7.8 Defence

Defence spending constitutes a significant part of the Commonwealth Budget. At $25.3 billion, it represents around 6 per cent of all Commonwealth expenditure.

The Government’s stated position is that the nation’s defence and security is its first priority. It has made a number of commitments in this area including no further cuts to defence spending; and that funding will reach 2 per cent of GDP within a decade.

The Commission considers the starting proposition for Defence funding should be to determine the defence capability required to successfully counter the various strategic risks Australia could face and then match this with appropriate funding to address the highest priority ones.

This approach must recognise the intrinsic long-term nature of acquiring, operating and maintaining military equipment, but also requires an expectation that Defence will efficiently use its resources.

The Government has also committed to a first principles review of the Department of Defence and all of its major processes, with a focus on achieving more streamlined and less bureaucratic decision making, bolstering ministerial control, reducing waste and restoring authority to the commanders responsible for delivering war-fighting capability.

Spending on Defence grew by 2.7 per cent per year in real terms from 2001-02 to 2013-14. This growth was driven by policy decisions reflecting increased concerns about international terrorism as well as the number of overseas operations involving Australian forces. Over the last few years, spending growth moderated.

Defence spending faces ongoing cost pressures, reflecting the growing cost of military equipment (often associated with increased capability) and increasing personnel costs.

In the absence of organisational and structural reform, the 2013 Defence White Paper and Defence’s planned timeframe for its capability and facilities requirements is unlikely to be afforded within the current budget and forward estimates and Defence funding guidance to 2022-23.

Meeting the commitment to increase Defence spending to reach 2 per cent of GDP implies considerable growth in expenditure over coming years (Chart 7.12). It will also be crucial to ensure that any run up in acquisitions can be efficiently accommodated by both Defence and industry and that value for money remains paramount in project selection and implementation.

Chart 7.12: Projected Defence funding

This chart shows the projected growth in Defence expenditure to 2023-24, and the Commission assessment of the additional growth needed to reach 2 per cent of Gross Domestic Product.

Source: National Commission of Audit.

Strategic assessments

In its submission to the Commission, the Australian Strategic Policy Institute noted that over the past 30 years governments have consistently failed to deliver the funding commitments Defence has used to formulate plans.

Determining what is required to secure Australia’s security interests, and estimating what it will cost, should be the job of the 2015 Defence White Paper.

The Commission considers a sensible way of approaching this task is for the Government to use the White Paper process to consider the strategic risks and associated capability requirements that different levels of funding can address. As part of this process, the Government should also assess the balance of strategic and fiscal priorities and how this compares with the 2 per cent of GDP spending commitment. This should result in a better balance between risk and resourcing – and implies a force structure focused on the most important threats.

Efficiency and transparency

Regardless of how governments choose to address the balance of defence resourcing with Australia’s strategic security interests, any growth guarantee must come with an obligation to ensure funding is used efficiently.

As a former Chief of the Defence Force has noted ‘there is a simple imperative at work here. The efficiency with which Defence manages its resources and controls its business has a direct impact on our nation’s defence capability and military effectiveness.’

Defence has a mixed record in improving its efficiency. There is no doubt securing greater efficiency in Defence is a major challenge. Contemporary defence systems and assets can be amongst the largest and most sophisticated engineering projects nations undertake. Predicting their costs and completion time can be difficult.

A major issue is the difficulty in instituting and sustaining change in Defence. The Commission notes that there have been numerous examinations of Defence and its efficiency – with more than 10 major reviews since 1982. These reviews consistently highlighted similar issues. The Defence Management Review in 2007, for example, attributed Defence’s lack of dynamism and responsiveness to accountability structures, business processes, the quality and availability of management information, the preparation of senior managers and prevailing attitudes.

The Defence budget needs greater scrutiny and a more strategic and effective approach to settling and managing spending. Australian taxpayers have a right to be better informed about defence spending and its composition. Greater scrutiny should come through the Government’s broader budget process including through the Expenditure Review Committee. In particular, a pre-condition for setting the new funding profile for Defence under the White Paper should include improvement to the effectiveness and transparency of expenditure by enhancing Defence budget arrangements and governance, capability development and delivery mechanisms.

One way to do this is to move from the traditional ‘single line’ budget to an approach that separates expenditure on future capability — including the Defence Capability Plan, facilities and information and communications technology capital programmes and any associated increases in operating costs — from outlays on current activities.

Funding for future capability could be held in a separate budget allocation and released to Defence as ‘administered’ funding rather than ‘departmental’ funding as proposals are considered. This would ensure a greater degree of financial control over and scrutiny of Defence spending.

As strategy discussions can pre-ordain future funding, the Commission also considers that there would be merit in ensuring that the Minister for Finance participated in strategic policy deliberations relating to Defence undertaken by the National Security Committee of Cabinet.

It is not clear that Defence Headquarters in Canberra has the capacity to drive efficiency and better policy outcomes as the organisation has grown more complex and top-heavy over the years.

