The Cost of DefenceASPI Defence Budget Brief 2003–04*Forty-three million, three hundred & fourthousand, eight hundred and fifty-four dollarsand seventy-nine cents per day.Prepared byMark ThomsonProgram DirectorBudget and Management

Top 22 Project Briefs Compiled by:Gregor FergusonDaniel CotterillTom MuirEditor and Senior writers of Australian Defence Magazine

� The Australian Strategic Policy Institute Limited 2003

This publication is subject to copyright. Except as permitted under the Copyright Act1968, no part of it may in any form or by any means (electronic, mechanical,microcopying, photocopying, recording or otherwise) be reproduced, stored in aretrieval system or transmitted without prior written permission. Enquires should beaddressed to the publishers.

First published May 2003

Published in Australia by:Australian Strategic Policy Institute (ASPI)Level 2, Arts House, 40 Macquarie StreetBarton ACT 2600Australia

Tel: + 61 (2) 6270 5100Fax: + 61 (2) 6273 9566Email: enquiries@aspi.org.auWeb: http://www.aspi.org.au

Cover cartoon courtesy of Geoff Pryor.

Note on title

The figure of $43,304,854.79 represents one three-hundred-and-sixty-fifth of the total fundsavailable to Defence for financial year 2003–04. This does not include funds appropriated tothe Defence Housing Authority nor those administered by Defence for militarysuperannuation schemes and housing support services.

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CONTENTS

Director’s introduction v

Executive summary vii

Section 1 – Background 1

1.1 Strategic context for the budget 1

1.2 Defence organisation and management 5

1.3 The Federal budget process 9

Section 2 – Defence Budget 2002–03 PBS Explained 13

2.1 Overview [PBS Chapter 1] 14

2.2 Results for government as Defence’s customer [PBS Chapter 2] 29

2.3 Results for Government as Defence’s owner [PBS Chapter 3] 66

2.4 Enabling business processes [PBS Chapter 4] 77

2.5 People matter [PBS Chapter 5] 81

Section 3 – The Cost of War 91

Section 4 – Improving Defence Budget Transparency 99

Section 5 – Top 20 Projects 107

Section 6 – The Financial Statements Explained 155

Section 7 – Financial Performance and Trends 173

About the Australian Strategic Policy Institute 188

Glossary 190

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v

DIRECTOR’S INTRODUCTION

This is the second of ASPI’s Defence Budget Brief. Our aim remains, as it was lastyear, to help inform discussion and scrutiny of the Defence budget. This is asimportant now as it was then. Australia increasingly faces a spectrum of strategicchallenges that demand the efficient and wise application of the Defence dollar.

We hope that this brief will contribute to the wider Defence debate in two importantways.

The first is to provide an accessible body of information on Defence budget matters.One of ASPI’s two key aims is to nourish public understanding of Australia’sstrategic and defence policy choices. All of those choices need to be made within afinancial context: any discussion of policy options that is not firmly based in fiscalreality is a waste of time. Our public debate therefore needs to be supported by agood basic understanding of the size and shape of the Budget, and of the pressures onit.

The second is to provide some new and independent ideas about the Defence budget.ASPI aims to provide an alternative source of policy options and ideas forGovernment, injecting an element of contestability for the advice, which comeforward to Government from Defence and other agencies. This sort of contestabilityis as important in the arcane world of the Defence budgets as is in the more glamorousareas of strategic policy and force development.

On the basis of what has happened since last year’s ASPI Budget Brief we think thatwe can claim some modest success in both these areas.

While it is difficult to gauge how much of an impact we had on the broader publicdebate, we can at least claim that the ASPI Budget Brief influenced some of thediscussion at last year’s Senate Estimates hearings on the Defence budget. This isimportant. Parliamentary scrutiny of spending is an essential component of our systemof Government. If we can continue to support the Senate Legislative Committee ineven a small way, then all the work put into producing this Brief will be well worthwhile. Indeed, the reason we set ourselves the goal of producing a brief only twoweeks after the Budget is handed down is to make sure it is available in time for theCommittee.

The other success is that we think that last year’s brief may have influenced Defencepolicy in the important area of public disclosure. If last year’s ASPI Budget Brief hada theme it was the imperative to improve the disclosure of Defence budgetinformation. This year we were gratified to see many of our suggestions reflected inwhat, is without question, the most comprehensive and clear Defence PortfolioBudget Statement since Federation.

It may be that over time the official Defence budget papers will become so clear andcomprehensive and there will be no need for us to produce this brief in its presentform. If that’s the case this document will fade from view like the Cheshire Cat inAlice in Wonderland until all that is left is a smile, our work having been done. Butwe are not there yet.

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We cannot deny that this document is long and detailed, although this year we can atleast claim to be shorter than the Defence Portfolio Budget Statement. While we havemade every attempt to provide information in the brief at varying levels of detail fordifferent audiences, we are mindful that the brief remains a long and somewhatforbidding document. To draw an analogy, if Defence were a car, this brief would bethe unabridged workshop manual. It allows you lift up the hood and check the timing.

This year we aim to go another step further and produce the owner’s manual. Overthe next month or two we will put together an ASPI Policy Paper style document thatgives a higher level overview of the budget in plain language. And we promise it willbe small enough to fit in the glove box.

This brief has been the result of intensive cooperative work by many people, mostlyover the past two weeks. These include Ms Kate Freebody and Mr Peter Gunningwho provided invaluable assistance on accounting matters. Mr Dougal McInnes wasresponsible for what we think is an informative overview of the Federal budgetprocess. And once again our colleagues from the Australian Defence Magazine have

Many others have helped by providing comments, offering advice, and checking facts.Our thanks go out to them all.

Also, Defence was kind enough to look over a preliminary draft of this brief andprovide valuable comments. This helped clarify some important points and resultedin improved accuracy in several areas. Of course this does not in any way imply thatDefence endorses this document or even supports its conclusions.

My colleague Dr Mark Thomson, who is the Manager of ASPI’s Budget andManagement Program, has designed the Brief, done much of the research himself, andpulled the whole thing together in a very short time. I congratulate him on the result.

Finally, a special thanks to Geoff Pryor from the Canberra Times for producing theoutstanding cartoon on the cover of this year’s brief. We think it captures in a light-hearted way a very essential fact. The decisions made in Canberra today about theDefence budget will impact on the battlefield now and into the future.

With so many contributors and helpers, consensus is impossible except at the price ofblandness. So not all of those who have worked with us on this project would agreewith all the judgements in the Brief. Responsibility for those judgements lies with DrThomson and me alone.

In an areas as complex as this we do not claim omniscience. We welcome comments,corrections and suggestions as to how we can improve this Brief next year. They canbe sent to us at ASPI via www.aspi.org.au.

Lastly we should acknowledge that we at ASPI are not disinterested observers of theDefence budget. Our funding from Government is provided through Defence.

Hugh White

Director

done a great job of capturing informative snapshots of the top 20 Defence projects.

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EXECUTIVE SUMMARY

$15.8 billion in 2003-04

How much are we spending? $1.2 billion more than last year

1.9% of GDP

Total Defence Funding for 2003-04 will be $15.8 billion, which is an increase of $1.2billion on 2002-03. This will continue to rise across the next four years with a budgetof $17.1 billion planned for 2006-07. As a percentage of GDP the 2003-04 budgetrepresents around 1.9% to 2% of GDP depending on how you do the calculation. Thiswill probably slowly fall over the next few years given the prediction of continuingstrong GDP growth.

plus $1.1 billion for logistics over 5 years

plus $645 million for Iraq operations over 3 years

How will it be spent? less $642 million for capital investment over 4 years

plus $157 million for Special Forces over 4 years

plus $103 million to boost ADF numbers over 3 years

The five major funding initiatives in this year’s budget are:

• $1.1 billion over 5 years for increased logistics funding. This funding will correctsome of the long-standing shortages that have troubled Defence in the past, andhelp meet preparedness requirements in the new strategic environment.

• $645 million for the ADF’s Iraq operations over 3 years. This is an early estimateof the cost over three years and a more refined figure is due later this year. Thisestimate certainly includes the cost of the conflict phase of operations earlier thisyear and may also cover the post conflict reconstruction phase as well.

• $642 million of funding for capital investment has been deferred to beyond theforward estimates period. This has been done in anticipation of delays in theprogress of the capital investment program including the Defence Capability Plan.

• $157 million over 3 years to establish a Special Operations Command and to addmore than 330 additional personnel mainly in the regular Commando Regiment.

• $103 million over 3 years to take account of favourable recruiting results in Armyand Airforce. This will accelerate the build up of the ADF towards the goal ofaround 54,000 personnel by the end of the decade through the funding of anaverage 500 additional position over the next three years.

In addition, $71 million over two years will be spent to continue enhanced security forDefence facilities and personnel around Australia, and a total of $328 million over 5years has been provided to maintain the buying power of the Defence budget againstprice and foreign exchange variations.

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What’s the big picture?There continues to be a slow re-balancing ofDefence spending away from capitalinvestment for the future, and towardspersonnel and operating costs today.

This year’s budget looks much like those in the years leading up to the White Paper inwhich the capital program was cut to fund personnel and other operating costs. Whatmakes this year different is that the re-balancing of spending from capital to personneland operating does not appear to have been the result of a zero sum calculus.

All indications are that the capital program was not cut to provide funds for useelsewhere in the budget. Instead, the Government reluctantly rescheduled $642million of major capital equipment projects because it has become clear that theoriginal schedule of expenditure will not be met.

This is probably the result of both delays in preparing and approving new projects andthe slow progress of existing projects. There are a variety of explanations for thisincluding the challenging targets set in the White Paper and the more stringentapproach being taken to scrutinising projects prior to approval. Either way, Defencewill need to lift its game to meet the Government’s priorities.

As for the additional funding for logistics, this comes after several years of theServices highlighting the risk due to the so-called ‘logistics short-fall’. And despitethe addition of significant new funding this year, Navy continues to describe theirsituation in serious terms. It is likely that we have not heard the last of bids for moremoney for logistics. It remains unclear just how well the cost of operating ADFplatforms are understood.

What about theDefence Capability Plan?

There is no way to escape the conclusion thatparts of the Defence Capability Plan will notbe delivered on time.It is not yet possible to say where this impactwill be felt.

The Defence Capability Plan is the Government’s 10-year program of new capabilitydevelopment that underpinned the 2000 White Paper. It sets out the militarycapabilities that the Government decided were necessary to develop for Australia’sDefence.

This year’s reduction in funding to capital investment comes on top of a $150 millionrescheduling this financial year, and the failure to spend similar amounts of fundingover the last two years. In absolute terms this represents a modest part of the roughly$3 billion annual capital equipment program. But to the extent that it prevents thecommencement of new projects, the long-term consequences could be verysignificant, especially if this trend continues over the coming years.

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The promised review of the Defence Capability Plan due for later this year will haveto balance any new capability priorities with the realities of what can be delivered inpractice. And it will probably have to do so in the context of rising cost estimates.

Also due later this year is a report to the Minister from the Defence ProcurementReview. This will be a good starting point for what is emerging the key managementchallenge for Defence – improving the timely delivery of new capability to meet theGovernment’s expectations.

Finally, its worth mentioning that the planned 24% increase in spending on equipmentprojects next year will be a big challenge given past performance.

PersonnelThe recent improvements to retention andrecruitment are predicted to continue, but thisdoes not yet mean that personnel shortages aresolved.

Army and Air Force numbers have grown strongly over the last year and theGovernment has provided additional funding to capitalise on this. This does not meanthat personnel shortages have gone away in Army and Air Force. It is one thing tohave improved recruitment, it is quite another to have the right people with the rightskills. Given the time it takes to train personnel it will be some time before somespecialist areas have the trained personnel they need.

Navy has seen some improvements but not nearly enough to alleviate shortages insome key areas. Accordingly, a $10 million a year program (funded from within thecurrent Defence budget) has been put in place to improve the retention of Navalpersonnel.

Greatly improved budget transparency

Defence Management Greater fiscal discipline apparent

Additional savings measures

Cash reserves to grow to over $1 billion

This year’s Portfolio Budget Statement is clearer and more comprehensive than anysince Federation. The level of detail provided now goes down to the fundamentalbuilding blocks of ADF capability. This is a big improvement, but there is still roomfor better disclosure of how $15.8 billion of taxpayer’s money is spent. We includesome suggestions of how this could be done in Section 4 of this brief.

During 2001-02 spending in many administrative areas of Defence grew well beyondplanned levels including in travel, contracted professional services, and civiliannumbers. This year’s budget sets out to rein in this spending and impose a tighterregime of fiscal management overall. At the same time the information provided inthe PBS is more detailed and demonstrates a more capability-focused approach tobudgeting.

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This year’s budget also sets targets for additional administrative savings beginning at$50 million per annum rising to $200 million per annum over time. These will beused to offset other cost pressures elsewhere in the budget. This is understandablegiven the recent history of Defence financial management, but we hope thateventually real productivity gains will be sought to funds capability enhancements.

Earlier this year Defence transferred all but $100 million of its cash reserves to an‘appropriation receivable’. Under current planning this will grow to in excess of $1billions (the bulk of which accumulated back in 2001-02). Some of this is unspentcapital investment money whose use will be reviewed in the 2003-04 budget, but thebulk of it is being held to cover very long-term employee liabilities. However, giventhat Defence’s liabilities are covered by the Government in any case, it might bebetter to use the money for military capabilities. Like exercising the option for twomore AEW&C aircraft which expires in June this year – an expansion from 4 to 6aircraft at a cost of less than 10% of the current project approval.

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SECTION 1 – BACKGROUND

1.1 Strategic Context for the Budget

For the second year in a row, Defence was at the centre of the Government’sbudgeting for the coming financial year. In the lead-up to the Budget, the Treasurermade it clear that defence and security were the Government’s top priority in framingtheir fiscal decisions. And again this year, as he did last year, the Treasurer openedhis budget speech with references to Australia’s security situation, and gave morespace throughout his speech to defence and security issues than to any others – eventhe headline issues of tax cuts and higher education.

Another Anxious Year

The strategic context for this strong political focus on defence and security is plainenough. During the course of Budget Week the first Australian service personalstarted to arrive back in Australia after their involvement in Iraq, the trial of suspectsin the Bali bombing got under way in Denpasar, Indonesian troops massed in Aceh torenewal the war on GAM, an Australian was killed in a terrorist bombing in SaudiArabia, new terrorist alerts were issued for Southeast Asia, the ANZ bank closeddown its operations in the Solomon Islands under threat of violence, and newconcerns arose about whether North Korea had restarted its plutonium reprocessingplant.

In fact over the twelve months since last year’s budget, global and regional securityconcerns have never been far from the front pages. Not since the 1960’s haveAustralians been so anxious about their security, and not since the 1960’s havesecurity issues been so consistently at the centre of the national political agenda. Onthe global level, the scene has been dominated by the build up to the war in Iraq, andAustralia’s approach to it. And the Bali bombing – still the worst terrorist attack sinceSeptember 11 - brought the war on terror home to Australians in the most direct andtragic way. Indeed apart from the loss of life itself, Bali is significant preciselybecause of the way it demonstrated the intersection of the new global concerns aboutterrorism with more traditional Australian concerns about the security of our ownregion.

The urgency of the campaign against terrorism has not abated. Some important AlQaeda leaders have been captured, but Osama bin Laden remains at large, and themovement evidently remains capable of mounting well-planned attacks in many partsof the world. The successful investigation of the Bali bombing by Indonesianauthorities has damaged Al Qaeda’s regional affiliates, but there is every reason toexpect that they retain a significant capacity to undertake major terrorist attacks in ourregion, including within Australia itself.

Meanwhile in October 2002 - the same month as the Bali bombing – global concernsabout the spread of Weapons of Mass Destruction found a sharp focus in our regionwhen North Korea acknowledged it had maintained a covert nuclear weaponsprogram in contravention of the agreements it had made in 1994. With the regime ofSaddam Hussein now removed from Iraq, the North Korean issue looms as the mostpressing and dangerous global security issue of the coming year.

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For Australia the stakes in North Korea are higher than they were even in Iraq,because Korea is within the Asia-Pacific region, and falls unambiguously under theANZUS Treaty. If it comes to war, the US will look to Australia for support, and itsexpectations of us will reflect Australia’s standing as America’s closest ally in thisregion. Australia’s longer-term strategic interests are more directly engaged in Koreathan they were in Iraq, because the way things develop on the Peninsula will do muchto shape America’s future strategic posture in North East Asia, and hence the long-term security of the wider Asia-Pacific. And the economic consequences to Australiaof a major war in North East Asia would be immediate and profound, with major andperhaps prolonged disruptions of trade in Australia’s biggest markets.

These high-profile concerns play out against a background of persistent anxiety aboutthe stability of many of our immediate neighbours. The Solomon Islands in particularis suffering a slow-burning crisis in which effective government has virtually ceasedas a result of a collapse of law and order in and around the capital, Honiara. Itsneighbours, PNG and Vanuatu, are also suffering from deep-seated and systemicproblems. East Timor is facing serious security problems with significant internalpolitical ramifications. And on a different scale, Indonesia continues to wrestle withthe challenges of building effective democratic government across its diversearchipelago.

