Concerns Australia’s defence mega projects could break the bank

We can all agree that home and contents insurance is a necessary evil; it is one of those things that is better to have and not need, than need and not have. A nation’s armed forces, its capabilities and supporting strategic policy and sovereign industries all serve the same purpose.

As the regional balance of power in the Indo-Pacific continues to evolve, Australia’s role, responsibilities and position within this new paradigm are all serving to undermine the nation's security. 

With Australia edging ever closer to the elusive 2 per cent of GDP on defence expenditure amid the largest peacetime rearmament program in the nation’s history, much concern has been placed on the nation’s capacity to finance the next-generation capabilities and mega projects over the long term.

The election of the Coalition in 2013 saw a major shake-up in the way defence was approached by government. Following what the Coalition describes as six years of neglect and delays under the tumultuous Rudd/Gillard/Rudd governments, the newly formed government sought to create an environment of stability and consistency for defence with a number of key policy objectives.

Central to this was the commitment to return Australia’s defence expenditure to 2 per cent of GDP following what both Prime Minister Scott Morrison and now former defence minister Christopher Pyne explained as a 10 per cent reduction in real terms in the last year (FY2012-13) of the previous government – resulting in defence investment falling to its lowest levels since 1938.

While Australia’s defence expenditure looks set to increase to $38.7 billion in 2019-20, it is a case of business as usual for Defence and industry, with the Coalition’s budget announcement signalling the government’s continued commitment to supporting the capability and development of Australia’s sovereign defence industry capabilities.

The Coalition remains committed to continuing the delivery of a number of key projects identified as part of the government’s 2016 Defence White Paper, which focused on delivering a series of major capability upgrades and modernisation programs across the Australian Defence Force, including:

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• The delivery of the first unit as part of the $5.2 billion LAND 400 Phase 2 program for Boxer combat reconnaissance vehicles;
• Industry partners presented their bids as part of the $10-15 billion LAND 400 Phase 3 Armoured Fighting Vehicle program;
• Construction progress for the $35 billion SEA 5000 Hunter Class guided missile frigate program;
• Construction commencement and milestones at the $535 million SEA 5000 Shipyard facility at Osborne, South Australia;
• The continued arrival of Australia’s Lockheed Martin F-35A Joint Strike Fighters;
• Signing the Strategic Partnership Agreement for the $50 billion SEA 1000 Attack Class future submarine program; and
• Committing to the acquisition of 30 self-propelled howitzers and 15 support vehicles to be built and maintained at a specialised facility in Geelong. 

Further supporting these milestones, the government has confirmed over the next decade to 2028-29 that it will invest more than $200 billion in defence capabilities. 

However, while this expenditure marks a major increase in the capability of the ADF, ASPI defence economist Marcus Hellyer has raised growing concerns regarding the capacity of the nation to maintain and modernise these platforms through life, particularly in the immediate aftermath of COVID-19 and the devastation it has wrought on the national and global economies. 

Hellyer sets the scene: "Since the capital program traditionally is the area that gets hit when Defence has to take a budget cut, that area could be a tempting target should the government need to find funds.

"But there’s another potential threat to the capital program, and that’s an internal one. Since the 2016 defence white paper, the capital budget has underspent by around $4.8 billion.

"Meanwhile, the sustainment program has overspent by a very similar amount. There’s a lot going on behind those numbers (exchange rate adjustments, changes to accounting methods, and so on), but overall it looks like sustainment costs have increased more than expected and Defence has had to dip into capital funding to cover it.

"The pressure on the capital budget could get worse as sustainment costs increase."

The 'big four' could break the bank

Defence acquisition is currently dominated by what can be best described as the 'big four' acquisition programs, the long-maligned, multibillion-dollar SEA 1000 Attack Class submarine program; the SEA 5000 Hunter Class frigate program; the F-35 Joint Strike Fighter program; and LAND 400 recapitalisation of the Army's ASLAV and M113 armoured personnel carrier program. 

Each of these programs has a high profile presence both in defence and the broader Australian psyche, meaning the value propositions for both defence capability, the economy and perspective of the tax payer are paramount, however, it is the long-term costs associated with through-life support, modernisation and sustainment that may break the bank. 

Hellyer explains, "There will be twice as many Attack Class boats, and they’ll be around 50 per cent bigger. They’ll be more complex, with more subsystems and more software, and will operate more unmanned and autonomous systems. So, it’s reasonable to assume the sustainment cost for the Attack Class will be at least three times more than Collins, or $2 billion. Granted, that spending’s a long way off; the first boat won’t be handed over to the navy until 2032, and the twelfth 22 years later."