Since 2000 the number of public service senior executives in Defence has grown by 63 per cent (from 103 to 168) and the number of serving star ranked officers by 58 per cent (from 120 to 190). Since 1996 the number of three-star officers (lieutenant general equivalent) has grown from four to seven, while the number of deputy secretaries in Defence has increased from four to 14.

A simpler and leaner structure is a priority. The Department of Defence should be required to monitor and publish information on the number of personnel in the combat force, Defence headquarters and support roles. A particular focus should be the ratio of the combat force to other personnel (the so called ‘teeth to tail’ ratio). Defence should develop a programme to improve this over time.

At the same time, staffing in Defence Headquarters, including the numbers of star-ranked and Senior Executive Service officers, should return to the 1998 level.

The higher organisation of the Department of Defence and the Australian Defence Force, and the joint leadership through the Secretary and Chief of the Defence Force — an arrangement known as ‘the diarchy’ — runs the risk of blurred accountabilities.

The Commission considers accountabilities within the diarchy could be improved by a ministerial directive, which clearly sets out the separate responsibilities of the Secretary of the Department and the Chief of the Defence Force along the lines shown in Box 7.1. This would form a basis for ensuring that the Secretary and Chief of the Defence Force are held individually accountable for Defence’s performance.

Scope exists to simplify conditions of service for both military and civilian personnel. The complexity of military conditions of service can add significant overheads, however they need to deliver benefits in terms of retention and recruitment. Conditions for civilian personnel need to ensure sufficient management flexibility and focus on performance.

Options should be considered to streamline military and civilian conditions of service, with a view to reducing overheads, promoting performance and management flexibility and providing a simplified package of benefits for staff. As outlined in Section 5.2, the Commission recommends closing the Military Superannuation and Benefits Scheme to new entrants and introducing a new accumulation scheme to provide superannuation for military personnel. Indexation for the Defence Force Retirement and Death Benefits Scheme and Defence Force Retirement Benefits Scheme pensions should remain linked to movements in the CPI.

Defence procurement and the Defence Materiel Organisation

While governments will typically seek the most appropriate capability at the least cost, at times governments will also seek to use defence acquisitions to leverage support for industry policy. This obscures transparency of industry assistance and corrupts Defence budget processes.

A major driver of defence costs is the preference for unique and Australian built equipment. In the case of the Air Warfare Destroyer and Landing Helicopter Dock ship projects the premiums in the prices tendered for an Australian build were considerable. The effective rate of assistance is estimated at about 30 per cent for the destroyers and over 100 per cent for some of the helicopter ship options. Choosing to support Australian industry cost billions of dollars. In effect, a foreign build could have provided an extra ship in each class for the same cost.

Using Defence for industry policy support comes at a price and the Commission considers that governments must be clear and transparent on these issues.

The future of the Defence Materiel Organisation (DMO) and its counterpart in the department, the Capability Development Group, must also be considered.

The DMO’s mission is to equip and sustain the Australian Defence Force. In the Commission’s opinion the 2005 decision to create the DMO as a statutory independent organisation outside the Department of Defence, under a purchaser provider arrangement, has not worked. It has not been effective in enhancing accountability.

The Commission received a number of submissions that highlighted shortcomings of DMO and the Capability Development Group. These included: 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.

Ensuring all parts of the capability process reside within Defence — including a much smaller DMO focussed predominantly on contract management rather than detailed project management — will allow for a more integrated view of the capability process, better defined accountabilities and better sharing of information. It will serve as a basis to address the shared problems faced by DMO and Capability Development Group. A more professional Capability Development Group could be achieved by ensuring it was headed by a senior policy officer experienced in independent analysis of contending military equipment and with staff recruited from a new professional capability development career stream.

The Commission understands that significant challenges have been encountered with budget and accounting issues and with reconciliation of accounts and payments across DMO and Defence systems. The rationalisation of financial management systems could help improve the business management of the DMO‑Defence relationship.

The Commission considers that the DMO should be fully integrated into the Department of Defence. While the DMO’s Chief Executive could continue to provide independent advice about major capital projects to government in a manner similar to that of the Chief Defence Scientist who also provides independent advice to government about major projects on behalf of the Defence Science and Technology Organisation. This arrangement would provide potential for greater cost savings across corporate activities.

Recommendation 24: Defence

Ensuring the nation's defence and security is a core function of the Commonwealth Government. The Commission recommends a number of steps be taken to improve the efficiency, effectiveness, accountability and transparency of Defence spending through:

  1. ensuring preparation of the new Defence White Paper identifies capability options and associated costs for different sets of strategic risks. As part of this process, the Government should also assess the balance of strategic and fiscal priorities and how this compares with the commitment to increase Defence expenditure to 2 per cent of GDP within a decade;
  2. as a pre-condition for setting any new funding profile for Defence under the White Paper, the Government should ensure that Defence improves the effectiveness and transparency of expenditure by improving Defence budget arrangements and governance, capability development and delivery;
  3. transparency and control for government should be significantly improved by stronger budget processes including through the Expenditure Review Committee. For new capital, in particular new equipment projects, this would include holding funds in separate budget allocations and releasing them as projects are approved. Such expenditure should be treated as administered funding rather than departmental funding, so that there is greater financial control and scrutiny of this expenditure through established budget processes;
  4. a new ministerial directive to the Secretary of the Department of Defence and the Chief of the Defence Force specifying their separate and shared responsibilities and holding them individually accountable for Defence performance;
  5. reintegrating the Defence Materiel Organisation into the Department of Defence, with the size of the Defence Materiel Organisation being significantly reduced and with a renewed focus on contract management as opposed to project management;
  6. establishing a more professional Capability Development Group within Defence with an increased use of project development professionals skilled in cost and risk assessment;
  7. reducing the staffing size of Defence headquarters in Canberra, including senior staff, to 1998 levels; and
  8. Defence publishing performance indicators that reveal progress with reform, including the 'teeth to tail' ratio and the additional cost of unique and Australian built procurement decisions.