The Policy Imperatives

For all the relentless intensity of the defence and security challenges faced byAustralia, the new budget does not reflect any decisive new departures in Australia’sdefence policy approaches. Over the twenty months since September 11 2001 theGovernment has already set in place the broad outlines of its response to the demandsof the new security environment. Within the Defence portfolio the key tasks havebeen to ensure that the ADF is properly prepared for the operations which theGovernment has tasked it to undertake overseas. To contribute effectively to thedomestic response to the increased threat of terrorism, and to make any changes toAustralia’s long-term defence plans that are needed to adapt to the more enduringconsequences of the new security environment.

Of these, the first two have been relatively straightforward. The ADF has providedthe Government with an appropriate range of options for contributions to operationsin Afghanistan and Iraq, with some small but significant requirements for additionalequipment. The ADF has properly been seen to have a relatively modest place in thedevelopment of our domestic response to the threat of terrorism, but some importantchanges have been made.

Most attention has focussed on the third of the key defence policy challenges – thereview of our long-term defence plans. In 2002 the Government conducted anextended review of the Defence White Paper published in 2000, to ascertain the extentto which that pre-9/11 document remained an appropriate basis for Australia’sdefence planning. This resulted in the publication in February 2003 of a conciseDefence Update which concluded that the key directions set out in the White Paperremain appropriate as the foundations of our defence policy, but that some ‘re-balancing’ of capability and expenditure would be required.

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The details of this re-balancing remain to be determined. They are expected to beembodied in a review of the Defence Capability Plan (DCP) – the long-term blueprintfor the development of the ADF, which was the cornerstone of the 2000 White Paper.The DCP Review was expected to be finalised as part of the development of thisyear’s budget. That has not occurred. The Government has made no formalstatement about the process, but we understand that the DCP review is now expectedaround October 2003 – in time to shape next year’s budget.

The most widely-discussed issue has been the question of whether or not, after 9/11,Australia needs to shift the emphasis of its force planning away from the traditionalfocus on the defence of Australia and its immediate neighbourhood, and instead buildup capabilities specifically designed to contribute to US-led coalitions further afield.The Defence Update seemed to adopt a conservative approach on this issue, but thematter is not yet resolved, and we can expect more debate on this question in comingmonths.

However these fundamental strategic questions are likely to be less important inshaping the future of the DCP than the more prosaic issue of the ability of Defence toimplement the plan. This year’s Budget contains substantial evidence of the stresseson the DCP that arise from problems Defence has in both deciding what majorequipment to buy, and in managing the projects once the decisions have been made.The effective delivery of the military capabilities called for in the DCP remains thekey long-term challenge to Defence and the Government.

The Budget Challenge

Against this background, the government has faced three major issues in framing thisyear’s defence budget. The first has been the need to fund the operations undertakenby the ADF in Iraq and elsewhere. It has met this need by deciding to maintain thelong-standing practice of supplementing the Defence budget to cover the netadditional costs of active service operations. The 2003-04 budget provides substantial– even generous - funding to cover not only the personnel and operating costs of thedeployments to Iraq, but also to cover significant additional equipment boughtspecifically for the deployment. Supplementation has also been provided for the costsof other operations including our continued deployment to East Timor, and theresidual costs of Afghanistan.

More broadly, the Government has decided to pump substantial additional resourcesinto broader logistics and support for the ADF, ostensibly to underpin the increasedtempo of operations now being expected of the Defence force.

The second issue for the Government has been the need to develop the ADF’scapability to contribute to the response to terrorism in Australia. It has done this byproviding additional funding for extra Special Forces capabilities which the PrimeMinister announced in December 2002, and by funding the development of modestnew capabilities in the Reserves to assist in responses to terrorist attacks or other civilemergencies.

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The third issue for the Government has been the need to sustain funding for the long-term development of new capabilities. To fund the DCP the Government inDecember 2000 committed itself to sustained increases in Defence spending of 3%per annum real growth over the decade from 2001 to 2011. This year the Governmenthas again met that commitment as it did last year and it evidently remains stronglyfocussed on the need to maintain the momentum of our long-term capabilitydevelopment program. However for the second year in a row the actual funds flowinginto the capital investment program have in fact been cut, in this case becauseDefence has not been able to implement the projects as quickly as the DCP envisaged.

Indeed the cumulative affect of a number of adjustments in this year’s budget hasbeen to strengthen a long-term trend to move resources away from long-terminvestment in future capabilities and towards funding of short-term operations andsupport. This is not necessarily what the Government intends; it is rather theinevitable consequence of growing operating costs and slow progress on investmentprojects. But it has important long-term strategic implications for our future defencecapability.

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1.2 Defence Organisation and Management

Commonwealth Outcomes and Outputs Framework

The Defence budget is set out in the Budget papers according to a framework ofoutcomes and outputs. This framework was introduced by the Commonwealth in1999, and is applied to all Commonwealth agencies. It works like this:

• Outcomes are the results or benefits that the Commonwealth aims to deliver to thecommunity through the work of its agencies. They are specified for each agency,and are meant to express the purpose or goal of each agency’s activities.

• Outputs are the goods and services that each agency produces to achieve itsoutcomes.

Under the framework, the performance of agencies is measured to assess both howmuch output they are generating, and the extent to which that output is actuallydelivering the outcomes intended. So the aim is to show not only how much anagency is doing, but how much it is actually achieving.

The outcomes and outputs framework is not just an accounting device. It is intendedto provide a structure for management decision-making and resource allocationthroughout Commonwealth agencies. So the way the framework is applied in anagency like Defence is very important to its management and performance.

The Defence Outcome

The key to the effective application of the framework is the specification of theoutcome or outcomes. Prior to this budget the Government had set down only oneoutcome for Defence, that being: The Defence of Australia and its National Interests.

This year the Government has set out seven outcomes for Defence:

1. Command of Operations in Defence of Australian and its Interests;

2. Navy Capability for the Defence of Australian and its Interests;

3. Army Capability for the Defence of Australian and its Interests;

4. Air Force Capability for the Defence of Australian and its Interests;

5. Strategic Policy for the Defence of Australian and its Interests; and

6. Intelligence for the Defence of Australian and its Interests.

And a seventh outcome covering primarily superannuation payments for current andformer Australian Defence Force (ADF) personnel, and housing subsidy providedunder the Defence Force (Home Loans Assistance) Act 1990:

7. Superannuation and Housing Support Services for Current and RetiredDefence Personnel.

Previously this last item was not counted as an Output.

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If effect, the previous six capability related Defence Outputs from 2002-03 have beenreclassified as Outcomes with the addition of some extra words to align them with thenotion of ‘Defending Australia and its Interests’. Why the wording no longer refers toNational Interests is unknown.

Defence Outputs

The presentation of Defence outputs has changed a number of times since theoutcomes and outputs framework was introduced in1999, and a survey of past outputstructures can be found in the 2002-03 ASPI Defence budget brief. This year, whatwere previously termed sub-Outputs have almost one-for-one been elevated to thestatus of Outputs grouped under the new Outcomes. This is a very positive stepforward in providing visibility of how the Defence budget is spent. Table 1.2.1 liststhe new Outputs.

Table 1.2.1 – Defence Outputs and Sub-Outputs

Outcome Output1. DefenceOperations

1.1 Command of Operations1.2 Defence Force Military Operations and Exercises1.3 Contribution to National Support Tasks

2. NavyCapabilities

2.1 Capability for Major Surface Combatant Operations2.2 Capability for Naval Aviation Operations2.3 Capability for Patrol Boat Operations2.4 Capability for Submarine Operations2.5 Capability for Afloat Support2.6 Capability for Mine Warfare2.7 Capability for Amphibious Lift2.8 Capability for Hydrographic and Oceanographic Operations

3. ArmyCapabilities

3.1 Capability for Special Forces Operations3.2 Capability for Mechanised Operations3.3 Capability for Light Infantry Operations3.4 Capability for Army Aviation Operations3.5 Capability for Ground-based Air Defence3.6 Capability for Combat Support Operations3.7 Capability for Regional Surveillance3.8 Capability for Operational Logistic Support to Land Forces3.9 Capability for Motorised Infantry Operations3.10 Capability for Protective Operations

4. Air ForceCapabilities

4.1 Capability for Air Combat4.2 Capability for Combat Support of Air Operations4.3 Combat Support for Strategic Surveillance4.4 Maritime Patrol Aircraft Operations4.5 Capability for Air Lift

5. StrategicPolicy

5.1 Strategic & International Policy, Activities & Engagement5.2 Military Strategy and Strategic Operations

6. Intelligence 6.1 Intelligence7. Superannuation and Housing Support Services for Current and Retired Defence Personnel

The only retrograde step in the new framework is the grouping of the previous sub-Outputs for Tactical Fighter Operations and Air Strike Reconnaissance into a singleOutput thereby obscuring two quite separate Force Element Groups in Air Force.

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Performance Targets and Measurement for Outcomes and Outputs

A key purpose of the outcomes and outputs framework is to provide a basis for settingtargets and measuring performance. This year’s PBS has increased the level ofdisclosure of output performance targets to an unprecedented level. Nevertheless, wethink there are a couple of avenues for further improvement in this area, which wediscuss in Section 4 of this brief.

Defence’s Outputs and it’s Organisational Structure

The traditional concept of Defence’s organisational structure is that it consists of threeServices – Army, Navy and Air Force – and the Department of Defence. Thisimpression is reinforced by the output structure, focused as it is on Army, Navy andAir Force capability outputs. But, in fact, the Defence organisation is not organisedlike this at all. It is divided into (we think) fourteen or fifteen ‘Groups’; these are theentities between which the Defence budget is divided. The arrangement of theseGroups is set out in figure on p. 18 of the PBS, although it is unclear what amounts toa Group on the figure.

The Groups are divided into three categories:

• Output Executives Groups are (mostly) responsible for delivering Defence’soutputs to the government as customer;

• Owner Support Executives Groups are responsible for protecting theGovernment’s interest as the owner of Defence, including ensuring its long-termviability; and

• Enabling Executives Groups are responsible for providing business servicessuch as asset management to the other two types of groups.

These Groups and their executives are responsible for spending Defence’s money anddoing its business. Consequently, it is within the group structure that financialaccountability occurs. But there is no clear mapping of the Groups to the outputs. Nordoes the PBS provide data on how Defence’s resources are divided between theGroups. This is a significant inhibition to our understanding of Defence’s resourcemanagement and accountability.

Last year we published an indicative breakdown of the resources consumed by, andthe personnel allocated to, the various Defence Groups based on data from early 1999.Rather than reproduce this out of date information, we have instead assembled thelimited amount of updated information that has more recently surfaced.

It is particularly disappointing that we have no idea of the distribution of militarypersonnel between the Groups since this would be a useful indication of how mayuniformed personnel are working in non-combat/combat related areas. It is unclearwhy Defence released the civilian data to Senate FAD&T Legislative Committee butdeclined to release the ADF numbers.

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Figure 1.2.2 The Defence Groups – What we know and what we don’t know.

PersonnelExecutive/Group Budget ADF

PermanentADF

ReserveCivilian

Output ExecutivesCommander Australian Theatre 61Chief of Navy 752Chief of Army 662Chief of Air Force 778Deputy Secretary Strategic Policy 125Deputy Secretary Intel and Security 1,573Owner Support ExecutivesChief Finance Officer 252Vice Chief of the Defence Force 80Chief Defence Scientist 2,255Inspector-General (included in Corporate Services) 97Head Defence Personnel Executive 1,201Head Public Affairs and Corporate 91Enabling ExecutivesUnder Secretary Defence Material 5,404Deputy Secretary Corporate Services 1,700 4,400Total 17,731

All civilian data from Senate FAD&T Legislative Committee question on notice W17, Budget estimatesJune 2002, except for Corporate Service and Infrastructure Group taken from 2003-04 PBS p 165.

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1.3 The Federal Budget Process

In 1789 Benjamin Franklin lamented: 'In this world there is nothing certain but deathand taxes.' And while no amount of epistemology or religion can explain Franklin'sfirst certainty, the annual Federal Budget offers some solace to those Australians whocare about the afterlife of their taxes. Over 1000 pages in four volumes of technicalBudget papers and 17 volumes of Portfolio Budget Statements prescribe the spendingof around $176 billion in public money.

Two recent events have reshaped the Budget process. Firstly, to ensure the public isbetter informed about the Federal Budget and to open up the Government's fiscalstrategy to public scrutiny, the 1998 Charter of Budget Honesty Act legislated therequirement to publicly release a host of mid-year statements and periodical reports.An extract of the Charter outlining the principles of sound fiscal managementinvariably appears in Budget Paper Number 1 each year. And secondly, from the1999-2000 financial year, the traditional cash-based Budget was replaced by anaccrual Budgeting system that takes account of the Government’s full financialposition, not just expenditure against revenue in any year. The Government hascommitted to periodically review the Budget framework to assess its effectiveness,which to date has resulted in the 1999 Vertigan Report and the 2002 Budget Estimatesand Framework Review.

Yet, an understanding of these reforms and the Budget papers in their entirety doesnot explain the actual construction of the Budget. So who are the King's men countingall the money? And in which Canberra counting houses are decisions made abouthow, where and why $176 billion is spent?

The bottom-line revenue and expenditure dichotomy is a good starting point. In the2003-04 Budget, the government collected around $178 billion - taxes making up 93per cent - and spent $176 billion. (By contrast, 1993-94 expenditure was $117 Billionand revenue $100 Billion in then year dollars). The delivery of a balanced set ofbooks has become a policy priority in recent times and the balance between spendingand saving is paramount.

Of course, each financial year there are many more pleas for spending than thepolitically sensitive suggestions for collecting money. The key agencies in thisbalancing act are Treasury and the Department of Finance and Administration(Finance). Whereas Treasury has a wide economic role in advising cabinet on fiscalstrategy generally and on revenue policy in particular, Finance advises Governmenton expenditure priorities, coordinates Agency financial estimates and oversees themajority of Budget processes. In short, Finance is the government's Chief FinanceOfficer; Treasury the government's economic adviser and banker.

A Budget Co-ordination Committee (BCC) assists the planning and management ofthe Budget. Recommended by the Vertigan Report, membership is from theDepartment of Prime Minister and Cabinet, Treasury and Finance. Followingconsultation with the Cabinet Secretariat, Ministerial offices and agencies, the BCCagree on a "whole-of-government" approach, including deadlines and detailedoperating arrangements for agencies to be put forward for Cabinet endorsement.

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Against this backdrop, the Budget process can be condensed into ten actions.However, like any bureaucratic script, there are always differing roles, interpretationsand dramas in each Budget performance.

October: Budget BidsThe Budget cycle begins with the 17 portfolio Ministers writing to the Prime Ministerwith initial bids for new policy, advice of financial pressures and possible savings intheir respective portfolios.

October: Updating of EstimatesForward estimates from the current financial year are updated to provide an accuratebaseline of figures for the upcoming Budget, taking account of any spending orsavings measures agreed since the Budget and changes in economic parameters suchas the estimated rate of growth in GDP. These figures are reported in the Mid YearEconomic and Fiscal Outlook (MYEFO) in November.

November-December: Senior Ministers' ReviewA team consisting of the Prime Minister, Deputy Prime Minister, the Treasurer andthe Minister for Finance meet to establish policy priorities and strategy and to agreeon any Budget initiatives which come forward for consideration. This sets the overallpolicy framework for the Expenditure Review Committee. The substance of thispolicy framework becomes manifest in the final Budget priorities, which in 2003-04included: Reducing personal income tax; Strong defence; Enhancing Australiansecurity; Investing in Education; and Sustaining first rate health services.

January: Portfolio Budget Submissions (PBS)Against these Ministerial policy priorities, each Commonwealth department preparesa draft PBS for Ministers. These submissions detail the new policy proposals for eachagency in the Budget and forward estimates period.

Circulation of the Portfolio Budget SubmissionsEach draft PBS, like any Cabinet Submission, is circulated to departments andagencies with a relevant interest. For example, the Department of Defence may viewany Customs proposals that affect border protection arrangements. Treasury, Financeand Prime Minister and Cabinet provide comments on all draft PBS. Final PBS aresubmitted and circulated to ERC members through the Cabinet Secretariat.

March: Expenditure Review Committee (ERC)Created in its present form as a standing ministerial sub-committee under Hawke, andreinstated under Howard, the ERC considers expense proposals and funding levels. Atpresent, membership of the committee consists of the Prime Minister, the Treasurer,the Ministers for Finance and Administration, Trade, Environment and Heritage, andthe Assistant Treasurer. The ERC meets over several weeks, discussing each PBSwith the relevant portfolio minister(s) and recommends to Cabinet new policyproposals that are to be included in the Budget. The ERC may also commission workon its own reviews and initiatives from a department. The ERC also relies oninformation from Finance in the form of "Green Briefs"- information on PBS thatform the agenda for each ERC discussion, and "scoresheets" - daily briefings on theGovernment's financial position that reflect the impact of evolving ERC decisions.

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Revenue DecisionsRevenue proposals are typically less common than expenditure proposals and aremade by Cabinet or by senior Ministers as authorised by Cabinet.

March to May: Budget DocumentationAgencies prepare explanations of their respective Budgets; statements of the risksinvolved; and a "measures descriptions" which are published in Budget Paper Number2. These measures reflect the successful new policy priorities that were first raised inNovember, and outlined in the draft PBS in January, as well as additional strategies asdetermined by the ERC and any revenue decisions. To varying extents, policies andinitiatives can be either released ahead of the Budget, or withheld until Budget night,as the Government prefers. The Budget documents contain the latest estimatesflowing from a pre-Budget review that takes into account the most up-to-dateinformation on economic parameters and program activity levels.