Shifting to the Hunter Class program, Hellyer expands on the challenges facing the capital budget, stating, "The nine Hunter Class frigates will be more than twice as big (around 8,000 tonnes compared to 3,600 tonnes).

"They’ll have more capability, like 32 vertical launch missile cells compared to the Anzacs’ eight. Doubling the Anzacs’ sustainment cost would be $700–750 million, and that’s probably understating it. Again, those costs are a fair way off, with the first Hunter expected to be operational around 2030 and the ninth somewhere in the mid-2040s."

While F-35 has suffered its share of teething issues, the program appears to be resolving some of the long held concerns about the fifth generation super jet, nevertheless, the quantum leap in technological components and the quantum leap in capability is not cheap, with Australia's fleet of 72 fighter jets having a dramatic impact on the defence budget bottom line. 

"The third mega-project is the F-35, but we’ll look more broadly at the air combat fleet. In contrast to the previous two programs, these costs are increasing right now.

"The air force is in the middle of a long transition from an air combat force consisting of the F/A-18A/B ‘classic’ Hornet and the F-111 to one consisting of the F-35, the F/A-18F Super Hornet and the EA-18G Growler.

"The total for the air combat fleet in 2007–08 was $335 million. Because the force is in transition, there isn’t a steady state to compare it to, but the cost last year was $691 million and Defence predicts $832 million this year.

"If we project out to the end of the transition when the classic Hornets have retired and all F-35s are in service, the number could reach $946 million, if the F-35’s hourly flying costs don’t come down. So, overall, the cost of the air combat fleet is at least doubling and coming close to tripling."

Not to be outdone, the Army's big ticket modernisation and recapitalisation program, LAND 400 the multiphase program to recapitalise the Army's ASLAV and Vietnam-era M113 APC vehicles also draws the attention of Hellyer. 

"The fourth is the army’s armoured vehicle program, LAND 400. Here there’s some worrying new news. Phase 2 acquires 211 Boxer combat reconnaissance vehicles to replace the ASLAV fleet," Hellyer states. 

"An economic impact study commissioned by Defence was recently released in response to a freedom of information request. The study was completed in March 2018, the same month the government announced it had selected the Boxer, so we can assume it was based on tendered cost data.

"The study presents a $9.6 billion out-turned whole-of-life sustainment cost for the Boxer. If we convert that to a constant, or real, number, it’s around $225 million per year (or $1 million per vehicle). According to data provided by Defence to ASPI, the average sustainment cost of the ASLAV fleet over the past seven years is $43 million. So that’s a five-fold increase.

"The really worrying bit is when we project that onto phase 3, which will acquire up to 450 infantry fighting vehicles to replace the army’s obsolete M-113 fleet. These tracked vehicles are likely to be even bigger than the Boxer. That suggests they’ll cost at least as much as the Boxer to operate. So, the cost for the fleet will be at least $450 million. The average annual operating cost for the M-113 over the past seven years is only $17 million."

Each of these programs are coming online at a time when the nation is seeking to not only rebound from the impact of COVID-19, but equally at a time when the Indo-Pacific balance of power is swinging further against the established post-Second World War order accordingly Australia will have to balance and prioritise its own defence and national security capability. 

Nevertheless, Hellyer remains confident that things will work out for the best, "Defence is making big bets on the affordability of its future force, but is it bound to lose those wagers? Not necessarily.

"Overall, the economy grows in real terms. Over the past two decades, GDP has grown by around 80 per cent in real terms, with the defence budget growing by 95 per cent. So, even if Defence’s budget stays at around 2 per cent of GDP, its government funding too will grow in real terms," Hellyer added.

Your thoughts 

Australia’s security and prosperity are directly influenced by the stability and prosperity of the Indo-Pacific, meaning Australia must be directly engaged as both a benefactor and leader in all matters related to strategic, economic and political security, serving as a complementary force to the role played by the US.  

Australia cannot simply rely on the US, or Japan, or the UK, or France to guarantee the economic, political and strategic interests of the nation. China is already actively undermining the regional order through its provocative actions in the South China Sea and its rapid military build-up.

To assume that Australia will remain immune to any hostilities that break out in the region is naive at best and criminally negligent at worst. As a nation, Australia cannot turn a blind eye to its own geopolitical, economic and strategic backyard, both at a traditional and asymmetric level, lest we see a repeat of Imperial Japan or the Iranian Revolution arrive on our doorstep.

It is clear from history that appeasement does not work, so it is time to avoid repeating the mistakes of our past and be fully prepared to meet any challenge.  

There is an old Latin adage that perfectly describes Australia’s predicament and should serve as sage advice: “Si vis pacem, para bellum”  – “If you want peace, prepare for war”. 

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