Better Defence Value for Money

The report of the federal government’s Commission of Audit begins the section on defence by making the almost obligatory Australian complaint of excessive spending on defence, pointing out that defence accounts for “a significant part of the Commonwealth Budget … around 6 per cent of all Commonwealth expenditure”. That obeisance to custom out of the way, the commission goes on to a generally valuable examination of how the defence organisation might deliver better value for money.

The commission questions the government’s commitment to increasing defence spending to 2 per cent of GDP within ten years. It points out that the commitment lacks any assessment of strategic risk or capability requirements. This is the traditional approach of Australian politicians. Defence is regarded as one of those basic requirements of government but it seems one that is simply too hard to deal with compared with the populist vote-buying that seems to drive the national debate. Decisions made will not gain credit for a government that will be out of office before they become effective. For at least forty years, Australian governments have made similar commitments, bolstered on occasions by White Papers, but those commitments have often been cancelled or deferred, sometimes indefinitely.

For the Australian community generally, national defence is something of a mystery. We take pride in the achievements of our troops, not merely the Anzacs but the high-class professionals of the modern Australian Defence Force (ADF). At the same time, we—or our mouthpieces in the media—shudder when the prime minister, sitting in the cockpit of the latest fighter aircraft, announces that we will spend $12 billion on a not very large number of these “boys’ toys” as they are often termed. That the aircraft will be in service for thirty years and are crucial to the deterrence of conflict is ignored.

The defence and political PR machines treat the wider community with a degree of condescension that is insulting. The national defence debate, such as it is, is conducted between the ADF, the department and a handful of academic commentators, many sourced from the military and the department. With few exceptions, media coverage is superficial and focused more on passing scandals than on issues of substance. Because defence is an executive function with virtually no legislative backing except a very plastic allocation of funds in the Budget backed by the Supply bill that covers the whole of government expenditure, there is virtually no parliamentary discussion of core defence policy and therefore no political interest.

The Audit Commission notes that defence spending grew by 2.7 per cent annually in real terms between 2001 and 2013. While it notes the persistence of cost pressures over those years, it fails to point out that real costs of equipment and personnel have grown more quickly, so net defence capability has effectively declined.

Worth noting—as the commission does not—is that defence spending as a proportion of federal government outlays has fallen from 10 per cent in 1981-82 to 6 per cent today. In other words, there has been a vast increase in spending on such major and populist outlays as health, education and welfare at the expense, at least partially, of defence. In the 2013-14 Budget, health, education and welfare accounted for almost 60 per cent of total outlays.

Looking at the issue of how the money is spent, the commission asserts “that value for money remains paramount in project selection and implementation”. Here the issue should be whether the spending increases capability rather than some vague definition of value that cannot be measured in the absence of some strategic assessment. Unfortunately, in the Australian context, strategic assessments are normally based on speculative threats from an outsider. The fundamental weakness of this process is that threats invariably emerge much faster than capabilities can be developed. The most basic challenge for defence planners is to define those national interests that must be protected on the assumption that in any jungle weakness will attract predators. It also means that the ADF must be intellectually flexible, operationally adaptable and logistically sustainable.

The commission proposes a rational process of proceeding from an assessment of strategic risks through capability development to the funding required. But it ducks away from the possibility, likelihood perhaps, that the financial requirement will exceed 2 per cent of GDP. Given that over several decades defence White Papers and government policy statements envisaged an increase in defence spending to 3 per cent of GDP coupled with the constantly increasing real costs of personnel and equipment, 2 per cent of GDP seems a modest outlay for an adequate defence capability. Notwithstanding, the commission’s focus is very much on improving the capacity of the defence organisation to spend its money efficiently.