Budget CabinetCabinet approves the final package and Budget measures in late April.

May: Budget Day and NightIn a practice instituted under Curtin, journalists are "locked in" at Parliament Housewith advance copies of the Budget. At 7.30pm the Treasurer delivers his BudgetSpeech. He commends the Budget to the House, and tables the Budget papers. Theseinclude a Portfolio Budget Statement for each Department that forms the basis forpublic hearings on the estimates by Senate legislation committees.

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SECTION 2 – DEFENCE BUDGET 2002–03 PBS EXPLAINED

The 210 pages of the 2003–04 Defence Portfolio Budget Statements (PBS) sets outthe Government’s plan for the expenditure of over $15.8 billion by Defence in thecoming financial year.

This guide attempts to explain and, where possible, analyse the information in thePBS. The approach adopted has been to skim over those parts of the PBS that arerelatively clear, and to focus on those areas where explanation might be useful.Fortunately this task has been made easier by the fact that this year’s PBS is morecomprehensive and clear than any before.

Some of the material is unavoidably technical due to the disciplines and complexitiesof accounting. However, it is not necessary to read this Section as a whole or insequence to gain insight. Every attempt has been made to enable the reader to jumpinto a section and gain an improved insight into the PBS and defence spending.

This brief does not cover in any detail the funds administered by Defence on behalf ofthe Government for superannuation and housing support services for current andretired Defence personnel.

Most parts of the guide are best read with the PBS at hand. Copies can be down-loaded from the web at <http://www.defence.gov.au/budget/>.

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Section 2.1: Overview [PBS Chapter 1]

The most important part of Chapter 1 of the Defence PBS is the section headed‘Resourcing’, pp.19–34. This sets out how much money Defence is going to get.Earlier parts of Chapter 1 provide a summary of the Government’s defence policy andthe strategic setting of the budget, which is discussed in Section 1.1 of this brief, andan organisational chart, which is addressed in Section 1.2

How much money will Defence get?

With the Budget Summary on p.19 of the PBS, we get to the heart of the issue. Table1.2 of the PBS gives three key figures for the Defence budget:

• Total Revenue from Government, being those funds formally appropriated toDefence by the Government for departmental purposes. In 2003-04 this amountsto $15,418,843,000.

• Total Departmental Funding, being those funds actually available to Defenceincluding appropriations and revenue from other sources. In 2003-04 this amountsto $15,806,272,000.

• Total Defence Resourcing, being Total Departmental Funding plus those fundsappropriated administratively through Defence for superannuation and defencehousing subsidies. In 2003-04 this amounts to $18,042,753,000.

It is the Total Departmental Funding that equals the funds available to Defence todeliver the six departmental Outputs and maintain the ongoing program of investmentin new equipment and facilities. It is also the figure commonly used to measuremovements in Defence’s funding and therefore the one we shall focus on for the mostof this brief. It does not include the administered funds covered by Output 7. Tostreamline the discussion we shall henceforth refer to Total Departmental Fundingsimply as ‘Defence funding’ where no ambiguity occurs.

Several other measures of the Defence budget arise within the complexities of theCommonwealth finance framework. Two that can be useful when trying tounderstand Treasury budget papers are explained on p. 31 and 32 of the PBS. Theseshall not concern us further except for the Underlying Cash Balance Impact which isrelevant when calculating the percentage of GDP share and % of Governmentpayments.

The mechanism through which Defence receives its funds is somewhat complex, so adetailed explanation has been provided in conjunction with the discussion of thefinancial statements in Section 6 of this brief.

How much has the Budget grown?

Table 2.1.1 displays Defence funding for the past three, and next four, financial years.Also shown are both the nominal and real year-to-year percentage growth rates. Incalculating the growth rates we have followed Defence’s approach in Table 1.2 of thePBS where growth is calculated after correcting for the transfer of the cost of the Iraqconflict between 2002-03 and 2003-04.

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The difference between the nominal and real rates of growth is that the former iscorrected for the changes to the buying power of the currency due to inflation. Table1.2 of the PBS inadvertently presents the nominal growth rate as the real growth rate.

Table 2.1.1 Total Defence Funding – Real and Nominal Growth

1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07$m 12,445 12,648 14,501 14,609 15,806 15,942 16,174 17,139$m adjusted1 12,445 12,648 14,501 14,857 15,557 15,942 16,174 17,139nominal growth 1.6% 14.7% 2.5% 4.7% 2.5% 1.5% 6.0%real growth -2.7% 12.4% -0.6% 2.6% 0.5% -0.5% 3.9%1Adjusted for the repayment of $248.6 million in 2003-04 for costs incurred in 2002-03 for the Iraq war.

In calculating the real growth rate the nominal dollar values of the individual yearshave been converted to a single base year using the deflator used by the Departmentof Finance to maintain Defence buying power in real terms. Since 2001-02 this hasbeen the implicit Non-Farm GDP Deflator (NFGDPD). Specifically, we have used thehistorical Defence deflator for the first two years, and the actual and Treasury-projected NFDGPD up to 2003-04. Beyond that we have assumed that deflator willrun at 0.5% below the Treasury-projected CPI rate, there being no official estimatespast 2003-04.

What happened to the 3% growth promised by the White Paper?

There is no reason to expect the 3% real growth delivered by the White Paper in2001-02 to be visible given the very significant additional funds allocated to Defenceto the early years of this decade in supplementation for deployments over an abovethe White Paper increases and the budget measures enacted to boost domesticsecurity.

The White Paper committed specific additional funds for the development of newcapability through the Defence Capability Plan. The average 3% real growth factorwas built upon the then planned schedule of Defence spending. The one-off fundsallocated for operations in Afghanistan and Iraq, as well as the boosts to ADFcapabilities for the War on Terror, have all worked to increase near-term spending andthereby depress year-on-year real growth, as has recent foreign exchangesupplementation.

Consider for example 2001-02, where very significant growth arose due to the initialWhite Paper funding, the commencement of the war on terror, large foreign exchangesupplementation growth and, importantly, a recouping of funding for costs incurredthe previous financial year. These factors tend to exaggerate the actual growth fromthe previous year and serve to reduce the growth to 2002-03 that would haveotherwise been the case.

Finally, it is worth stressing the point that the promised White Paper funds wereexplicitly allocated to Defence back in the 2001-02 budget as reflected in PBS Table1.4, and in the Treasurer’s 2003-04 Budget Overview p.10. If you really want to besure you can go back to the 2001-02 PBS to Table 1.5 on page 19 and check foryourself.

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What is the Defence share of GDP?

Table 2.1.2 gives Defence funding as a percentage of GDP calculated in two differentways. The first column shows Total Departmental Funding as a percentage of GDPand the second column shows the Underlying Cash Balance Impact of Defencefunding as a percentage of GDP. Defence has used the former in calculating thepercentage of GDP given on page 22 of the PBS, while the later accords withgovernment financial statistics conventions used by the Australian Bureau of Statisticsand may provide a better measure for international comparison.

The figures in brackets in the first column are the result after taking account of therepayment in 2003-04 for expenses incurred in 2002-03. In both representationsDefence spending is declining as a proportion of GDP because current GDP growth isstrong at 3%, and is projected to grow to 3.5% in the forward estimates.

This highlights the peril of placing too much weight on the percentage of GDP as ameasure of Defence spending. Surely no one would suggest that we shouldautomatically reduce spending if the economy suffers a downturn. At best, thepercentage of GDP is a useful comparator of the relative commitments that differentcountries make to Defence, and it also gives some measure of how much extra anation might be able to devote to defence spending before it starts to distort theireconomy. But it is by no means an absolute measure of whether a nation is spendingenough on Defence or otherwise.

Table 2.1.2: Defence Spending as a Percentage of GDP

Year Total Departmental Funding% of GDP

Underlying Cash Balance Impact% of GDP1

2000-01 1.89% 1.86%2001-02 2.03% 1.85%2002-03 1.93% (1.97%) 1.79%2003-04 1.99% (1.96%) 1.89%2004-05 1.90% 1.82%2005-06 1.83% 1.80%2006-07 1.83% 1.82%1 Using data from2003-04 Budget Overview page 10.

What is the Defence share of Commonwealth payments?

Defence spending as a percentage of total Commonwealth payments is shown inTable 2.1.3, again in terms of both Total Departmental Funding and Underlying CashBalance Impact. As before, the figures in brackets take account of the repayment in2003-04 for expenses incurred in 2002-03 due to the Iraq conflict. In bothrepresentations the percentage drops and then rises at the end of forward estimatesperiod. But once the current supplementation for operations is accounted for, theunderlying trend is that the Defence share payments is growing.

This may change as competition for funds from other departments increase, especiallyin the future as Australia’s aging population begins to grow placing greater demandson health and social security. But this is a problem for the coming decades, not theforward estimates period.

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Table 2.1.3: Defence Spending as a Percentage of Commonwealth Payments

Year Total Departmental Funding% Commonwealth Cash Payments

Underlying Cash Balance Impact1

% Commonwealth Cash Payments2000–01 8.17% 8.04%2001–02 8.87% 8.05%2002–03 8.59% (8.74%) 7.96%2003–04 8.94% (8.80%) 8.51%2004–05 8.58% 8.22%2005–06 8.35% 8.24%2006-07 8.55% 8.48%1 Using data from2003-04 Budget Overview page 10.

Background to Defence Funding and the White Paper [PBS p 20]

The White Paper Defence 2000 included a decade-long Defence funding commitment by theGovernment. This was based on a detailed model of past and future Defence costs. At the coreof the funding commitment is a ten-year program of capital investment called the DefenceCapability Plan (DCP). The DCP was designed to ensure that all current ADF capabilities arecarried forward into the future along with the introduction of many new capabilities. Inaddition, the Government agreed to provide additional resources to maintain six full-timeinfantry battalions in the ADF.

There are five components of the Defence funding commitment made by Government:

• Increases to the Defence budget of $507 million in 2001–02, $1051 million in 2002–03,$1475 million in 2003–04, $2046 million in 2004–05, $2353 million in 2005–06 and$3102 million in 2006-07 above the pre-White Paper base. These and subsequent boostsdeliver an on average real increases of around 3% across the decade to funds the goalsincluded in the White Paper.

• Retention of supplementary funding of around $449 million per annum, originally for‘force generation’ for operations in East Timor, past 2004–05. This money funds themaintenance of six full-time infantry battalions in the ADF and 555 additional Air Forcepersonnel.

• Supplemented for the net additional cost of operations such as the War on Terror andIraq.

• Price and exchange adjustments on a no-win-no-loss basis.

• Additional funding for new initiatives (not covered in the White Paper) as they arise suchas the raising of the second Tactical Assault Group in the 2002-03 budget.

The PBS p. 20 to 22 usefully details the key adjustments to Defence funding since the time ofthe White Paper in 2001-02. It is worth noting that the figures at the bottom of PBS Table 1.3and 1.4 match the Total Revenue from Government in Table 1.2 and not the TotalDepartmental Funding, the difference being that the latter includes revenue generated byDefence internally.

Successive budgets are built up by adding ‘budget measures’ and ‘funding adjustments’ to theprevious estimate for that year. In this way the budget estimate for 2003-04 is built upon theforward estimate for that year appearing in the 2002-03 PAES.

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The 2003-04 Budget Measures and Adjustments [PBS p. 23 – 29]

Changes to this year’s Defence budget are set out in the PBS. The changes fall intotwo categories: budget measures and funding adjustments. The formal distinctionbetween budget measures and funding adjustments is that the former are detailed inthe Treasury budget papers and the later are not. In practice, the distinction is oftenarbitrary with identical items classified differently from one year to the next.

There are nine budget measures and ten funding adjustments in this year’s budget asdetailed on page 21, 22 and 27 of the PBS. These are reproduced in Table 2.1.4overleaf. For clarity we have removed the adjustments in 2006-07 that roll over thelong announced White Paper funding of $3,102 million and the continuation of ‘ForceGeneration’ funding of $467 million.

We have, however, included the funds used in 2002-03 from Defence’s cash reservesand those allocated in the 2003-03 PAES for Iraq, even though they do not representnew funding. Accordingly, these funds have not been added into the sums calculatedelsewhere in the table. We have included them to show explicitly how the announcednew spending on logistics and the Iraq war comes about.

Table 2.1.4: 2002-03 Budget Measures and Adjustments

$ m 2002-03previous

2002-03 2003-04 2004-05 2005-06 2006-07 Total

Budget Measures:Logistics Funding 101.41 244.3 285.5 284.9 229.0 1043.7Iraq - Ops Bastille and Falconer 123.82 297.21 197.9 25.8 223.7Special Forces Command 21.6 35.8 49.2 50.2 156.8Accelerated ADF Growth 49.8 36.5 16.5 102.8Operation Safebase 34.6 36.1 70.7Special Purpose Aircraft 7.1 7.2 7.5 7.8 29.6Coastal Surveillance - Op Reflex II 17.8 17.8Bougainville - Op Bel Isi II 10.11

Sub-total 123.82 408.71 573.1 426.9 358.1 287.0 1645.1Other Adjustments:Rescheduling of Capital Program -212.0 -199.0 -143.0 -88.0 -642.0Price & Exchange -220.0 151.6 134.5 137.4 144.7 348.2Refund for Iraq Costs in 2002-03 248.6 248.6East Timor Revised Estimate -95.4 -95.4Increased Superannuation Costs 19.7 19.7 19.7 19.7 78.8Return of Operating Leases -8.5 -8.5 -8.4 -8.3 -33.7Return of Project Savings -11.9 -11.9Refund for Op Bel Isi II in 2002-03 10.1 10.1 Sub-Total -327.3 209.4 -53.3 5.6 68.1 -97.3 Total -327.3 782.6 373.6 363.8 355.1 1547.81 Cash reserves not included in sums.2 Previous funding not included in sums.

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So how has Defence funding changed?

One might expect that adding all the budget measures and the other adjustments to theprevious estimates from the 2002-03 PAES would reproduce the new estimates in the2003-04 PBS. This was certainly the case last year (except for an undisclosed $15million shift that took some time to flush out). But it is not the case this year, and norwas it in the 2002-03 PAES. Table 2.1.5 shows the results of the calculation for thisbudget.

Table 2.1.5: Changes to Total Departmental Funding

$ ‘000s 2002-03 2003-04 2004-05 2005-062002-03 Additional Estimates 14,865,668 15,041,236 15,596,623 15,838,461Budget Measures & Adjustments -327,300 782,500 373,600 363,700Total 14,538,368 15,823,736 15,970,223 16,202,1612003-04 Budget Estimates 14,609,324 15,806,272 15,942,108 16,174,141Difference 70,956 -17,464 -28,115 -28,020

Notwithstanding that the PBS says on p. 31 that the Total Departmental Funding is‘commonly used to measure movements in Defence’s funding allocations relative tothe previously agreed budget and forward estimates allocations’ the disclosed budgetmeasures and adjustments do not reconcile with the shift in Defence funding. Instead,the disclosed budget measures and adjustments reconcile with the changes toappropriations. As a consequence, changes in funding from own source revenues andnet capital receipts shift the Total Defence Funding.

Much of this is of no concern. All of the shifts across the final three years results fromchanges to own-source revenues, as does about $25 million of the money in 2002-03(and $19 million of the additional funds arising in the 2002-03 PAES). Own sourcerevenues are a zero sum game in the sense that they represent income for goods andservices that Defence provides essentially at cost. Changes in this area do not alterthe amount of funds Defence has available for other things.

However, the remaining component in 2002-03 resulting from net capital sales doesrepresent real additional funding. This amounts to $46 million from this year’s PBSand another $23 million from the 2002-03 PAES. This is a significant change. Lastyear’s PBS even included a specific budget measure to cover Defence for a $38million drop in non-property sales which would have otherwise reduced their fundingvia own source revenues.

It is unclear why budget measures and adjustments are made down to the nearest$100,000 but far larger shifts due to net capital receipts are not adjusted for.

What are the budget initiatives? [PBS p. 23 – 28]

In terms of the big numbers the story is simple. Defence gets an additional $1043million for logistics, $157 million for Special Forces, $103 million for additionalpersonnel and $71 million for security at Defence facilities. And they have beenrecompensed for the cost of the Iraq deployment to the tune of $572 million (or $645million including funds previously allocated and taken from cash reserves) although itremains unclear what this does and does not cover.

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Against this, they have lost $642 million in Defence Capability Plan capital fundingacross the next four years and have handed back $95 million of unused fundsprovided for East Timor operations in 2002-03.

As has been the case in previous years the Government has absorbed the impact ofprice and exchange fluctuations which amounts to $348 million over five years. Butmuch of this is due to price adjustments that will increase Federal revenues elsewhere,and the exchange rate assumption of 60c compared with the US dollar is arguablyconservative.

Before discussing the individual initiatives in detail it’s worth making the point thatthis year’s budget looks much like those in the years leading up to the White Paper. Inthose budgets the capital program was cut to fund increased personnel and otheroperating costs. What makes this year different is that the re-balancing of spendingfrom capital to personnel and operating does not appear to have been the result of azero sum calculus.

