be spent (figure 2).
Defence has also been asked to cover the $251.9 million over the next four years for the additional C-17 that the defence minister announced at Avalon. Government will cover $81 million out till 2036 for net personnel and operating costs (NPOC) of the aircraft that is expected to be received and operational this year. This will be funded in part by the cancellation of two extra C-130J Hercules which Defence figures will save it $520.1 million over the coming decade out to 2020-2021. How this figure was reached is not made clear.
But government will cover the previously announced acquisition of RFA Largs Bay for $104 million. The government will also provide another $73.4 million over three years for fit out costs and $99.4 million over six years from 2011-2012 for NPOC. ADM understands that the $73.4 million will cover a 16-week refit at Falmouth for Lloyds recertification which will include upgrading the engine cooling systems for warm weather operation; some on two refurbished Mexefloats; some on navigation and comms systems (the RFA fitout was leased) though existing equipment from HMAS Manoora will also be utilised where possible. ADM also understands that HMAS Manoora’s Typhoons will not be remounted on Largs Bay.
Handbacks
In this financial year alone, 2010-2011, Defence will hand back $1.6 billion to the government in order to support the key theme of the federal budget this year: efficiency. Budget papers call the cuts a ‘realignment’ where $1.1 billion from the major capital acquisition budget will be handed back to the government over the forward four years thanks to re-programming and $400 million from this year.
According to the government, the reasons behind the underspend this year include:
• industry not meeting milestones;
• natural disasters and weather conditions leading to delays in construction and infrastructure projects alongside particular skills shortages and;
• the caretaker period of two months surrounding the federal election last year where there was a freeze on all government decisions.
There are a range of projects from the AMCIP and the Major Capital Facilities Program (MCF) affected. AMCIP will see $815 million handed back while MCF will see $294 million returned. The DMO manages $790 million of the AMCIP budget and has broken down the value of non-deliverables that have contributed to the cashback.
• Multi-Role Tanker Transport $316 million
• Wideband Global Satellite $70 million
• Multi-Role Helicopter $93 million
• Wedgetail AEW&C $61 million
• Air Warfare Destroyer $55 million
• Armed Reconnaissance Helicopter $17 million
• Another 25 projects totalling $178 million
On a positive note, the Super Hornet project handed back $25 million thanks to negotiations that led to lower costs for spares and support equipment.
But more importantly is the level of reprogramming outlined out until 2020-2021. Thanks to increased efficiencies (both permanent and temporary measures), the cancellation of the two C-130J Hercules aircraft which the government valued at $520 million over that period in favour of an extra C-17 and substantial reprogramming, see figure 3, Defence aims to give back $2.765 billion in the coming decade. The $2.7 billion can broken down into;
• $1.185 billion in increased efficiencies;
• a temporary increase in the efficiency dividend of $139 million;
• C-17 acquisition that saw the cancellation of two C130Js (as previously announced at the Avalon Air Show this year) saving $111 million over four years; and
• Capital investment reprogramming across the entire defence organisation to the tune of $1.281 billion.
This raises some interesting questions given that ‘neither of these measures [reprogramming and the C-17 purchase] and the efficiency dividend will have an adverse impact on the delivery of Force 2030 or military operations’. Yet this goes against everything that the Defence Capability Plan stands for. If the projects listed in there can be moved from year to year with no consequence to the capability of the Australian Defence Force of 2030, why bother having the capability? See P34 from Derek Woolner for more on this issue.
Material coming out of the budget papers and associated government releases speak of numerous cases where industry has failed to deliver on time or on budget but they say nothing about the blockages of work due to projects not being progressed through the DMO and government in a timely way (see P34 from Mark Thomson for more on this issue). Depending on who ADM talks to, delays are caused from either a lack of movement on Cabinet passing projects or a lack of tender quality information being delivered to Cabinet by DMO and Capability Development Group (CDG). Either way, industry is not getting a steady supply of first and second pass approvals on which to plan their business.
In a budget where numerous parts of the federal government bureaucracy are being told to tighten their belts, Defence is in the unenviable position of giving back money that they can’t spend for whatever reason. With this in mind, perhaps the decision to reprogram substantially over the forward estimates is not the worst idea in the budget. But it does not bode well for the raft of new projects announced in the 2009 White Paper.
Also of note was the complete lack of material from the Defence Science and Technology Organisation apart from the barest of mentions for their relatively minimal income and expenses, which did not seem to fluctuate wildly over the coming four years. When the matter was raised with Defence officials in the budget lockup, ADM was told that they would contribute to the 1,000 jobs that would be cut as part of the Strategic Reform Program (SRP) measures announced by minister Smith (see workforce box for more detail).
Platform Deliverables
Elements of deliverables from each of the three services are all clearly outlined in terms of unit ready days, rate of effort or flying hours - except for the Navy. Unit ready days for the Navy are an amorphous dollop of figures on a page, grouped by major and minor combatants, amphibious and afloat support, maritime teams and hydrographic force. This means that readers are unable to see how many unit ready days are being reported for individual Navy platforms. Even new and retiring capabilities such as Army helicopters and Air Force jets can be seen in such terms, as can the other platforms operated by these services.
Then again, neither of these organisations operates the Collins class submarine.
Interestingly, the Navy’s six Sea Kings stop flying next year in 2012-2013 and the ramp up for the fleet of 46 MRH90s (40 for Army and six for Navy) is 2,000 flying hours a year. It remains to be seen if the timelines outlined in the budget papers will come to pass given the delivery issues the MRH90 program has faced.
Alongside the top 30 major projects (see figure 4), the budget papers also include the top 20 sustainment projects (see figure 5). But more importantly, each section provides a small summary of the issues facing each of these programs and give perhaps more timing detail into their schedule than perhaps can be readily found otherwise.
Highlights include:
• IOC for the MRTT is scheduled for mid- 2012, two years overdue, and makes no mention of the boom refuelling system certification.
• IOC for Land 125 Ph 3A is due next month with 7 Brigade ready to go.
• JASSM completed successful test firings in the US in early December last year and is working towards IOC at the end of this year.
• while government has selected the final three contenders for Land 121 Ph 3 medium/heavy trucks, source selection is expected mid year with contract signature in the following financial year.
• the AWD program has acknowledged that there are program delays with module construction and that schedule and skilling issues need to be addressed.
ADM considered providing the tables of first and second pass approvals outlined in the Defence portfolio statement but the flexible time brackets now used for planning purposes (up to three years) mean the value to readers is questionable.
Infrastructure
No decisions, let alone announcements, had been made about the fate of various Defence estate assets at the time of ADM going to press. The previously announced Defence Estate Review (DER), in the wake of the Pappas review, will no doubt shed more light on the fate of various bases and assets but the budget papers understandably do not mention any of these nor make provision for them in any way. The DER is due to report within 18 months of the Pappas review and the chances of the review coming in early, even for budget, were very slim to begin with. But if the 2009 White Paper still holds true, then “Defence should consolidate into fewer, larger and sustainable multi-use bases” and will invest accordingly. For more infrastructure spending details, see Figures 6 and 7.