The commission is sharply critical of the defence organisation, comprising as it does the Department of Defence, the Defence Materiel Organisation and, not least, the ADF. In polite terms, it describes an organisation that is top heavy, overly complex and inefficient. It points to the growth in senior military and civilian officer positions from 223 in 1980 to 358 in 2013, a growth of more than 60 per cent. Despite some ten efficiency reviews over the same period, very little appeared to be gained in efficiency or, more importantly, effectiveness. Indeed, total ADF numbers including reserves declined by almost 20 per cent. The commission’s strictures focus upon administrative efficiency rather than military effectiveness. These are two very different concepts: an administratively efficient force may be quite ineffective when faced with a capable adversary.

Arguably, the problem arises from the preoccupation of the defence leadership with the processes of management rather than performance. Defence is awash with programs, each with its own staff and each with a conviction that their program is of overriding importance. An example is the preoccupation with gender equity. A current television commercial for the Defence Force tells us that there are 44,485 soldiers in the Australian Army. That total number includes both regular and reserve soldiers, but according to the commercial more are needed. In fact, somewhat more than one-third are reservists in under-strength and poorly equipped and trained units. The regular army is more than 1000 soldiers below authorised strength and more than 10 per cent of the total are new personnel under training.

Perhaps the most intriguing aspect of the commercial is that around 80 per cent of the soldiers shown enjoying Army life are women. Perhaps the subliminal message for young men is that the Army boasts significant numbers of young and, in the nature of such commercials, attractive women. Far more likely is that the equal-opportunity enthusiasts are anxious to show their political correctness by targeting women as potential soldiers. Over recent years most recruiting advertising for the defence force has emphasised the equal-opportunity aspect, with now virtually all employment trades open to women. Yet despite expanding employment opportunities for women, three decades of effort has struggled to get the proportion of women beyond 18 per cent. In the Army, the figure is just 11 per cent. Perhaps women just don’t find military service appealing.

The Audit Commission recommended that the Defence Materiel Organisation, a statutory independent organisation, should be brought back under the control of the department. It pointed to failures in the DMO including:

a high turnover of military staff; project management and costing skills shortages; unnecessarily complex contracting arrangements; underestimation of initial project costs; a lack of independent scrutiny; inadequate identification of technical risks; and unreliable whole-of-life cost estimates.

To be fair to the DMO, most of these problems predated its establishment, which was intended to overcome the problems. It is at least doubtful whether the reincorporation of the DMO can solve these problems. What is clear from the commission’s report is that both the DMO and the department are plagued by excessively ponderous management that adds significantly to costs. When I worked at the Lithgow Small Arms Factory in 1970, the overhead cost applied to the price of each rifle produced was 213 per cent. Currently, overheads in defence generally are of the order of 400 per cent—and that does not count the overheads already applied to equipment sourced in another country.

The commission proposes that conditions of service for both military and civilian personnel be simplified to reduce significant overhead costs while retaining initiatives for recruitment and retention of personnel. As with most of these recommendations, none are novel. The former Senator Jocelyn Newman as shadow defence minister was committed to a streamlining of service conditions that she regarded as too complex and administratively wasteful. One of the problems is that there are so many complexities in the system that most military personnel are unaware of the range of their entitlements while others spend too much working time trying to exploit the system. Of course, managing such complex systems demands very large staffs with an increased overburden of managers.

Not surprisingly, the Audit Commission raises the hoary old issue of the diarchy, the joint leadership of the defence organisation by the Secretary of the Department of Defence and the Chief of the Defence Force. The diarchy originated in the reforms proposed in 1973 by Sir Arthur Tange, then Secretary, and implemented under the authority of the Whitlam government. From my perspective, it is a structure that has never worked satisfactorily. Its failings have been at the root of every one of the multitude of reviews of defence since that time. Repeatedly its abolition has been recommended, and the current Defence Minister is believed to view it with no little suspicion.