All indications are that the capital program was not cut to provide funds for useelsewhere in the budget. Instead, the Government reluctantly rescheduled $642million of major capital equipment projects because it has become clear that theoriginal schedule of expenditure will not be met.

The descriptions of the initiatives given in the PBS are clearer and morecomprehensive than in previous budgets. So in what follows we have tried not torepeat that material, but to compliment it with additional information andcommentary.

Logistics FundingDefence will spend an additional $1145.1 billion on logistics over five years including$1043.7 in new funding committed in this budget. According to the PBS this has beennecessary because ‘changes in the new strategic landscape have given rise to a higheroperational tempo for the ADF, which has increased the cost of maintaining andoperating existing defence assets beyond that envisaged in the White Paper’.

The magnitude of the boost averages over $200 million per annum, or in the vicinityof 10% of expenses attributed to repair & overhaul and inventory consumption in the2001-02 annual report. This is a significant boost about which two things must besaid.

First, it is likely that the need for additional logistics funding has as much to do withsystemic under-funding of the fixed costs of ownership, as it does with the marginalcost of increased operational tempo. To begin with, the net additional cost of recentdeployments is supplemented for and should require no further funding, and theactivity rates of platforms for which data is available have on average not increasedmuch compared with levels before the White Paper (see Section 2.2).

In contrast, and as successive PBS and Annual Reports have made clear, the cost ofmaintaining aging aircraft has become an increasing problem for Air Force as has thefinancial burden of being a ‘parent navy’ for the RAN. Neither of these factors hasanything to do with increased operational tempo.

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Second, a careful reading of the Output section of the PBS reveals that logisticsproblems have not gone away. Army seems the most optimistic that the increasedfunding will improve the situation, especially in the area of ammunition which hasbeen a long-standing concern for them. Airforce is less worried than in previous yearsbut still retain concerns about aging aircraft. Finally, it is as if nothing has changedfor Navy who say that ‘logistics shortfalls and lack of funding for forecast logisticsshortfalls hinder the Navy’s ability to sustain the current force structure, operationalcommitments and preparedness requirements’, adding that the problem has beenneglected for so long that lead times for procurement will make it impossible toresolve these issues in the short term anyway.

Thus, notwithstanding the additional $1.1 billion being spent, it remains unclearwhether the problem has been fixed. It would be helpful to know how large anyremaining logistics shortfall is and upon which capabilities in impacts – especially forNavy. At the same time it would be good to know where the additional funds aregoing to be applied and in what proportions.

Rescheduling of the Capital Investment ProgramThe second largest initiative in the 2002-04 Budget is the rescheduling of $642million of funds previously committed to in the capital investment program acrossfour years. This amounts to an average reduction of $160 million per annum. Noexplanation is given in Section 1 of the PBS but an informative paragraph is providedon page 134 in the Capital Budget section.

The explanation given under the heading of ‘Rescheduling of the Defence CapabilityPlan’ is that there has been an adjustment to the Defence Capability Plan (DCP) toreflect ‘timing changes due to more rigorous assessment of projects before seekingGovernment approval’. This could be taken to imply that the rescheduling has beenquarantined to those projects awaiting Government approval, which would be analarming prospect for those in industry waiting to start new projects. But we are prettysure this is not the case.

What has happened is that the total capital budget has had the available funds reducedacross the next four years by between 5% and 3%. This includes both approved andunapproved major capital projects, capital facilities projects and other capitalequipment.

The process that has been gone through to calculate the reductions is to increase theanticipated level of ‘slippage’ to the aggregate funds available for capital investmentby 5%. Slippage involves an analytic formula that takes money from the early years ofthe investment program and reschedules it to some time in the future. An explanationof the process and the formula can be found on Defence’s web-site in a documententitled ‘Capability Systems Life Cycle Management Manual 2002’. This process hasbeen used by Defence for years to align an initial planned investment profile with thatwhich can reasonably be expected on the basis of past performance. What’s happenedthis year is that the anticipated performance has been down graded by another 5%.

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The explanation given on p 134 of the PBS stresses that the Government remainscommitted to the full Defence Capability Plan funding program. This is consistentwith the application of ‘slippage’ to the capital program. No projects have beenremoved. It’s just that the planned rate of spending has been adjusted to take accountof anticipated delays.

This reduction needs to be understood in light of the projected $200 millionunderspend on capital equipment in 2002-03 which followed a shortfall of around$250 million the year before. And as we will explain in Section 2.4, a number ofprojects planned for approval in the DCP are already behind schedule. Accordingly,although this rescheduling is a disappointing set back to the delivery of capability, itmakes sense.

The strategic consequence of this rescheduling, which comes on top of similar movesin the past two years ($60 million in 2001-02 and $150 million in 2002-03) will needto be thought through. The planned revision of the Defence Capability Plan this yearwill need to ensure that delays do not leave us with gaps in capability such asoccurred with the Collins submarine

The War on IraqFollowing a great deal of speculation on the cost of the war in Iraq, which sawestimates ranging between $150 million and $1 billion, we finally know the answer.Well maybe we do. There is a number, $645 million over three years to be exact. It’smade up of $521 million announced in this budget and $124 million dollars offunding quietly slipped into the 2002-03 PAES back in December 2002 andsubsequently explained as funding for the Iraq war in the current PBS. The question iswhat does it cover?

On the one hand, Budget Paper No. 2 on p. 103 talks about the ‘estimated net cost ofdeployments and operations in Iraq (including $421 million in 2002-03)’ including‘funding for pre-deployment acquisitions, personnel allowances, operating costs,equipment remediation costs and contributions to post-conflict rehabilitationactivities’. It then goes on to say that the actual cost of the deployment will not beknown until the end of operations.

In contrast, the PBS p. 24 clearly states that the ‘The 2003-04 budget does not includefunding for Operation Catalyst, the Defence contribution to the rehabilitation of Iraq.’Adding that ‘Defence will fund the deployments, and any additional costs will bereimbursed in the 2003-04 additional estimates’.

The one thing that these two explanations have in common is a clear admission that itis too early to be sure what the cost of operations in Iraq will be. This is notsurprising, and neither is the apparent confusion between to two explanations, when itis remembered that the budget was being pulled together while the Iraq conflict wasstill ongoing. In the meantime the question remains as to the basis upon which thefunds were allocated. Of particular interest is the question of what the estimated costand nature of ‘contributions to post-conflict rehabilitation activities’ might be, andalso just what the scope and composition of the ongoing contribution will look like indetail.

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Ongoing Operations in East Timor, Bogainville and for Border ProtectionIn 2002-03 Defence will hand back $95.4 million as a result of Australia’s reducedforce commitments in East Timor, and in 2003-04 they will receive an additional$17.8 million to continue with border protection activities to the north of Australiaalbeit with a reduced force commitment. In addition, continuation of the peacemonitoring effort in Bogainville required an additional $10.1 million. We examine thecost of these operations in detail in Section 3 of this brief.

Special Forces CommandIn December 2002 the Prime Minister announced the establishment of the a SpecialForces Command along with additional personnel for the regular CommandoRegiment in Sydney (4RAR) and in support of the SAS Regiment in Perth. At thesame time he announced the accelerated acquisition of the 12 Additional Troop LiftHelicopters for which a request for proposals was issued in May this year.

This measure provides the necessary personnel and operating costs to enable theestablishment of the capabilities in Table 2.1.6:

Table 2.1.6 Special Force Command

Capability 2003-04 MatureHQ Special Forces 24 24Extra commando company & support elements 4RAR 79 181Additional personnel for the counter-terrorism company 4RAR 12 12Combat and logistics support for SASR 16 16Combat Service Support Team 15 101

Total 146 334

The establishment of HQ Special Forces will give Special Forces units a commandelement equal in rank to that of the existing Land, Maritime and Air Commands.There was already a Special Forces HQ but this initiative expands its size andpromotes its commander to the level of Major General.

The additional Commando Company is an important development. After Septemberthe 11th, 4RAR was given responsibility for East Coast counter-terrorism through theraising of a second Tactical Assault Group (the other being with the SASR in WA).In doing so, it lost the ability to deploy as a formed battalion because of the need toleave a company back in Sydney to perform the counter-terrorism role. Thisadditional company fixes that problem.

The various new support elements apply the lessons learnt on recent operations aboutwhat is required to support and maintain deployed Special Forces.

Accelerated ADF GrowthThe news that ADF recruitment and retention is strong is excellent given that prior tothe 2001-02 results there were serious concerns about the attainability of the WhitePaper goal of around 54,000 personnel by 2010. The Government is right tocapitalise on these favourable results and embrace the accelerated growth of the ADF.

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However, it is premature to conclude that personnel problems have gone away. It isone thing to have additional numbers of people, its quite another to have the rightpeople with the right training to fill the gaps. It may be some time before somespecific skill shortages in both Army and Air Force are corrected even with increasedrecruitment and retention.

One worrying point is that the additional funding seems a little under what one wouldexpect. In Table 2.1.7 we have estimated the cost of the additional personnel given inTable 1.5 of the PBS using the per-capita cost of personnel calculated from p 179 ofthe PBS. Our estimate assumes that the cost of a Reservist in 1/6 that of a full-timeADF member. It appears that only 2/3 of the cost of the personnel have been fundedby the measure and that the other 1/3 will need to be diverted from elsewhere in theDefence budget. Moreover, using the implied per-capita from the PBS figures, thecosts have been out-turned with a growth factor of 2% nominal – which is less thanthe promised 2% real in the White Paper. We explore this and other personnel issuesfurther in Section 2.5.

While it is true that the marginal cost of additional personnel will be less than the percapita cost because of the fixed component in the later, the difference still seems largegiven that many personnel costs are variable. It may be that the supplementation onlycovers direct costs like salary and allowances and that Defence anticipates usingexisting funds for health, housing and the like.

Table 2.1.7: Apparent Shortfall in Funding for Accelerated ADF Growth

2003-04 2004-05 2005-06 TotalExtra Army Personnel 598 548 136 -Extra RAAF Personnel 188 106 115 -Total Extra Personnel 786 564 251 -Estimated Cost $m 74,696 53,599 23,853 152,148Budget Measure $m 49,800 36,500 16,500 102,800Funding Shortfall $m 24,896 17,099 7,353 49,348

Navy Personnel Retention InitiativesThe accelerated ADF growth funded in the previous measure is restricted to Army andAir Force. While Navy’s recruitment and retention has shown some improvement itis far from being on a strong growth path. Last year’s annual report said that Navypersonnel numbers were 1,200 below what was required (although this might havebeen a comparison with the White Paper goal rather than an in-year shortage. Inresponse, this initiative will target specific critical employment groups to try andimprove retention through various mechanisms including training initiatives, workpractise rationalisation and a streamlined training regime. This initiative is fundedfrom within current defence resources at $40 million over four years.

Other Initiatives and AdjustmentsAside from various adjustments like an additional $19.7 million per annum foremployer superannuation costs, which are adequately explained in the PBS, there aretwo remaining items of interest. First, there is $70.7 million dollars for improvedsecurity at Defence establishments over two years which represents the continuationof enhanced security measures at defence establishments that have been in place sincelate 2001.

25

Secondly, $29.6 million has been allocated to cover additional lease costs formaintenance support facilities for the VIP aircraft fleet at Canberra InternationalAirport.

What costs has Defence had to absorb?

While the budget has been generous to Defence, the additional demands being placedon the ADF in the budget have also been substantial. Table 2.1.8 estimates the knowncosts that Defence will have to absorb. We have included an entry without funding forthe High Readiness Reserve capability which includes raising six reserve company-sized Brigade Response Forces to ‘provide a holistic response to the Army’s counter-terrorist capability’ [PBS p 72]. It’s surprising that this initiative was not moreprominent on budget night and that it is not included as a budget measure (albeitunfunded) in the PBS. This would appear to be a substantial expansion of the Army’spre-planned role in support of the civil authorities, and an essential component of theGovernment’s overall counter-terrorism and domestic security strategy.

Table 2.1.8: Total Costs Absorbed by Defence in 2003-04 Budget

$m 2003-04 2004-05 2005-06 2006-07 TotalSix Reserve counter-terrorist companies - - - - -Navy Personnel Retention 10 10 10 10 40.0Accelerated ADF Growth - Shortfall 24.9 17.1 7.4 49.3Total 34.9 27.1 17.4 10 89.3

What’s worrying about these absorbed costs is that we have no idea where the moneywill come from and what the impact of the redirection will be. The program ofadministrative savings on page 159 of the PBS talks about quite different destinationsfor the funds freed up. So will Defence have to stop doing something or are thesevalues so small as to be absorbed into the churn of $15.8 billion of spending?

New Defence Spending of $2.1 billion Over Five Years

The Treasurer announced new defence spending on budget night of $2.1 billion.Much of this can be found in Table 1.8 of the PBS. The exception being the $123million of funding for Iraq provided back in the 2002-03 PAES, which is needed toreproduce the total figure of $645 million given in the Budget Overview.

There is no question that there is $2.1 billion dollars of new spending, notwithstanding that $150 million of it was taken from Defence’s cash reserves and afurther $123 million was appropriated back in December last year. But it’s importantnot to confuse this with a boost to Defence funding. Spending and funding meandifferent things in the arcane world of Government finances.

There are a number of funding adjustments that serve to reduce total Defence fundingacross this year and the next four, key among them being the hand back of $95 millionin unused supplementation for the East Timor deployment, and the $642 millionrescheduled from the capital investment program to some point into the future. (Andonly last year the $150 million rescheduling of capital funds was treated as a budgetmeasure not an adjustment.)

26

There’s also adjustments for price and exchange but they are a matter of maintainingbuying power not funding provided to do something more, or taken away on accountof doing something less.

So while there was $2.1 billion of new spending in the 2003-04 budget, this shouldnot be confused with the net additional funding provided to Defence which wassomewhat less. A precise number is hard to calculate because it depends on how youchoose to account for funding from cash reserves for new initiatives and the inclusion,or exclusion, of price and exchange adjustments. We’ll leave you to do the sumsbased on what you judge to be sensible.

Use of Cash Reserves [PBS p 29]

In February 2003 Defence transferred all but $100 million of their cash holding to theOfficial Public Account as part of implementing a just-in-time cash drawdown systembased on an Appropriation Receivable. To complement Table 1.9 in the PBS thattracks the composition of the Appropriation Receivable from year to year, we havecreated the following table to highlight the balance available at the end of each yearand includes the various planned transfers into and out of the AppropriationReceivable. As has been the case for several years, Defence continues to accumulatecash, or more accurately, cash plus unused Appropriation Receivable. If it had notbeen for the Iraq war, Defence’s cash plus unused Appropriation Receivable wouldhave growth to $1.1 billion from a starting balance of $835 million at 20 June 2002.

Table 2.1.9: Tracking the Flow of the Appropriation Receivable and Cash

2002-03 2003-04 2004-05 2005-06 2006-07Appropriation Receivable 1 July 706,075 960,434 1,069,001 1,016,401Transfer in, and annual accumulation of funds 718,415 42,599 143,367Cash used to reduce employee liabilities -46,900 -34,800 -52,600 -75,300Cash used and refunded for Op Bastille -248,570 248,570Cash used and refunded for Op Bel Isi II -10,090 10,090DCP reprogramming 200,000Retained property sales 46,320Appropriation Receivable 30 June 706,075 960,434 1,069,001 1,016,401 941,101 Cash in Bank 30 June 100,000 100,000 100,000 100,000 100,000Appropriation Receivable + Cash 30 June 806,075 1,060,434 1,169,001 1,116,401 1,041,101

Why is there so much money in the bank?The first point to make is that Defence has usually used all of its cash on a year-by-year basis, as it is expected to more-or-less do across the forward estimates. This iswhy the cash and reserve remains pretty flat in Figure 2.1.9 especially after the $260million in 2003-04 is reimbursed through appropriations.

Figure 2.1.1 shows the estimated, revised, projected and actual cash reserves over thelast several years. The 2002-03 figure has been boosted by $260 million to reflect theplanned payback of that amount for the cost of the Iraq conflict due to be reimbursedin 2003-04. This more accurately captures the trend.

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The bulk of the money accumulated during a single year, 2001-02. So what made2001-02 so special? There were a number of factors. First, it was the first year of theWhite Paper 2001-02 when total defence funding jumped by almost two billiondollars from $12.6 to $14.5 billion. Second, some of the additional funds provided inthat year were retrospective payments for price and exchange supplementation for theprevious year. Third, the late receipt of funds at additional estimates (which weredeferred due to the election) delayed spending on new measures.

Figure 2.1.1 History of Defence Cash Reserves = Bank + Appropriation Receivable

Note: The projected figure for 2002-03 anticipates the payback of funds borrowed for the Iraq war.

At the same time, Defence also faced a significant challenge in terms of basicfinancial management. They were still working to implement accrual budgeting andaccounting (an ambitious task unparalleled anywhere in the public sector) while stillbedding down very significant structural changes wrought by Defence ReformProgram, and in the midst of a valiant program to replace and update criticalmanagement information systems.

The result was that by year’s end there was $835 million in the bank much of it notplanned for. Some of it was unspent capital funds, and some represents accrual-basedrevenues that did not translate into cash expenditure – like accrued employeeliabilities for example.

During 2001-02 the argument was made that this accumulation was a necessary partof prudent financial management being those funds necessary to cover pending short-term liabilities – in effect a cash float. This argument became irrelevant when thejust-in-time draw down arrangement was established earlier this year.

