Dr Andrew Davies - Australian Strategic Policy Institute
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Transcript of Dr Andrew Davies - Australian Strategic Policy Institute
ADM Conference 2017
The defence budget and the IIP –
status and outlook
Andrew DaviesASPI
ADM Conference 2017
Outline
Where we were: the 2016-17 defence
budget & DWP 2016
What’s changed since (MYEFO and
beyond)
Risks to the forward budget
The IIP and the looming train wreck
ASPI-RMIT Symposium: Jobs, growth and innovation in Defence IndustryADM Conference 2017
Where we were: the 2016-17 defence
budget & DWP 2016
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Operationsfunding
Baseline funding
Defence Spending
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GDP share
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2016-1
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OperationsfundingBaseline funding
Defence Spending + $14.8
billion
4.3% p.a.
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Capital Investment
Sustainment
Employee
Operating Expenditure
7.7% p.a. growth
5.7% p.a. growth
0.25% p.a.
growth
0.5% p.a.
growth
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What’s changed since (MYEFO and
beyond)
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GDP forecasts
2015-16 2016-17 2017-18
Budget 2.5 2.5 3.0
MYEFO 2.7 2.0 2.75
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Defence spending as % GDP
2016-17 2017-18 2018-19
Defence budget $32.4b $34.5b $36.8b
GDP % (budget) 1.88 1.92 1.94
GDP % (MYEFO) 1.93 1.96
NO EXTRA MONEY
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Risks to the forward budget
If things don’t go as well as planned: the cash problem
If things go as well as planned: the surplus trap
Who knows what’s going on in the global economy?
They the people (and their inconvenient expectations)
Externalities
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ASPI-RMIT Symposium: Jobs, growth and innovation in Defence IndustryADM Conference 2017
Debt Reduction =
Economic SecurityVoter Expectations
=
Political Security
Defence Spending
=
Strategic Security
$
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Fiscal challenges: each dollar can only be spent once
2002-2012 PBO
2016 Budget
Budget Share
Social services 3.70% 4.95% 27.60%
Health 4.80% 3.13% 14.30%
Education 4.60% 4.37% 8.60%
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Policy makers can neither explain nor manage the economy we are in today.
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For many years economists have been predicting stronger future growth
For many years that has not been happening
ASPI-RMIT Symposium: Jobs, growth and innovation in Defence IndustryADM Conference 2017
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Receipts (%GDP)
Payment (%GDP)
And yet: very
optimistic fiscal
projections
Budget 2016-17
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If a miracle happens…
•Treasury currently projects a surplus in 2020-21
•Worth looking at defence spending the last time that ‘happened’
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2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21
Bill
ion d
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Deferrals
Savings cuts
Reductions in Defence Spending
since the 2009 Defence White Paper
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2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21
per
cen
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DP
Underlying cash balance
as budgeted May 2012
? ? ? ? ?
The surplus trap…
once upon a time (2010 – 2012)
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The IIP, the industry policy and the looming
train wreck
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What does the (not very transparent, thorough or helpful) IIP tell us?
Key questions
Cost – is there enough money?
Schedule – will the stuff be delivered in a timely
way?
Capability – is it what we need to meet our
Defence aims?
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Capital Investment
Sustainment
Employee
Operating Expenditure
7.7% p.a. growth
5.7% p.a. growth
0.25% p.a.
growth
0.5% p.a.
growth
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Money
$160+ billion for capital investment
over the next decade
Compares with $70 billion over
past 10 years
Capital will be 40% of budget
in 2025-26 (28% now): $18.8B
versus $9.5B this year
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Conclusion is that money is unlikely to be a limiting factor (though the ability to spend it
all might be)
Artist’s impression of
Defence CFO circa 2023
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Which brings us to… schedule
“The fact that we are not getting cost blowouts
after 2nd pass does indicate that most of the
projects have been de-risked to an appropriate
level. The area we’ve identified as a problem
though is schedule”.
Stephen Gumley, 2011
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Schedule delays mean
ADF does not receive capability when expected
Older equipment has to soldier on and/or there is a
capability gap (e.g. air-to-air refuelling)
Monetary impact due to old equipment and project
overheads
Often (not always) associated with real cost
increases
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Schedule delays
Pre-approval – largely Defence’s
responsibility
Post approval – largely industry’s
responsibility (unless Defence changes its
requirements)
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Approvals
Two pass process has been streamlined into a
three pass process…
Gate 0 1st
pass
2nd
passProject delivery
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Catch Up
Second Pass
First Pass
Approvals – past, present and (near) future
So far this FYHistorical average
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Getting approvals is just the first step
“There is no question that this is a matter of profound national importance, that as far as possible we use our defence dollars to drive Australian industry, Australian innovation, because the benefits go well beyond the defence budget.”
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Innovation
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None of the developmental projectshave been delivered without a 40% overrun in schedule, and the average is 92%—almost double the planned time.
ANAO data
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Hurry up!
The first pass approval for the offshore patrol vessels, with construction to begin in Adelaide in 2018, following the completion of the Air Warfare Destroyers program and then the OPVs construction will transfer to Western Australia when the Future Frigate construction begins in Adelaide in 2020.
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Link
“Valley of death”
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… but hurry slowly.
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Programs with requirementchanges
Programs without requirementchanges
Program delay (months)
(US) GAO data
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Augustine* says:
Law Number XXIV: The only thing more
costly than stretching the schedule of an
established project is accelerating it, which
is itself the most costly action known to man.
*Norman, not Saint
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How MOTS will the designs be?
Submarines – not at all
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How MOTS will the designs be?
OPVs – substantially(?)
As part of the Competitive Evaluation Process (CEP) three designers have been shortlisted; Damen of the Netherlands, Fassmer of Germany, and Lürssen of Germany to refine their designs. This program is estimated to be worth more than $3 billion.
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How MOTS will the designs be?
Frigates – somewhat
First pass approval for the Future Frigates under Sea 5000 has also been granted. Three designers -- BAE Systems with the Type 26 Frigate; -- Fincantieri with the FREMM Frigate-- Navantia with a redesigned F100have been short-listed to refine their designs.
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How MOTS will the designs be?
Frigates – somewhat, but…
The frigates will all be built in Adelaide, incorporating the Australian-developed CEA Phased-Array Radar.
(Much) more modification than for AWDs
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We will likely need foreign purchases
The alternative is to return money to portfolio –
and to tempt future governments to renege on
funding.
But even if we ramp up foreign
spending Australian industry can
still get more money.
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As overall defence funding increases,
Australian industry funding will increase
over the next decade.
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Questions & Discussion
2016 Defence White Paper Masterclass