Box 7.1: Draft ministerial directive on Defence responsibilities

MINISTER FOR DEFENCE
MINISTERIAL DIRECTIVE TO:

SECRETARY OF THE DEPARTMENT OF DEFENCE

CHIEF OF THE DEFENCE FORCE

Preamble: In accordance with my powers under section 8 of the Defence Act 1903, I hereby issue the following directive to the Chief of the Defence Force and the Secretary of the Department of Defence.

Accountability: You are jointly responsible to me for the management of the Australian Defence Organisation as an integrated organisation including the Department of Defence and the Australian Defence Force. You are accountable to me for Defence's performance, having regard to our statutory responsibilities. Any authorisation or delegation of my authority with respect to Defence is through you, within the limitations below.

Results: I expect you, jointly and individually, to deliver an efficient and capable defence organisation, optimised to address the strategic priorities agreed by Government as the most significant, through:

Responsibilities of the Secretary of the Department of Defence:

  1. timely, accurate, coordinated and considered advice as my principal civilian adviser;
  2. not limiting your responsibilities under the Financial Management and Accountability Act 1997 and the Public Governance, Performance and Accountability Act 2013, sound management of financial and other resources, operating within budgeted financial performance, meeting statutory requirements for preparing financial statements and optimal management and use of the Defence estate; you will ensure those exercising your delegations (including military personnel) focus on achieving value for money;
  3. not limiting your responsibilities under the Public Service Act 1999, proper stewardship of the public service workforce, through developing and maintaining workforce skills and career structures, building and maintaining Defence's reputation and providing a living and working environment that attracts and retains people;
  4. acquisition and sustainment of all major capital equipment and logistics pertaining to sustainment of capability;
  5. advising on the performance of entities within the portfolio as identified in my separate directive or statement of expectations to those entities;
  6. not limiting your responsibilities under the Archives Act 1983, proper management of information and records within Defence;
  7. the provision of support services, including infrastructure, personnel, legal, health, travel, publishing and printing, library services, mail and freight, business transaction processing, base services and administrative support;
  8. the provision of information and communications technology; and
  9. the provision of Defence science research.

Responsibilities of the Chief of the Defence Force:

  1. timely, accurate, coordinated and considered advice as my principal military adviser;
  2. operational deployment of the ADF to enhance our national strategic interests and
    our alliance relationships, to strengthen regional security and to successfully conduct
    joint military exercises and operations;
  3. adequate preparedness of forces and the preparation of military policy and plans;
  4. not limiting your responsibilities under the Defence Act 1903 and related legislation,
    proper stewardship of the military workforce, through developing and maintaining
    workforce skills and career structures, building and maintaining Defence's reputation
    and providing a living and working environment that attracts and retains people;
  5. management of operational logistics; and
  6. management of military information and communications technology.

Joint Responsibilities of the Secretary of the Department of Defence and the Chief of the Defence Force:

  1. management of the Australian Defence Organisation, including the setting of organisational goals and responsibilities, the design of the organisation and its business processes, measurement and reporting of performance and the establishment of organisational policies;
  2. development of advice to government and strategic policy for use within Defence reflecting the best response to Australia's changing international environment;
  3. identification, development and provision of current and future capability to enable our armed forces to defend Australia and its national interests;
  4. intelligence capabilities, responsive to whole-of-government requirements;
  5. continual development of the Australian Defence Organisation so that it works in a more holistic, responsive, efficient and effective manner; and
  6. planning, evaluation and reporting documents, incorporating matters related to your individual and joint responsibilities, that provide transparency and support value-for-money decision-making with Government and Defence.

Guidance:You should pursue these results through effective leadership and management and should ensure that:

  1. your actions are prudent, lawful and ethical;
  2. your actions are consistent with Government policy;
  3. you make decisions and offer advice, considering:
    1. the impact on relationships with others who contribute to national security, including with the leadership of foreign Armed Forces and other Australian agencies with national security interests;
    2. the statutory responsibilities of appointments within Defence;
    3. the impact on resourcing and the risk to the sustainable delivery of Defence outputs; and
  4. the CDF's proposals for promotions to Brigadier equivalent and above are made in consultation with the Secretary, Vice Chief of the Defence Force and the Service Chiefs.

Previous Directives: This directive replaces all previous ministerial directives to the Chief of the Defence Force and the Secretary of the Department of Defence.