Since then, a further accumulation has occurred mostly due to the $200 million incapital funds unspent from 2002-03. There would have been more but for the $198million taken from the cash reserve for Iraq ($48.6 million that will not bereimbursed) and additional logistics costs ($101.4 million also that will not bereimbursed).

It must be said that things appear to have been improving since 2001-02. Goodprogress has been made on financial systems and the costing of Defence outputs has

Defence Cash Reserves

0

200

400

600

800

1000

1200

1999-00 2000-01 2001-02 2002-03

$ m

ilion

Budget EstimateAdditional EstimateProjectedActual

28

been considerably refined. This year’s budget also has some strong signals that tighterfinancial management is now in place with, for example, the hand back of $95 millionof unused funds from East Timor that will help prevent the further accumulation ofcash. And the rescheduling of $642 million from the capital program across the nextfour years represents a hard decision, but one that will reduce the risk of the cashreserve growing further due to surplus investment money.

Of course, we won’t be sure until the end of the year when the financial statements areavailable whether 2002-03 goes to plan or not. This will be interesting to watch and atest of the progress that has been made.

So why hasn’t it been spent?The obvious question is why the cash reserves were not used to fully fund the conflictin Iraq? Quiet simply, the Government has decided that Defence should retain thesefunds in reserve to cover part of the more than $3 billion in employee liabilities (asidefrom those portions now ‘tagged’ for other purposes like the $200 million inreprogrammed capital investment money). This is fully consistent with what theGovernment is saying about the need for public companies to hold sufficient funds tocover such liabilities in case the worst happens.

This appears reasonable except that employee liabilities will fall due gradually sometime in the far future, and unlike a public company the department of Defence will notgo out of business leavings its employees out of pocket – in that sense the employeeentitlements are Government guaranteed.

So what should be done with the money?Sitting where it (nominally) is the money doesn’t cause any additional Governmentborrowing or increase the deficit, if anything it counts towards the underlying cashbalance. By the same token, given that it will only change by $20 million over thenext four years, its not doing Defence any good at all. Under current plans it’s just astatic reminder of a difficult year. But you have to ask whether it would be better todraw down the funds as opportunities arise such as the $150 million used during2002-03 for the Iraq conflict and logistics?

Methods of Presenting the Defence Budget [PBS p. 31 – 32]The final section of Chapter 1 in the PBS explains three different ways of presentingthe Defence Budget. This is both useful and interesting. It would be helpful if Defencehad also provided a reconciliation of the various presentations.

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2.2 Results for Government as Defence’s Customer [PBS Chapter 2]

Under the outputs and outcomes framework explained in Section 1.2 of this Brief, theGovernment ‘buys’ Outputs from Defence to achieve its desired Outcomes. Chapter 2of the PBS describes these transactions between the Government as customer forDefence’s Outputs, and Defence as supplier of those outputs.

The Price of Outcomes and OutputsThe heart of the Defence Budget is the statement of the price of Outputs on p.27 ofthe PBS. The concept of ‘price’ is used within the Outcomes and Outputs frameworkto capture an element of businesslike competitiveness in the relationship betweenGovernment and agency. In many areas of Government the concept has some validity,but its application in Defence is problematic. There is of course no commercialmarket in the services Defence provides to Government, so prices cannot be informedby market data. In practice, the price is built up from past forward estimates correctedfor budget measures and other funding adjustment. In 2002–03 price is built upon theforward estimate given in the 2001–02 Portfolio Additional Estimates Statements(PAES).

Because Defence’s organisational structure is not aligned with the Outcome/Outputframework, the prices are ultimately attributed quantities derived from the actualphysical Group budgets that correspond with the organisational structure. TheOutcome/Output prices therefore depend on both the actual expenses incurred withinDefence Groups and the costing methodology used to apportion this money to theOutcomes/Outputs.

Defence has put a lot of effort into improving the Output costing methodologyincluding through the development of BORIS the Budget and Output ReportingInformation System. BORIS was implemented during 2001-02 and used to developthe 2003-04 classified Defence Management and Finance Plan that underpins thePBS. Further development is planned for 2003-04.

There is a subtle accrual aspect to the Outcome/Output prices. The various expensesthat go into making up the prices include items that translate directly into cashexpenditure, like employee salaries and allowances, and other items like depreciationthat do not. Nevertheless, the full price is paid in cash through the Outputappropriation. As a consequence, those expenses that do not translate directly intocash expenditure generate cash that is available for other purposes such as investmentin new capital equipment or facilities. This is why the total of the capital budget andthe prices of outputs exceed total Defence funding. A fuller discussion of the Defencefunding framework appears in Section 6.

Outcome Price VariationsFor the purpose of comparison we have collected the Output prices from the past threeyears in Table 2.2.1 along with the newer Outcome prices from the 2003-04 PBS.Some care must be taken in making comparisons between years. Variations in priceare obscured by changes in definition between 2000–01and 2001–02 and the ongoingrefinement of the attribution rules used to construct the prices. In addition, the pricesfor 2002-03 and 2003-4 are exclusive of the capital use charge of around $4 - $5billion that was previously levied on Defence. This explains the rapid drop in priceafter 2001-02.

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The prices for the years 2002-03 through 2006-07 are directly comparable and resultfrom a recent extensive exercise within Defence to refine the attribution rules betweenGroup budgets and Outcomes/Outputs prices. The variations between 2002-03 and2003-04 are detailed within each Outcome section of the PBS [p. 40 to 111], alongwith a comprehensive listing of the expenses for each Outcome for the budget yearand forward estimates.

Table 2.2.1: Defence Output Prices 1999–2000 to 2002–03

OutcomeOutput

1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

1 1,102 1,353 807 546 845 535 528 5442 4,421 5,216 5,796 3,752 4,088 4,182 4,115 4,2543 4,576 4,758 5,392 4,529 4,845 5,247 5,155 5,4414 4,551 5,676 5,526 3,808 4,004 4,183 4,119 4,2495 193 209 197 213 232 214 2286 371

719339 342 403 439 422 439

Total 15,214 17,722 18,069 13,174 14,398 14,817 14,553 15,1557 2,236 2,236 2,336 2,336 2,436

There is little point in reproducing the detailed explanations that can be found in thePBS for price variations, except to mention that the increase in Outcome 1 in 2003-04compared with 2002-03 is probably due to the pay back of Iraq costs into the cashreserve. And we speculate that the reduction in price in 2005-06 may result from theend of East Timor supplementation but we have no way to confirm this.

Outcome StatementsThe PBS has a separate section beginning on page 40 devoted to each of theOutcomes. This generally includes, for each output:

• A listing of the Outputs within that Outcome followed by couple of introductoryparagraphs describing in broad terms what the outcome covers.

• A Planned Performance statement that explains some of the more significantactivities or developments in the outcome over the coming year including keymilestones in the development of new capabilities.

• A section outlining the ‘Key Risks and Limitations’ to the delivery of the outputsin the coming year.

• A section describing the ‘Risk Mitigation’ to address these risks and limitations.

• A price summary for the various Outputs within that Outcome.

• A series of Output statements that we describe next.

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Table 2.2.2 – Price of Defence Outcomes and Outputs

Outcome Output 02-03 03-04 %1. DefenceOperations

1.1 Command of Operations1.2 Defence Force Military Operations and Exercises1.3 Contribution to National Support Tasks

Total Defence Operations

328203

16546

409418

18845

+25%+106%

+12%+54%

2. NavyCapabilities

2.1 Capability for Major Surface Combatant Operations2.2 Capability for Naval Aviation Operations2.3 Capability for Patrol Boat Operations2.4 Capability for Submarine Operations2.5 Capability for Afloat Support2.6 Capability for Mine Warfare2.7 Capability for Amphibious Lift2.8 Capability for Hydrographic and Oceanographic Ops

Total Navy Capabilities

1,343413252683210324355174

3,752

1,487472261774215334366178

4,087

+11%+14%

+4%+13%

+2%+3%+3%+2%+9%

3. ArmyCapabilities

3.1 Capability for Special Forces Operations3.2 Capability for Mechanised Operations3.3 Capability for Light Infantry Operations3.4 Capability for Army Aviation Operations3.5 Capability for Ground-based Air Defence3.6 Capability for Combat Support Operations3.7 Capability for Regional Surveillance3.8 Capability for Operational Logistic Spt to Land Forces3.9 Capability for Motorised Infantry Operations3.10 Capability for Protective Operations

Total Army Capabilities

416744948413

98351

98407537517

4529

445801

1020450

93408

87433574535

4845

+7%+8%+8%+9%-5%

+16%-11%+6%+7%+3%+7%

4. Air ForceCapabilities

4.1 Capability for Air Combat4.2 Capability for Combat Support of Air Operations4.3 Combat Support for Strategic Surveillance4.4 Maritime Patrol Aircraft Operations4.5 Capability for Air Lift

Total Air Force Capabilities

1700398322489899

3,808

1,780424369535896

4,004

+5%+6%

+15%9%

-+5%

5. StrategicPolicy

5.1 Strategic & International Policy, Activities & Engagement5.2 Military Strategy and Strategic Operations

Total Strategic Policy

17522

197

17043

213

-3%+95%

+8%6.Intelligence

6.1 Intelligence 342 403 +18%

Total Capability Outcomes 13,174 14,398 +9.2%7. Superannuation and Housing Support Services for Current and RetiredDefence Personnel

2,236 2,236 -

Output StatementsWithin each Outcome statement are a series of Output statements, which generallyinclude:

• A brief description of the capability delivered by that Output including an outlineof the force elements included therein (which can be considered as a quantitytarget).

• A statement of performance targets which varies from Outcome to Outcome buttends to include includes things like overall preparedness goals, flying hourssometimes major capital equipment goals.

• A detailed Price of Output table that breaks down the various expenses which gointo making up the price of the Output over the next four years.

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The Output prices are nowhere tabulated in single place within the PBS, which isunfortunate because such a presentation permits an interesting comparison of thevarious prices as Table 1.2.2 shows.

The level of detail provided in the PBS at the Output level represents a verysubstantial improvement on previous years, and will support valuable analysis asmore information develops over time.

Planned PerformanceThere are three broad performance measures that have been employed at the outputlevel in the last two Defence Annual Reports; preparedness, core skills and quantity.These same performance measures are employed in the 2003-04 PBS. We explorethese three measures below. It’s important to note that some sub-outputs, especiallythose in Outcome 1, have additional specific performance targets beyond thesegeneric ones, and we make no attempt to describe the administered Outcome 7.

PreparednessPreparedness refers to the readiness and sustainability of the ADF to undertakeoperations, be it national support tasks, peacekeeping or war. The process by whichpreparedness targets are set bears recounting.

To begin with, the Government’s White Paper and Strategic Update set out the broadstrategic tasks that the ADF needs to be prepared to undertake – for example‘contributing to the security of our immediate neighborhood. Using this as a basis,Defence develops what is called Australia’s Military Strategy which includes for eachstrategic task a series of Military Response Options which define the broadoperational objectives without specifying how they are to be accomplished – forexample ‘maintain sea lines of communication to the north of Australia’. TheseMilitary Response Options then form the basis of the annual Chief of the DefenceForce’s Preparedness Directive.

The Chief of the Defence Force’s Preparedness Directive in turn forms the basis ofanother document, Commander Australian Theatre’s Operational PreparednessRequirement which defines Operational Preparedness Objectives down to the forceelement group (sub-output) level. But this is not the end of the process. Resourceconsiderations are then taken into account with the setting of a Directed Level ofCapability and for each Output along with a price agreed between the Secretary, Chiefof the Defence Force and the responsible output executive (eg Chief of Army).

The final result is a series of targets for each sub-output. For example, the lightinfantry Output might be required to ‘be prepared to deploy a battalion at 90 daysnotice to assist in a regional peacekeeping operation and to maintain the deploymentfor 12 months’ (this example is purely hypothetical).

Further details of the process can be found in Part 2 of Defence’s Capability SystemsLife Cycle Management Manual 2002 which is available athttp://www.defence.gov.au/dhq/cdaf/ and on page 186 of this year’s PBS.

This year’s PBS makes explicit reference to the Chief of the Defence Force’sPreparedness Directive and also usefully gives some explicit higher levelpreparedness goals to Army. These tend to be the requirement for Outputs to haveone or more battalion groups ready at 90 days notice.

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Core SkillsPreparedness targets set for Outputs are driven by Military Response Options with ananticipated warning time of less than 12 months. To take account of possible longerterm tasks and the requirement to retain broad expertise in the three Services, aenduring performance target for nearly all the Outputs is to ‘achieve a level of trainingthat maintain core skills and professional standards across all warfare areas’.

The assessment of what is to be achieved, and whether it has been achieved, isultimately based on the professional military judgement of the Service Chiefs. A keyconsideration is whether planned training has been completed or not.

QuantityMost of the Outputs include one or more ‘quantity’ measures that try to capture someaspect of how much capability will be delivered. Each of the three Services uses adifferent type of measure.

NavyThe basic measure of quantity used by Navy relates in some sense to the availabilityof ships and their crew to undertake a mission. From 1990-91 to 1998-99 the measureused was the average number of vessels available over the year, from 1999-00 to2000-01 it was the number of vessel days at Minimum Level of Capability (MLOC)and in 2001-02 it was the numbers of vessel days Fully Mission Capable (FMC). Thisyear yet another measure has been introduced, the planned number of Unit ReadyDays (URD) defined as follows:

Unit Ready Days are the number of days that a force element is available for tasking,by the Maritime Commander, within planned readiness requirements. Planned URDare determined for each Force Element Group by aggregating total days for the unitin commission (366 for 2003-04), less all days when the unit is programmed to be inmajor maintenance and conducting pre work-up (preparations for initial operationaltraining). The expectation is that the Navy will achieve 95 per cent of the plannedURD, because of unplanned maintenance delays.

This looks similar to the previous definition of Fully Mission Capable but the PBSsays that it is a new measure, and we therefore caution against comparison betweenthe two quantities.

ArmyWith the exception of Army Aviation, the quantity measure used by Army is thepresence of adequate quantities of trained personnel and equipment within an Output.Not quantified targets are released publicly. In practice we get a qualitativeassessment in the Annual Report.

AirforceThe quantity measure used by Airforce and Army Aviation is the number of flyinghours undertaken by the Output. These measures have been applied consistently forover a decade and constitute a useful diagnostic tool given the established baseline.

We discuss options for improving Output performance measures in Section 4 of thisbrief.

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Recent Performance

The last two Defence Annual Reports have maintained a largely consistent format ofreporting against performance targets at the sub-Output level which equates to thecurrent Outputs. This makes year by year comparisons possible. Table 2.2.3summarises the results from the 2001-02 Annual Report and tracks the changes fromthe year before. Defence uses a four point performance scale for preparedness andcore skills: Achieved, Substantially Achieved, Partially Achieved and Not Achieved.To facilitate presentation we have mapped the numerical ‘quantity’ results accordingto the key at the bottom of the table.

Aggregate performance against targets remained largely unchanged between 2000-01and 2001-02. There were improvements in 15 areas, and declines in 16. In manyareas this is an understandable result of the ADF’s high operational tempo.Nevertheless, problems remain overall with only 41% of Outputs only partiallymeeting their preparedness targets, 46% only partially meeting their preparednesstargets and 41% only partially meeting their quantity targets.

Navy did the best of the three Services with some solid improvements. Army hadmixed success with declines in Special forces and Light Infantry due to operationaldemands. And Air force continues to have the least success with only one Outputmeeting its preparedness targets and only one maintaining core skills. DefenceOperations, Strategic Policy and Intelligence continue to meet their targets

The failure to meet targets in 2001-02 was ascribed to a mixture of operationaldemands, equipment problems including aging equipment and logistics fundingshortfalls, ammunition and personnel shortages, and delays to both maintenance andproject.

Risks and Limitations

The 2003-04 PBS highlights a number of risks and limitations that follow directlyfrom the problems identified over the last several years. Key issues include; highoperational tempo and concurrent operations, personnel shortages in key areas,limitations pending the delivery of capital equipment projects, and equipment &logistic shortfalls. Table 2.2.4 summarises the problems and issues reported byDefence for the six Defence Outcomes over the last twelve months including thisPBS. In future it would be good if this sort of information was presented at the Outputrather than Outcome level, as it effectively has been in the last several annual reports.

