Is talk of defence budget, schedule ‘blowouts’ overblown?

Have claims of “systemic” mismanagement of significant defence projects been exaggerated?

Earlier this month, the Albanese government released data from the Australian National Audit Office (ANAO), which identified issues relating to a number of key Defence capability projects, valued at a combined $69 billion.

At least 28 projects are behind schedule by a cumulative 97 years and at least 18 projects are over budget, with variations totalling at least $6.5 billion.

Projects listed by the government in a statement to the media include:

  • $44 billion Hunter Class Frigate program — construction delayed by four years and expected cost is $15 billion higher than initially anticipated.
  • $1.4 billion C-27J Spartan Battlefield Airlifters — delivered four-and-a-half years behind schedule and unable to be deployed into battlefields.
  • $3.7 billion offshore patrol vessel project — running one year behind schedule.
  • $356 million Evolved Cape Class patrol boats — running nearly a year behind schedule.
  • $970 million Battlefield Command System — three years behind schedule.
  • Defence SATCOM projects worth $906 million — running between two and four years behind schedule.

According to the Albanese government, these “significant and systemic issues” result from mismanagement from the former Morrison government.

But Marcus Hellyer, ASPI’s senior analyst for defence economics and capability, claims there’s more than meets the eye.

Hellyer points to the nuances behind the perceived issues flagged by the federal Labor government, claiming the $6.5 billion overflow in the approved budget “is actually much lower”.

“The term Defence uses for this is ‘real cost increase’, which is way less sexy than ‘cost blowout’,” he writes.

These variations, he adds, are the result of two factors — the first of which is changes to a project’s scope.

“You want an additional 58 F-35As? You need to pay for them by increasing the project’s budget. That’s not a blowout. It’s a staged acquisition strategy (or, occasionally, an opportunity to use the defence portfolio’s underspend before it evaporates),” he observes.

The second factor is exchange rate fluctuations, with Defence “compensated for a decline in the Australian dollar” to “preserve its buying power”.

He continues: “This isn’t a blowout either. It shows up as a budget increase, but it’s not a ‘real’ increase (and with the Aussie dollar plummeting against the greenback, get ready for some extremely large upward adjustments in the October budget).

“The truth is, very few of Defence’s acquisition projects actually require real cost increases.”

He notes the figure for real cost increases for the projects on the ANAO’s latest report are “only a small fraction” of the $6.5 billion figure reported by the Albanese government.

“Other than a $243 million increase for the civil–military air traffic management system that occurred nearly five years ago, there’s not much there.

“Defence’s biggest real cost increase was $1.2 billion for the air warfare destroyer project — but that’s not on this list since the project is complete. And once that project’s numbers are finalised, it’s likely it won’t need all of that.”

Hellyer goes on to address project delays, which he concedes are a “more problematic issue”, but stresses the shortcomings are not black and white.

“For some projects there are straightforward explanations. Take, for example, the P-8A project. The government ordered six additional aircraft after the initial eight. If you order them later, they will be delivered later, so the original date for final operational capability will necessarily move,” he writes.

“Even the projects with real delays generally have delivered most of their intended capability but haven’t been closed out because there are some outstanding elements.”

He makes reference to the MRH-90 Taipan helicopter project, which has a 123-month delay to full operational capability, however, all 47 helicopters have been delivered.

Despite downplaying some of the rhetoric surrounding the ANAO’s figures, Hellyer flags legitimate issues with project costs and timelines.

Regarding timelines, he claims many delays are “real and affect the delivery of frontline capability”, caused by a number of factors, which include:

  • seeking 110 per cent solutions when a 90 per cent solution will do;
  • industry overpromising;
  • a lack of enough qualified people in Defence and industry to deliver; and
  • excessive process and documentation requirements.

“The delays illustrate the disconnection between our current strategic circumstances and Defence’s business processes,” he adds.

“If we don’t have warning time for impeding conflict, we can’t keep choosing capabilities that take so long to deliver — whether they’re on time or not.”

Given these concerns, Hellyer welcomes the Albanese government’s proposed reforms to Australia’s defence procurement strategy, which involve:

  • Establishing an independent projects and portfolio management office within Defence.
  • Requiring monthly reports on projects of concern and projects of interest to the Minister for Defence and Minister for Defence Industry.
  • Establishing formal processes and “early warning” criteria for placing projects on the projects of concern and projects of interest lists.
  • Fostering a culture in Defence of raising attention to emerging problems and encouraging and enabling early response.
  • Providing troubled projects with extra resources and skills.
  • Convening regular ministerial summits to discuss remediation plans.

“Closer government attention is a good thing, but nothing focuses the mind like greater public scrutiny, so it would also be good to see more information provided to the parliament and public,” he continues.

But ultimately, any solution to address shortcomings must include “multiple lines of effort”, which includes “abandoning peacetime mentality around risk and reward”.

“We can’t keep making the same kinds of acquisition choices and employing the same business processes that got us here,” Hellyer writes.

“A new approach will involve a different risk appetite from the government, parliament, Defence, the media and the public.”

He concludes: “As the old saying goes, ‘You want fast, cheap and good? Pick two.’

“If we want capability fast, we either need to moderate our requirements or accept that it could cost more.

“If getting capability faster results in sometimes having to pay more than expected, we all have to resist the temptation to run easy headlines about cost blowouts — otherwise, Defence will never change its risk-averse behaviours.”

Defence Connect

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