Until 1973, the Defence Department was little more than a co-ordinating body for the Service departments, Navy, Army and Air, while the Department of Supply was responsible for most procurement needs as well as scientific research. The small Service departments largely provided administrative support for the Navy, Army and Air Force, each of which was governed by its own board of administration under its own Minister. The system dated back to the Second World War and had operated generally satisfactorily before the change. It could not be said that the current system has worked any better in the ADF’s various operational situations since. In some cases, such as the asylum-seeker campaign, it has not until recently performed well.

In his advocacy of the joint organisation, Tange argued strongly that senior military officers were insufficiently educated and trained to develop defence policy. Coming from a foreign policy background, he asserted that defence policy should be in the hands of foreign policy experts. At the time he had a point, but since that time with the development of expanded joint service training and education, the education and training levels of middle ranking and senior military officers probably exceed those of most of their civilian counterparts. Certainly, the development of joint service commands in the ADF has generated a genuine integrated ADF that was lacking in 1973 but even that occurred largely due to ADF commanders rather than the civilian leadership. In my view, the Department of Defence should be much less a policy-making department than one that provides administrative including financial support for the ADF. Too much effort within the proliferation of staffs is spent on endless reviewing of policies and decisions already made.

The Audit Commission failed to deal with this fundamental problem that it said, with masterly understatement, “runs the risk of blurred accountabilities”. Instead it proposed a new ministerial directive that would set out the separate responsibilities of the Secretary, the Chief of the Defence Force and those it considers should be joint responsibilities. From my perspective, the latter will not solve the fundamental problem. For example, the draft requires the Secretary and CDF jointly and individually “to deliver an efficient and capable defence organisation” but does not attempt to define what that might be. There seems absolutely no reason why the CDF cannot advise the government on strategic defence policy as well as raise, train and equip a defence force optimised to implement that policy. There exist inter-department structures in which Foreign Affairs, Treasury, Transport and other key departments can provide advice to government and the ADF. Indeed, the more such departments are involved, the more likely will be the achievement of a sound national defence policy.

A further unstated problem with the diarchy lies at the basis of its institution and its problems. A former secretary of the department once listed for me his responsibilities that included “civilian control of the military”. Legally and constitutionally, of course, he was wrong. That responsibility lies with the minister. But underlying the claim is a suspicion at least institutionalised in the bureaucracy that Australia’s military forces cannot be trusted to act legally or democratically and therefore must be kept in check by civil servants. The notion, genuinely held if not stated publicly, is not only a nonsense lacking any evidentiary basis but is an insult to every Australian who has ever worn the country’s uniform. Moreover, it is a usurpation of the rights and responsibilities of elected ministers who are answerable to parliament.

One interesting recommendation of the commission is to provide defence funding under two separate budget heads, one to cover expenditure on future capability, the other for current activities. Future capability funding would be held as “administered” funding as distinct from ordinary “departmental” funding such as, for example, salaries, specific operational costs and management overheads. This concept could be useful in limiting the tendency of governments and administrators to switch funding allocations between recurrent and capital expenditure.

The commission notes that preference for unique and Australian-built military equipment adds substantially to the cost of such projects as the air warfare destroyer. It points out that the premium for Australian construction of the ships has added 30 per cent to the total project cost. Even then, Australian construction is only a part of the overall cost, with much of the ships’ equipment being necessarily sourced overseas. The preference is supposed to preserve Australian skills in key defence industries but, more likely, it is little more than a job preservation scheme.

Of far more value to Australian industry would be a strategic commitment by government, backed perhaps by legislation, to a twenty-five-to-thirty-year defence modernisation and enhancement program that provided continuity of work, skills development and continuous employment as well as lower costs. Almost certainly such plans exist tucked away in filing cabinets somewhere in the labyrinth that is Defence headquarters.

The bottom line in defence is that, as a nation, we don’t know what we want, don’t know how to get it, and would prefer not to think about it until the bombs start to fall. Like Mr Micawber, we just hope something will turn up. With luck, it won’t be an existential threat to us as a nation and people. But, then, the Americans will look after us, won’t they?