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Table 2.2.3 Sub-output Performance from the 2001-02 Defence Annual Report

Output Preparedness Core Skills Quantity1. DEFENCE OPERATIONS1.1 Command of Operations Achieved ↔ - Substantially ↓1.2 Military Operations Achieved ↔ - Achieved ↑1.3 National Support Tasks Achieved ↔ - Achieved ↑2. NAVY2.1 Major Surface Combatants Achieved ↔ Substantially ↔ Achieved ↑2.2 Naval Aviation Achieved ↔ Achieved ↔ Substantially ↑2.3 Patrol Boats Achieved ↑ Achieved ↔ Achieved ↓2.4 Submarines Partially ↔ Substantially ↔ Partially ↓2.5 Afloat Support Achieved ↑ Achieved ↑ Substantially ↓2.6 Mine Warfare Substantially ↑ Achieved ↑ Partially ↓2.7 Amphibious Lift Achieved ↔ Partially ↓ Substantially ↓2.8 Hydrographic Substantially ↑ Partially ↔ Achieved ↔3. ARMY3.1 Special Forces Partially ↓ Partially ↓ Achieved ↔3.2 Mechanised Ops Partially ↔ Partially ↔ Partially ↔3.3 Light Infantry Ops Partially ↓ Substantially ↓ Achieved ↑3.4 Army Aviation Ops Achieved ↑ Substantially ↔ Substantially ↑3.5 Ground-Based Air Defence Partially ↔ Substantially ↔ Partially ↔3.6 Combat Support Ops Substantially ↔ Substantially ↔ Partially ↔3.7 Regional Surveillance Achieved ↔ Achieved ↔ Achieved ↔3.8 Operational Logistics Spt Substantially ↔ Substantially ↔ Partially ↓3.9 Motorised Ops Partially ↔ Partially ↔ Substantially ↔3.10 Protective Ops Achieved ↔ Partially ↔ Partially ↔4. AIR FORCE4.1 Air Strike Reconnaissance Partially ↔ Partially ↔ Partially ↓4.2Tactical Fighter Ops Achieved ↔ Partially ↔ Partially ↓4.3 Strategic Surveillance Partially ↔ Partially ↔ Partially ↔4.4 Maritime Patrol Partially ↓ Substantially ↔ Achieved ↑4.5 Air Lift Partially ↔ Partially ↔ Substantially ↑4.6 Combat Spt of Air Ops Partially ↔ Partially ↔ Partially ↔5. STRATEGIC POLICY5.1 Strategic Engagement Achieved ↔5.2 Military Strategy & Cmd Achieved ↔6. INTELLIGENCE Achieved / Partially Achieved ↔

Improved since 2000-01: ↑ Static since 2000-01: ↔ Declines since 2000-01: ↓Quantity: Above 95% = Achieved, 95% to 75% = Partially Achieved, Below 75% = Partially Achieved

Table 2.2.4 Recently Identified Problems and Risks by Defence Outcome

PersonnelIssues

Tempo ofOperations

Impact ofProjects

Equipment& Logistics

Other

1. DEFENCE OPERATIONS 1,2,3 2,3 2,32. NAVY 1,2,3 1,2,3 1,2,3 1,2,3 1,2,33. ARMY 1,2,3 1 2 1,2,3 1,24. AIR FORCE 1,2,3 1 1 1,2,3 2,35. STRATEGIC POLICY 2 2,3 2,36. INTELLIGENCE 1,2,3 2,3

1 = 2001-02 Defence Annual Report 2 = 2002-03 PBS and PAES 3 = 2003-04 PBSThere is a good degree of consistancy in the story being told through successivebudget documents. Though it should be said that the problems with logistics and

36

personnel mentioned in this year’s PBS are far less alarming than in the recent past.This is no doubt a result of recently improved recruitment and retention and theadditional funding provided in this budget for logistics. The exception is Navy wherelogistic funding is still a major issue.

The problem of reconstituting and retraining forces following the recent periods ofhigh operational tempo has been elevated as a concern in this PBS but that is only tobe expected.

Output Summaries

To augment the information provided in the PBS at the Output level we have prepared½ to 1 page Output summaries that seek to draw together relevant backgroundinformation including on recent performance. In doing so, we have not sought toreproduce in full the material in the PBS but to compliment it.

An important part of the summaries is a graphical comparison of current targets withpast performance. Unfortunately, it has not always been possible to include all theavailable data on flying hours and sea days within the summaries so the data has beenrestricted to key platforms where necessary.

37

Output 1.1 Command of Operation (Defence Operations)2003-04 Price: $408,959,000Force Structure & Role• HQ Australian Theatre (HQAST) at Potts Point Sydney has the job of planning,

commanding and controlling military and National Support tasks as well as joint andcombined operations. The collocated Australian Theatre Joint Intelligence Centresupports them in this task.

• The 1st Joint Movements Centre coordinates the deployment, supply and redeploymentof ADF forces on operations and exercises.

• HQ Northern Command in Darwin acts as a subordinate HQ to HQAST for operations tothe north including support to the civil authorities and surveillance.

• The ADF Warfare Centre in Williamtown develops joint doctrine and plans, conducts andevaluates joint training for HQAST.

• The Joint Task Force Headquarters and support elements (when established foroperations) provide a divisional level operational command capability.

Commander Australian Theatre is responsible for the planning and conduct of ADFcampaigns, operations and other activities.

Issues• The PBS lists geographical dispersal of command elements as a difficulty. HQAST works

with and through the four component commands; Maritime HQ at Potts Point Sydney,Land Command at Victoria Barracks Sydney, Air Command at Glenbrook and SpecialForces Command at Potts Point Sydney. It is planned that the component commandsalong with the 1st Joint Movements Centre and Australian Theatre Joint IntelligenceCentre will be collocated at Bungendore (West of Queanbeyan, NSW) by 2007 in a $200million purpose-built facility.

Performance Targets• Australian operational concepts are developed to support ADF planning against credible

contingencies.• The Australian Theatre Operational Preparedness Requirement provides guidance for

joint force preparedness in accordance with the Chief of the Defence Force’s direction.• Theatre command of ADF forces is effective and the Government’s strategic objectives

for operations are achieved.

Past Performance (Annual Report):Price $’000 Preparedness Core Skills Quantity

2000-01 Achieved Not Reported Achieved2001-02 - Achieved Not Reported Substantially Achieved2002-03 327,767 - - -

38

Output 1.2 ADF Military Operations and Exercises (Defence Operations)2003-04 Price: $418,433,000Force Structure & Role

As for Command of Operations (Output 1.1) plus forces specifically assigned for the purposeof the operation or exercise. As the title suggests this is the actual conduct of operations andjoint ADF combined (international) exercises.

Issues

• The ADF is currently involved in three operations contributing to the security of theimmediate neighbourhood and seven contributing to wider interests. This includessignificant operations in Iraq, East Timor and Bougainville.

• There are three ADF joint exercises and forty-seven combined exercises planned for2003-04 including 13 with the United States.

• This high operational tempo may impede the maintenance of operational preparednessfor other tasks and degrades skills and interoperability due to deferred training andexercises.

• High operation tempo also puts pressure on logistics due to shrinking inventory levels andmay require new equipment in some instances.

• Measures are in place to mitigate the potential loss of skills and interoperability with alliesand regional partners during the current period of high tempo operations.

• The apparent increase in price from 2002-03 is probably due to the appropriation of fundsto replenish the cash reserve for expenditure on the Iraq conflict during 2002-03.

Performance Targets• ADF operations meet Government directives.• Forces identified in the Australian Theatre Operational Preparedness Requirement for

operational tasks maintain required preparedness levels.• ADF forces are effectively deployed and sustained.• The Program of Major Service Activities is reviewed regularly and modified where

required.• Exercise Crocodile 03 is conducted as a combined exercise with United States forces in

2003-04.

Past Performance (Annual Report):Price $’000 Preparedness Core Skills Quantity

2000-01 Achieved Not Reported Substantially Achieved2001-02 - Achieved Not Reported Achieved2002-03 202,886 - - -

39

Output 1.3 Contribution to National Support Tasks (Defence Operations)2003-04 Price: $18,001,000Force Structure & RoleAs for Command of Operations (Output 1.1) plus forces specifically assigned for the purposeof national support in non-combat roles. This ranges from the ongoing routine allocation ofPatrol Boat and P3C Maritime Patrol Aircraft time, to the allocation of specific capabilities atshort notice in a national support emergency. National Support tasks include security,ceremonial, civil maritime surveillance, search and rescue, bush fire response and support tothe Army / ATSIC community assistance program.ADF support to the civil surveillance program, in consultation with Coastwatch, includes 250flying hours by P-3C surveillance aircraft, and 1,800 Fremantle-class patrol boat days. Otherqualitative performance targets are listed in the PBSThere are currently 12 extant national support tasks including Operation Reflex II to deterunauthorised boat arrivals across Australia’s northern approaches.In 2001-02 P3C flying hours were diverted to Operation Reflex I from Coastwatch. In addition286 patrol days by Regional Force Surveillance units were delivered against a target of 240patrol days.Past Performance (Annual Report):

Price $’000 Preparedness Core Skills Quantity2000-01 Achieved Not Reported Substantially Achieved2001-02 - Achieved Not Reported Achieved2002-03 15,530

Patrol Boat Days Support to Coastwatch

0

500

1000

1500

2000

2500

1998-99 1999-00 2000-01 2001-02 2002-03

Patr

ol B

oat D

ays

ActualTarget

P3C Flying Hours in Support of Coastwatch

0

50

100

150

200

250

300

1999-00 2000-01 2001-02 2002-03

Flyi

ng H

ours

ActualTarget

40

Output 2.1 Major Surface Combatant Operations (Navy Capabilities)2003-04 Price: $1,487,315,000Force Structure & RoleSix 1980’s US-designed Oliver Hazard Perry class Guided missile frigates (FFG) plus fiveincreasing progressively to eight by 2007, newer Anzac class frigates (FFH). Both vesselscarry Harpoon anti-shipping missiles, anti-submarine torpedoes and eventually Evolved SeaSparrow surface-to-air missiles. Only the FFG are equipped with the more capable Standardsurface-to-air missile. The Anzac class have a 5” gun useful for shore bombardment (asrecently seen in the Gulf) while the FFG has a less capable 3” gun. Both classes of vesselcan embark a Seahawk anti-submarine helicopter although the current availability andcapability of these aircraft is less than desired. The Anzac class still awaits the delivery of thedelayed Seasprite helicopter.The Anzac and FGG are Navy’s fighting ships. They have the role of controlling sea-lanes,attacking hostile ships and submarines, escorting shipping, protecting land forces andcontributing to high intensity operations in coalition operations. They are sometimes tasked toundertake lesser roles like civil surveillance and border protection.Issues• The PBS lists personnel shortages, logistics shortfalls and the reconstitution of capability

in light of the current high operational tempo as risks. The lack of a dedicated air-warfarecapability is also highlighted as a limitation as are declining anti-submarine warfare skills.

• Other problems include the 24 month delay to the $1.45 billion upgrade to the FFG class,and the deferred start of both the Anzac anti-ship missile defence and undersea war-fighting upgrades. These upgrades are important enablers for high intensity operations.

• In 2001-02 the major surface combatants achieved 1914 Fully Mission Capable (FMC)days. The target for 2002-03 is 2046 FMC days and for 2003-04 is for 2900 URD days.

• The current high tempo of operations has made it difficult to maintain some specific skills.Past Performance (Annual Report):

Price $’000 Preparedness Core Skills Quantity2000-01 Achieved Substantially Achieved 86%2001-02 - Achieved Substantially Achieved 98%2002-03 1,342,596

Note: Differing and incompatible quantity measures used over time have been converted percentages.

Surface Combatant Fleet - % of Quantity Target Acheived

0%

20%

40%

60%

80%

100%

120%

140%

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

41

Output 2.2 Naval Aviation Operations (Navy Capabilities)2003-04 Price: $472,472,000Force Structure & RoleThe RAN has sixteen 1980’s US designed Seahawks helicopters that can be embarked onthe Anzac and FFG class frigates. They are configured for anti-submarine and surfacesearch/targeting although the later role is increasingly less practiced. There are seven 1970’sUK designed Sea King helicopters used for troop lift and logistics tasks including from theNavy’s amphibious and afloat support vessels. Twelve Squirrel light helicopters are usedfor training and short-term operations at sea. In addition thirteen Australian designedKalkaras unmanned aerial targets provide a training capability.Issues• The Seahawks have been a problem capability for the last decade with logistics and crew

shortages limiting the number of aircraft that can be embarked on vessels. The airframeand mission package has also degraded over time requiring an ambitious upgradecurrently planned for approval this year and completion in 2007.

• The $1 billion Anzac ship helicopter project is now 3½ years late and will not deliver itseleven refurbished (to Australian unique specifications) 1960’s US designed Seaspritehelicopters until a limited training capability commences in 2003-04.

Past Performance (Annual Report):Price $’000 Preparedness Core Skills Quantity*

2000-01 Achieved Achieved 79%2001-02 - Achieved Achieved 92%2002-03 412,969

*Sea King and Seahawk % of planned flying hours achieved.

Seahawk Flying Hours - Target verses Actual

0

1000

2000

3000

4000

5000

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

Tota

l Fle

et F

lyin

g H

ours Target

Actual

Seaking Flying Hours - Planned verses Actual

0

1000

2000

3000

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

Tota

l Fle

et F

lyin

g H

ours

Target

Actual

42

Output 2.3 Patrol Boat Operations (Navy Capabilities)2003-04 Price: $260,599,000Force Structure & RoleFifteen 1980’s vintage Australian built, UK designed, Fremantle class patrol boats. These42m vessels are mainly tasked in support of Coastwatch’s civil surveillance program (seeOutput 1.3). Although, they can be used for the insertion and extraction of army patrols on thecoast including Special Forces.The patrol boat fleet also plays an important role in training junior officers by providing anopportunity for early independent command, and is an essential element in the ADF’sengagement with South West Pacific nations.Issues• The vessels are getting old following a decision to cancel the planned life-of-type

extension in 2000. The $350 -450 million project for their replacement is currently at thestage of source selection from three short-listed candidates. This means that contractsignature will occur some 12 months after the date in the DCP although it is still plannedthat the vessels will enter service as originally intended between 2004-07. The newvessels will have improved sea-keeping, sensors, armaments and habitability.

• The target for 2003-04 is for 4,871 URD days.

Past Performance (Annual Report):Price $’000 Preparedness Core Skills Quantity*

2000-01 PartiallyAchieved

Achieved 103%4,469 MLOC Days

2001-02 - Achieved Achieved 96%2,655 FMC Days

2002-03 251,516 Target: 2,709 FMC Days

Patrol Boats - % of Quantity Target Acheived

0%

20%

40%

60%

80%

100%

120%

140%

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

Note: Differing and incompatible quantity measures used over time have been converted to percentages.

43

Output 2.4 Submarine Operations (Navy Capabilities)2003-04 Price: $773,777,000Force Structure & RoleWith the commissioning of HMAS RANKIN the RAN now has all six of Collins classsubmarines. Their primary roles are to attack enemy shipping and to counter the threat ofadversary submarines. In addition, they can collect intelligence and insert and extract SpecialForces. The Collins Class is equipped with Harpoon anti-ship missiles and the US Mk84heavyweight torpedo.Issues:• The delay in the introduction of the Collins class into service as the Oberon class payed

off disrupted both submariner training and the retention of skilled personnel. This is nowbeing corrected.

• The current operational capability of the Collins class is below that contracted for and thevessels are only provisionally accepted into naval service. Around a billion dollars ofadditional work is planned in order to bring the vessels up to required standard. Thisincludes a new combat system to replace the current interim arrangements. These aretechnically challenging projects that are not without risks.

• Now that the submarine construction program is drawing to a close the AustralianSubmarine Corporation (ASC) will transition to an upgrade, repair and maintenance role.The ownership of ASC is pending the Government’s mooted rationalisation of the navalshipbuilding sector.

• The target for 2003-04 is for 945 URD days compared with 500 FMC days for 2002-03.

Past Performance (Annual Report):Price $’000 Preparedness Core Skills Quantity

2000-01 PartiallyAchieved

SubstantiallyAchieved

97%450 MLOC days

2001-02 - PartiallyAchieved

SubstantiallyAchieved

47%370 FMC days

2002-03 683,784 Budget Target: 606 FMC DaysRevised: 500 FMC Days

Submarines - % of Quantity Target Acheived

0%

20%

40%

60%

80%

100%

120%

140%

160%

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

Note: Differing and incompatible quantity measures used over time have been converted to percentages.

44

Output 2.5 Afloat Support (Navy Capabilities)2003-04 Price: $215,090,000Force Structure & Role:HMAS Westralia: a 1970’s UK-made 40,800 tonnes full displacement single hulled Oiler-Tanker, andHMAS Success: a 1980’sFrench designed, Australian-made 17,900 tonnes full displacementUnderway Replenishment Tanker.

The role of the afloat support force is to refuel and re-supply Navy vessels at sea and providelogistics support to land operations. Issues:• The shortfall in FMC days by HMAS Success in 2001-02 was due to an extension of the

vessel’s refit period.• The Defence Capability Plan schedules the replacement of HMAS Westralia in 2009 but

International Maritime Organisation limitations on the use of single hulled tankers mayforce an earlier replacement.

• The targets for 2003-04 are 310 URD days for Westralia and 303 URD days for Success.

Past Performance (Annual Report):Price $’000 Preparedness Core Skills Quantity

2000-01 - SubstantiallyAchieved

SubstantiallyAchieved

Replenishment Ship: 98% 337 MLOC daysOiler-Tanker Ship: 97% 263 MLOC days

2001-02 - Achieved Achieved Replenishment Ship: 30% 42 FMC daysOiler-Tanker Ship: 100% 308 FMC days

2002-03 210,260 Replenishment Ship Target: 294 FMC daysOiler-Tanker Ship Target: 343 FMC days

Note: Differing and incompatible quantity measures used over time have been converted to percentages.

Afloat Support - % Target Achieved

0%

20%

40%

60%

80%

100%

120%

140%

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

45

Output 2.6 Mine Warfare (Navy Capabilities)2003-04 Price: $333,790,000Force Structure & Role:6 Coastal Mine Hunters – 720 tonnes displacement, plastic hulled, Italian designed andAustralian made in the late 1990’s. The ships employ sonar to search for mines which canthen be destroyed using a remote controlled mine disposal vehicle or otherwise.2 Auxiliary Mine Sweepers – 1980’s converted tugs that physically sweep for mines.2 Clearance Diving Teams – one on each coast at Sydney and Perth capable of clearingmines and other ordinance, clandestine survey and obstacle clearance, and submerged battledamage repairs.Issues:• The 2001-02 Annual Report said that the auxiliary mine sweepers had a limited

operational capability due to the necessary equipment not being fitted. As a result theywere being used in other roles. The 2003-04 PBS indicates that they are now back inservice in their primary role.

• The Coastal Mine Hunters represent the state-of-the-art in mine hunting capability.• The last of the Inshore Mine Hunters was decommissioned in 2001-02.• The targets for 2003-04 are Coastal Mine Hunters 1,721 URD days, Auxiliary

Minehunters 732 URD days, and Clearance Diving Teams 732 URD days.Past Performance (Mine Hunter Coastal):

Price $’000 Preparedness Core Skills Quantity2000-01 - Partially

AchievedSubstantially

AchievedAchieved: 86% 543 MLOC days

2 vessels2001-02 - Substantially

AchievedAchieved Achieved: 101% 392 FMC days

4 vessels2002-03 323,797 Target: 700 FMC Days

6 vessels

Note: Differing and incompatible quantity measures used over time have been converted to percentages.

Mine Hunter Coastal - % of Target Achieved

0%

20%

40%

60%

80%

100%

120%

1999-00 2000-01 2001-02 2002-03

46

Output 2.7 Amphibious Lift (Navy Capabilities)2003-04 Price: $366,429,000Force Structure & Role:2 Landing Platforms Amphibious (LPA), HMAS Manoora and HMAS Kanimbla: refurbishedin the late 1990’s from 2 second hand 1970’s US Landing Ship Tank vessels. They displace8,450 tonnes and can carry 450 troops along with vehicles and landing craft. In addition, theyhave been fitted with medical and command & control facilities, and have the ability to houseup to four troop lift helicopters.1 Heavy Landing Ship (HLS), HMAS Tobruk: a 1980’s Australian made vessel capable ofcarrying 315 soldiers, 18 tanks and 40 armoured personnel carriers. She displaces 5,800tonnes and can operate any ADF helicopter from her deck.6 Landing Craft Heavy (LCH): a fleet of 1970’s craft that can carry a load of up to 180tonnes a distance of over 1200 nautical mines. Each vessel can carry three Leopard tanks,twenty-three quarter-tonne trucks or thirteen armored personnel carriers.

Issues:• The LCH have just completed a life-of-type extension.• In 2001-02 operational tempo prevented the joint training necessary for maintaining core

skills. For example, HMAS Tobruk spent 185 days on border protection duty in 2001-02.• Joint amphibious training has been identified as a priority for 2003-04.• Targets for 2003-04: LPA 568 URD, Tobruk 294 URD and LCH 2,070 daysPast Performance (Annual Report):

Price $’000 Preparedness Core Skills Quantity2000-01 - Achieved Achieved LPA: 95% 424 MLOC days

HMAS Toburk: 98% 256 MLOC daysLCH: 97% 1678 MLOC days

2001-02 - Achieved PartiallyAchieved

LPA: 96% 485 FMC daysHMAS Toburk: 49% 126 FMC daysLCH: 73% 1019 FMC days

2002-03 354,849 LPA: target 568 FMC daysHMAS Toburk: target 226 FMC daysLCH: target 1171 FMC days

Note: Differing and incompatible quantity measures used over time have been converted to percentages.

Amphibious Fleet - % of Target Achieved

0%

20%

40%

60%

80%

100%

120%

140%

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

47

Output 2.8 Hydrographic & Oceanographic Ops (Navy Capabilities)2003-04 Price: $178,219,000Force Structure & Role:2 Hydrographic Ships: 2250 tonne Leeuwin Class Australian-made hydrographic ships.4 Survey Motor Launches: 305 tonne Paluma Class Australian-made survey launches.1 Hydrographic Survey Unit: a deployable survey unit from the Hydrographic Office inWollongong.1 Laser Depth Sounder: an airborne depth sounder capability used in shallow water.Hydrographic and Oceanographic operations

Issues:• In 2001-02 only 28% of the Hydrographic Ship FMC days were devoted to hydrographic

work, the remainder was spent providing 451 days in support of border protectionoperations.

• Personnel shortages affected the Hydrographic Survey Unit last financial year.• Defence reported that the Survey Motor Launches no longer fully meet international and

Defence feature detection requirements in 2001-02. This will be addressed by the SurveyMotor Launch Upgrade project whose progress is unknown.

• In 2003-04 the target will be 732 URD days for the Hydrographic Ships and 1,464 URDdays for the Survey Motor Launch fleet.

Past Performance (Annual Report):Price $’000 Preparedness Core Skills Quantity

2000-01 - PartiallyAchieved

Not Applied Partially Achieved(nil data on MLOC days)

2001-02 - SubstantiallyAchieved

PartiallyAchieved

Hydrographic Ships: 105% 627 FMC daysSM Launches 97% 1012 FMC days

2002-03 173,530 Hydrographic Ships: target 627 FMC daysSM Launches: target 926 FMC days

Note: Differing and incompatible quantity measures used over time have been converted percentages.

Hydrographic Fleet - % Quantity Target Achieved

0%

20%

40%

60%

80%

100%

120%

140%

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

48

Output 3.1 Special Forces Operations (Army Capabilities)2003-04 Price: $445,118,000Force Structure & Role:One SAS Regiment in Western Australia whose roles include special recovery (includingdomestic and overseas counter terrorism by the west coast Tactical Assault Group - TAG)long-range reconnaissance and offensive operations.One full time Commando Regiment 4 RAR in Sydney including the east coast TAG.One reserve Commando Regiment split between Sydney and Melbourne. Roles includeland, sea- and air-borne offensive commando raids.126 Commando Signals Squadron in Melbourne provides a reserve special forces signalscapability.An Incident Response Regiment based in Sydney is capable of dealing with nuclear,chemical and biological incidents. This is a reinstatement of a capability developed for theSydney Olympics.And this budget funded a Special Operations Command in Sydney as well as an additionalcompany for 4RAR plus support elements.Issues:• A very high operational tempo has been maintained by the SASR over the last five years

resulting in a significant drop in preparedness and core skills according to the 2001-02Annual Report. A period of re-consolidation would no doubt be beneficial.

• The decision in December 2002 to add an additional company to 4 RAR will allow theregiment to concurrently maintain the east coast TAG while still retaining a more-or-lessbattalion strength unit for deployment.

• The rapid expansion of the Special Forces from within the more slowly growing Army willmake it increasingly difficult to recruit suitably qualified and experienced personnelwithout denuding the conventional force.

Performance Target:Achieve levels of preparedness directed by the Chief of the Defence Force for militaryresponse options with a warning time of less than 12 months, including the provision of abattalion-sized group within 90 days readiness and achieve a level of training that maintainscore skills and professional standards across all warfare areas.

Past Performance (Annual Report):Price $’000 Preparedness Core Skills Quantity

2000-01 Achieved Achieved Achieved2001-02 Partially Achieved Partially Achieved Achieved2002-03 416,218

49

Output 3.2 Mechanised Operations (Army Capabilities)2003-04 Price: $800,591,000Force Structure & Role:Based around the Darwin’s 1 Brigade which includes:The 1 Armoured Regiment equipped with German-made 1970’s Leopard tanks.The 2 Cavalry Regiment (Reconnaissance) equipped with 1990’s North American designedbut Australian modified ASLAV light armoured vehicles.5/7 RAR mechanised infantry battalion equipped with 1960’s US-made M113 armouredpersonnel carriers.8/12 Medium Artillery Regiment equipped with US-made 155mm M198 Medium Howitzersand the 105mm L119 Hamel light gun.In addition, 1st Brigade includes extensive organic logistics and engineer support including 1Combat Engineer Regiment, 1 Combat Service Battalion and 1 Communications SupportRegiment.

Issues:• In recent years ammunition shortages have compromised the maintenance of core skills

and preparedness. This year’s PBS is optimistic that this problem is being fixed acrossArmy Outputs.

• An upgrade program will see 350 of the Army’s fleet of aging M113 armoured vehiclesupgraded with new armour, turret, gun, engine, drive-chain and suspension beginning in2006 (Grandpa’s axe comes to mind!).

• In the 2000 White Paper the Government decided not to continue the ADF tank capabilitypast the planned withdrawal date of the leopards, although this decision may be revisited.The Leopards are currently being fitted with thermal sights to enhance their night fightingcapability.

• Additional ASLAV light armoured vehicles are being acquired commencing this year.Performance Target:Achieve levels of preparedness directed by the Chief of the Defence Force for militaryresponse options with a warning time of less than 12 months, including the provision of abattalion-sized group within 90 days readiness and achieve a level of training thatmaintains core skills and professional standards across all warfare areas.

Past Performance (Annual Report):Price $’000 Preparedness Core Skills Quantity

2000-01 Partially Achieved Partially Achieved Partially Achieved2001-02 Partially Achieved Partially Achieved Partially Achieved2002-03 743,836

50

Output 3.3 Light Infantry Operations (Army Capabilities)2003-04 Price: $1,020,185Force Structure & Role:Based around the Queensland based 3 Brigade which includes:Three infantry battalions; 1 Royal Australian Regiment (RAR), 2 RAR and 3 RAR (Sydney),4 Field Artillery Regiment equipped with the 105mm L119 Hamel light gun,B Sqn 3/4 Cavalry Regiment with a squadron of 1960’s M113 armoured personnel carriersand organic engineer and logistics support including 3 Combat Engineer Regiment, 3 CombatService Battalion and 3 Communications Support Regiment.The brigade includes a Parachute Battalion Group comprising 3 RAR along with airbornemedical, artillery and other support elements.The role of infantry is to seek out and close with the enemy, to kill or capture him, to seize andhold ground, to repel attack, by day or night, regardless of season, weather, or terrain

Issues:• The ongoing commitment of troops for rotation on peacekeeping operations in East Timor

imposed some limitations on preparedness in 2001-02.• In 2001-02 the lack of C-130 availability affected the Output’s preparedness, as has the

unavailability of Navy amphibious assets due to the recent high operational tempo. Thislatter problem will be redressed by the priority on amphibious joint training in 2003-04.

Performance Target:Achieve levels of preparedness directed by the Chief of the Defence Force for militaryresponse options with a warning time of less than 12 months, including the provision of athree battalion-sized group within 90 days readiness and achieve a level of training thatmaintains core skills and professional standards across all warfare areas.Past Performance (Annual Report):

Price $’000 Preparedness Core Skills Quantity

2000-01 Substantially Achieved Achieved Substantially Achieved

2001-02 Partially Achieved Substantially Achieved Achieved

2002-03 947,509

51

Output 3.5 Ground Based Air Defence (Army Capabilities)2003-04 Price: $92,956,000

Force Structure & Role:16 Air Defence Regiment in South Australia equipped with the Swedish RBS 70 shoulderlaunched, optically guided, ground-to-air anti-aircraft missile; and the larger towed ground-to-air Rapier RF-guided anti-aircraft missile from the United Kingdom. Both weapons were firstdeveloped in the 1970’s and are classed as short-range systems.The role of ground based air defence is to shoot down hostile enemy aircraft.

Issues:• In 2001-02 shortages in equipment, personnel and ammunition, as well as deployment on

operations, resulted in an only partial achievement of preparedness targets. This year’sPBS is optimistic that the ammunition issues is being addressed across Army Outputs.

• Project Land 19 ($100-150 million) is extending the life, and enhancing the capability, ofthe existing RBS 70 systems through improved sensors and a night operating capability.The project recently also acquired an RBS simulator to improve training. In the longerterm, Land 19 will replace the existing Rapier systems with additional RBS 70 weapons.The in-service date for the new systems is 2005.

Performance Target:Achieve levels of preparedness directed by the Chief of the Defence Force for militaryresponse options with a warning time of less than 12 months, and achieve a level of trainingthat maintains core skills and professional standards across all warfare areas.

Past Performance (Annual Report):Price $’000 Preparedness Core Skills Quantity*

Partially Achieved Substantially Achieved Partially Achieved

2000-01 Partially Achieved Substantially Achieved Partially Achieved

2001-02

2002-03 97,671

52

Output 3.4 Army Aviation (Army Capabilities)2003-04 Price: $449,568,000Force Structure & Role: Army aviation is based around the 1st and 5th Aviation Regimentswhich have components in Oakey & Townsville in Queensland, and Darwin in the NorthernTerritory. The force structure includes thirty-six 1970’s designed Black Hawk troop lifthelicopters, forty-two 1970’s designed Kiowa light observation & training helicopters,twenty-five 1960’s designed Iroquois troop lift and fire support helicopters and sixdesigned Chinook medium lift helicopters. All the helicopters are of US design. In addition,two Twin Otter and three King Air fixed wing aircraft are used for surveillance andcommand & control support. The role of Army Aviation is provide troop and logistics transport,surveillance, reconnaissance, aerial fire support and command & control support.Issues:• High operational tempo has made it challenging to maintain core skills and preparedness

in recent years according to the 2001-02 Annual Report.• In 2001-02 reduced trainee pilot recruitment, and high pilot failure rates, reduced the

number of hours flown on both the Kiowa and Iroquois aircraft, as did maintenanceproblems with the Blackhawks.

• The Eurocopter armed reconnaissance helicopter will enter service sometime beginningin December 2004, and following the PM’s announcement last year, the 25 Iroqois will bereplaced by 12 additional troop lift helicopters some time ahead of the original in-service-date of 2007.

Past Performance: (*% of planned Blackhawk, Chinook, Iroqois & Kiowa flying hours)

Price $’000 Preparedness Core Skills Quantity*2000-01 Substantially Achieved Substantially Achieved 91%2001-02 - Achieved Substantially Achieved 95%2002-03 412,501

Blackhawk Flying Hours

0

2000

4000

6000

8000

10000

12000

14000

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

Target

Actual

Chinook Flying Hours

0

200

400

600

800

1000

1200

1400

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

Target

Actual

Kiowa Flying Hours

02000400060008000

10000120001400016000

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

Target

Actual

Iroqois Flying Hours

0

2000

4000

6000

8000

10000

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

Target

Actual

53

Output 3.6 Combat Support Operations (Army Capabilities)2003-04 Price: $407,921,000Force Structure & Role:Combat Support Operations includes all non-logistic support to combat operations that is notembedded within Army’s brigades. As such, it does not represent any single capability norformation although most of its components report directly to land HQ.Accordingly, the sub-output includes a diverse collection of units includingHQ Engineer Support Regiment,21 Construction Regiment (Sydney),22 Construction Regiment (Melbourne),17 Construction Squadron (Sydney),21 Construction Squadron (Brisbane),19 Construction Engineer Works Section (Sydney),1 Topographical Survey Squadron (Enoggera, QLD),Combat Training Centre (Townsville),131 Surveillance Target Acquisition Battery (Enoggera, QLD),110 Signals Squadron - Electronic Warfare (Sydney),1 Military Police Battalion (Sydney), and1 Intelligence Battalion.Issues:• Over the last two years the Output has experienced personnel shortages especially in

critical trade areas which are inherent to many of the specialist units. This has resulted inonly partially achieving the quantity target, and less than full achievement againstpreparedness and core skills targets. This may now be improving given the boost to Armynumbers.

Performance Target:Achieve levels of preparedness directed by the Chief of the Defence Force for militaryresponse options with a warning time of less than 12 months, and achieve a level of trainingthat maintains core skills and professional standards across all warfare areas.Past Performance (Annual Report):

Price $’000 Preparedness Core Skills Quantity

2000-01 Substantially Achieved Substantially Achieved Partially Achieved

2001-02 Substantially Achieved Substantially Achieved Partially Achieved

2002-03 351,443

54

Output 3.7 Regional Surveillance (Army Capabilities)2003-04 Price: $86,750,000Force Structure & Role:This is the smallest of all the Army outputs being made up of three regional surveillance unitswhich are predominately manned by reserve personnel. These are:51st Battalion Far North Queensland Regiment which is responsible for conductingreconnaissance and surveillance over 640,000 square km in Far North Queensland and theGulf country;The West Australian based Pilbra Regiment with 1.3 million square km to cover from theKimberley boundary in the north, to Shark Bay in the south, then east to the NT/SA/WAborder; andNorth West Mobile Force (NORFORCE) which covers the Northern Territory and theKimberly region of Northern Western Australia, an area of operations covering nearly onequarter of Australia’s land mass – 1.8 million square kilometers.The three regional surveillance units are also responsible for offshore islands and the PilbraRegiment has specific responsibility for the oil and gas infrastructure on the northwest shelf.

Issues:• Nil. Unique among Army sub-outputs the three regional surveillance units achieved their

targets for preparedness, core skill and quantity last year.• During 2001-02 a total of 286 patrol days by Regional Force Surveillance units were

delivered compared with a target of 240 patrol days.

Performance Target:Achieve levels of preparedness directed by the Chief of the Defence Force for militaryresponse options with a warning time of less than 12 months, and achieve a level of trainingthat maintains core skills and professional standards across all warfare areas.

Past Performance (Annual Report):Price $’000 Preparedness Core Skills Quantity

2000-01 Not Applied Not Applied Not Applied

2001-02 Achieved Achieved Achieved

2002-03 98,218

55

Output 3.8 Land Operational Logistics Support (Army Capabilities)2003-04 Price: $433,401,000Force Structure & Role:The Logistics Support Force (LSF) is a brigade sized grouping of reserve and permanent ADFunits that can sustain a brigade on operations for extended periods while concurrentlymaintaining a battalion group elsewhere.It provides supply, fuel, communications, transport, repair, health and psychology capabilities.The LSF has its own HQ and includes;2, 9 & 10 Force Support Battalions,1, 2 & 3 Health Support Battalions,130 & 145 Signals Squadrons,Defence Force Support Unit,HQ Force Support Unit,1 Psychology Unit,1 Petroleum Coy,3 Recovery Coy, a logistics support force workshop and detachments on HMAS Tobrukand the two LPA vessels.The units are geographically dispersed.Issues:• Over the last two years the Output has experienced personnel shortages especially in a

number of key trade areas. This has resulted in only partially achieving the quantity targetin 2001-02, and less than full achievement against preparedness and core skills targets ineach of the last two years.

Performance Target:Achieve levels of preparedness directed by the Chief of the Defence Force for militaryresponse options with a warning time of less than 12 months, and achieve a level of trainingthat maintains core skills and professional standards across all warfare areas.

Past Performance (Annual Report):Price $’000 Preparedness Core Skills Quantity

2000-01 Substantially Achieved Substantially Achieved Substantially Achieved

2001-02 Substantially Achieved Substantially Achieved Partially Achieved

2002-03 407,486

56

Output 3.9 Motorised Infantry Operations (Army Capabilities)2003-04 Price: $573,759,000Force Structure & Role:Motorised Infantry Operations are based around the mostly medium readiness 7 Brigade.It is an integrated reserve-regular formation including a HQ in Enoggera Queensland, andincluding three motorised Battalions;6 Royal Australian Regiment (Enoggera),9 Royal Queensland Regiment (Queensland),25/49 Royal Queensland Rifles (Brisbane and Darling Downs region), and the2/14 Light Horse Regiment a reconnaissance battalion (Enoggera),1 Field Regiment (Enoggera) plus engineering and logistics support including;2 Combat Engineer Regiment, and7 Combat Services Support Battalion.

Issues:• The 2/14 Light Horse Regiment is progressively converting from M113A1 vehicles to

made Australian Light Armoured Vehicle (ASLAV) in the 2001-2004 timeframe.• The 1 Field Regiment will soon augment its 105mm Howitzer Towed Guns with the M198

155mm Towed Howitzer.• Many of the units in 7 Brigade will eventually be equipped with the Bushmaster Infantry

Mobility Vehicle.• Equipment, ammunition and personnel deficiencies in key areas have compromised

preparedness and the maintenance of core skills in recent years.

Performance Target:Achieve levels of preparedness directed by the Chief of the Defence Force for militaryresponse options with a warning time of less than 12 months, including the provision of abattalion-sized group within 90 days readiness and achieve a level of training thatmaintains core skills and professional standards across all warfare areas.

Past Performance (Annual Report):Price $’000 Preparedness Core Skills Quantity*

2000-01 Partially Achieved Partially Achieved Substantially Achieved (Regular)Partially Achieved (Reserve)

2001-02 Partially Achieved Partially Achieved Substantially Achieved (Regular)Partially Achieved (Reserve)

2002-03 537,201

57

Output 3.10 Protective Operations (Army Capabilities)2003-04 Price: $534,769,000Force Structure & Role:The protective operations sub-output includes all those reserve units not attributed to othersub-outputs. It is structured around 6 infantry brigades each of which has a HQ, two or threeinfantry battalions, an armoured reconnaissance unit and combat and logistics support units.These are:4 Brigade in Melbourne,5 & 8 Brigade in Sydney,9 Brigade in Adelaide and Hobart,11 Brigade in Townsville, and13 Brigade in PerthAccording to the PBS, the role of protective operations is focused on providing surge andsustainment forces to the Ready Deployment Force, and also to ‘assist the Australiancommunity during civil emergencies’.Issues:• The preparedness of Protective Operations is based on the availability of individuals and

sub-units for rotation and reinforcement.• Core skills and quantity targets have been adversely affected by personnel shortages in

recent years.• In December 2002 the Prime Minister foreshadowed the raising of a Reserve Response

Force. This will comprise a company sized Response Forces in each of the six ReserveBrigades, plus the 1 Commando Regiment in Sydney and Melbourne. These units willcomplement the ADF’s full-time counter-terrorism capabilities based around the twoTactical Assault Groups and the Incident Response Regiment.

Performance Target:Achieve levels of preparedness directed by the Chief of the Defence Force for militaryresponse options with a warning time of less than 12 months and achieve a level of trainingthat maintains core skills and professional standards across all warfare areas.

Past Performance (Annual Report):Price $’000 Preparedness Core Skills Quantity

2000-01 Achieved Partially Achieved Partially Achieved

2001-02 Achieved Partially Achieved Partially Achieved

2002-03 517,102

58

Output 4.1 Air Combat (Part 1 - Strike Reconnaissance)2003-04 Price: $1,779,583,000 (including both Strike Reconnaissance and Tactical Fighter)Force Structure & Role:25 F-111C & F-111G Strike Aircraft: 1960’s design US-made supersonic bombers plus 5 F-111G in storage and 2 being used for spares. The F-111C and F-111G aircraft provide a long-range strike capability that can bomb targets in adversary territory or in transit to Australiausing the Harpoon anti-shipping missile. Only the F-111C is equipped with a precisionbombing laser designation capability.3 RF-111C Strike Reconnaissance Aircraft: for aerial photographic reconnaissance andbattle damage assessment.Issues:• The F-111 fleet has been in service since the early seventies and the RAAF is now the

sole operator of the aircraft. Current planning is to retain the aircraft until 2015-2020.• Projects to provide improved electronic warfare self-protection and a long-range stand-off

missile capability for the fleet are both significantly delayed. Future projects are plannedto further enhance the F-111’s capabilities in both these areas.

• Unanticipated maintenance problems have reduced aircraft availability in the last coupleof years. As a result, the planned rate of effort dropped from an historical average ofaround 4300 hours to only 2600hrs in 2002-03. This prevented the achievement of moredemanding training and preparedness targets, and delayed trials of new equipment.Personnel shortages in aircrew, engineer and technical areas have also had an adverseimpact in recent years. The goal of 3800 flying hours for 2003-04 probably indicates thatthese problems are less severe.

Past Performance of the Strike Reconnaissance part of the Air Combat Output:Price $’000 Preparedness Core Skills Quantity*

2000-01 Partially Achieved Partially Achieved 77%

2001-02 - Partially Achieved Partially Achieved 71%

2002-03 - 2600hrs

F-111 Flying Hours Target verses Actual

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

Tota

l Fle

et F

lyin

g H

our

TargetActual

* Quantity refers to % of planned flying hours achieved. More detailed data appears in Section 7 of this brief.

59

Output 4.1 Air Combat (Part 2 - Tactical Fighter)Price: $1,779,583,000 (including both Strike Reconnaissance and Tactical Fighter)Force Structure & Role:71 F/A-18 Fighter Aircraft: these 1980’s vintage US designed and Australian assembledaircraft provide a capability for; air-defence using short and medium range air-to-air missiles,tactical air support and land strike using laser guided and unguided bombs, maritime strikeusing the Harpoon anti-shipping missile, and air reconnaissance.33 Hawk Lead-in-Fighters (LIF): these recently acquired UK made jet trainers provide atraining capability for both the F-111 and F/A-18 aircraft. The Hawks replace the now retiredMacci jet trainers.4 PC-9 Forward Air Control aircraft: used to designate targets for the F/A-18 aircraft.Issues:• The LIF budget estimate of 12500 hrs for 02-03 was revised down to 7,100 hrs due to

lower than expected aircraft availability under the commercial support contract. Thecapability impact and additional cost to be paid to, or damages to be sought from, thecontractor is unknown. The goal of 8,000 hrs for 2003-04 suggests only a smallimprovement.

• In recent years this sub-output has suffered from pilot and equipment shortages driven bylogistics shortfalls. This was exacerbated by the delayed delivery of the Hawk LIF.Hopefully this will be redressed by the additional logistics funding in this budget.

• The delivery of new air-to-air missiles for the F/A-18 is experiencing a modest delay.Past Performance of the Tactical Fighter part of the Air Combat Output:

QuantityPrice $’000 Preparedness Core SkillsF/A-18 LIF

2000-01 Achieved Partially Achieved 95%12,331 hrs

70%4917 hrs

2001-02 - Achieved Partially Achieved 87%11,287 hrs

56%5057 hrs

2002-03 - 12,500 hrs 9,000hrs7,100 hrs revised

F/A-18 Fighter Annual Flying Hours - Target and Actual

02000400060008000

100001200014000

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2001

-02

2002

-03

Lead-in-Fighter Annual Flying Hours - Target and Actual

0

2000

4000

6000

8000

10000

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2002

-03

60

Output 4.2 Combat Support of Air Operations (Air Force Capabilities)

Price: $423,662,000Force Structure & Role: Details about this Output are difficult to find beyond that itcomprises2 x Combat Support Wings,1 x Expeditionary Combat Support Wing,1 x Combat Reserve Wing,1 x Health Services Wing and1 x Air Field Defence Wing.Its role is to provide ‘operations support activities required to support expeditionary air baseswithin Australia and overseas in a contingencies’.

Issues:• Over the last two years personnel and equipment shortages have remained a problem,

and operational demands have prevented some training targets from being met.• In the 2001-02 Annual Report, Air Force were optimistic that equipment shortfalls are

close to being fixed but conceded that personnel shortages may take until 2005-06 tocorrect. The recent boost in Air Force recruitment and retention will no doubt help toredress this problem.

• One of the goals for 2003-04 is to develop doctrine, concepts and procedures forexpeditionary airfield operations, which will formalise directions for future capability.

Past Performance (Annual Report):Price $’000 Preparedness Core Skills Quantity

2000-01 Partially Achieved Partially Achieved Partially Achieved

2001-02 Partially Achieved Partially Achieved Partially Achieved

2002-03 397,709

61

Output 4.3 Strategic Surveillance (Air Force Capabilities)Price: $369,154,000Force Structure & Role:10 x Air Traffic Radar: including 9 fixed radar and one mobile, for the control of ADF airtraffic.2 x Tactical Air Defence Radar: ground based radar to detect hostile and own aircraft.JORN Over the Horizon Radar network: Operational over-the-horizon radar networkincluding a radar site at Laverton Western Australia and Longreach QLD and seventeencoastal beacons in the north of Australian and Christmas Island.The network is operated from the Jindalee Operational Radar Network CoordinationCentre in Edinburgh SA and can detect both sea and air-borne moving objects.

Issues:• In 2001-02 the sub-output missed preparedness targets due to project delays and

technical staff shortages, while core skills suffered due to a lack of training opportunitiesand simulation facilities. The later is being address through several simulation projects.

• The Tactical Air Defence Radar System project is long overdue but the first of four airdefence radars should be delivered during 2003-04.

• The $1.2 billion JORN network commenced operation in April 2003. It is capable of 24hour a day operation but planned operating hours are yet to be announced. Finalacceptance, involving completion of the major capital components of the contract, isprojected for mid-2003.

Past Performance (Annual Report):Price $’000 Preparedness Core Skills Quantity

2000-01 Partially Achieved Partially Achieved Partially Achieved*2001-02 Partially Achieved Partially Achieved Partially Achieved*2002-03 322,227 *Qualitative

Assessment by ASPI

62

Output 4.4 Maritime Patrol Aircraft Operations (Air Force Capabilities)Price: $535,451,000Force Structure & Role:19 P-3C Orion: 1970’s vintage US-made maritime patrol aircraft. The figure of 19 includes anumber upgraded to AP-3C standard through an ongoing Australian-unique upgradeprogram. A further 6 of these upgraded aircraft are due for delivery during 2003-04. The P-3Cundertake maritime patrol equipped with the Harpoon anti-shipping missile, the Mk46Lightweight anti-submarine torpedo, 500lb and 2000lb mines, and expendable sonobuoysused to locate submarines. They undertake maritime surveillance, reconnaissance, offensiveair support, surface & sub-surface strike, and search and survivor supply.3 TAP-3 Orion: training aircraft used for operational conversion training.Issues:• Although the P-3 upgrade project is more than three years behind the original schedule

the delivery of upgraded aircraft in 2001-02 exceeded expectations with four rather thantwo modified aircraft entering service. The rapid delivery of upgraded aircraft iscontinuing.

• High operational tasking (including for border protection) and the transition to the AP-3Cdisrupted preparedness and the maintenance of core skills last financial year.

• The higher than planned rate of effort in 2001-02 was due to border protection operations,while the increased estimate for 2002-03 arose due to the war-on-terror and continuingborder protection operations.

• The goal of 9,100 flying hours for 2003-04 represents a return to close to the highertargets set during the mid 1990’s.

Past Performance:Price $’000 Preparedness Core Skills Quantity

2000-01 Achieved Substantially Achieved 93%8216 hours

2001-02 Partially Achieved Substantially Achieved 111%9624 hours

2002-03 488,693 8,800 hours9,600 hours (revised)

Maritime Patrol Aircraft Flying Hours - Target and Actual

0

2000

4000

6000

8000

10000

12000

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2001

-02

63

Output 4.5 Airlift (Air Force Capabilities)Price: $895,843,000Force Structure & Role:12 x C-130J Hercules & 12 x C-130H Hercules: Troop lift and transport aircraft also capableof being used in parachute operations and medical evacuation.14 x Caribou: Tactical transport aircraft able to operate from short runways.4 x Boeing 707: Troop transport & air-to-air refueling, previously also used as VIP aircraft.2 x Boeing 737 & 3 CL604 Challenger: VIP aircraft. Plus navigation training aircraft (seebelow)Issues:• Modification to, and serviceability of, the C-130H fleet was a concern through 2001-02,

while crew shortages arose for the C-130J fleet at the same time.• The B707 were planned to be withdrawn from service by December 2002 but will now be

retained until at least 2007 as an interim air-to-air refueling capability when they will bereplaced in that role. Unfortunately, the B707 are aging aircraft with rising operating costsand maintenance demands.

• Seven Beechcraft Kingair 350 aircraft will be introduced into service for navigation trainingas the remaining six HS748 aircraft are retired.

Past Performance:QuantityPrice $’000 Preparedness Core Skills

C-130H/J Caribou2000-01 Partially Achieved Partially Achieved 78%

10,054 hrs82%

4,174 hrs2001-02 Partially Achieved Partially Achieved 94%

13,102 hrs84%

4,289 hrs2002-03 899,366 14,000 hrs 5,080 hrs

C-130 Flying Hours - Target and Actual

0

5000

10000

15000

20000

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

Target

Actual

Caribou Flying Hours - Target and Actual

0

2000

4000

6000

8000

10000

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

Target

Actual

64

Output 5.1 Strategic and International Policy, Activities and Engagement2003-04 Price: $170,465,000 2002-03 Price: $174,517,000Force Structure & Role:Includes International Policy Division within Russell Offices and Defence attaches in foreigncountries. According to the 2003-04 PBS this Output ‘provides strategic and internationalpolicy advice to the Government to enable it to make sound judgements on, and developappropriate response to, changes in Australia’s strategic circumstances, and on specificissues as they arise’. It also makes recommendations to Government on internationalengagement activities and initiatives.Issues: This Output has had to balance the demands of recurrent crises with the day-todayongoing management of defence international engagement including the more than $60million a year Defence Cooperation Program that funds regional military-to-military activitiesand cooperation.

Past Performance: In the past two years this Output has achieved all or most of itsperformance targets, see recent Annual Report for a very extensive narrative.

Output 5.2 Military Strategy and Command (Strategic policy)2003-04 Price: $42,964,000 2002-03 Price: $22,119,000Force Structure & Role:Includes two Divisions at Russell Offices, one predominantly military charged with strategiccommand advice to the CDF, and another military-civilian division tasked with thedevelopment of strategic policy and guidance. According to the 2003-04 PBS this Output‘provides strategic policy guidance to assist the development of recommendations to theGovernment on force structure, capability development, preparedness of ADF elements, andoperational matters.’ It also provides advice to the Government on the command of ADFoperations.Issues:• The 2001-02 Annual Report said that high operation tempo has created a risk that

insufficient staff will be available in Strategic Command division at peak times.• The big issue for 2003-04 will be the review of capability priorities and the subsequent

development of an updated Defence Capability Plan.

Past Performance: In the past two years this Output has achieved all or most of itsperformance targets, see recent Annual Reports for a very extensive narrative.

Nominal Defence Cooperation Spending

0

20

40

60

80

100

120

1987

-88

1988

-89

1989

-90

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1989

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

$ m

illion

Other Regional EngagementSouth East AsiaSouth PacificPNG

65

Output 6: Intelligence2003-04 Price: $403,085,000 2002-03 Price: $342,309,000Force Structure & Role:Defence Intelligence Organisation (DIO) at Russell Offices in Canberra undertakes analysisof intelligence information from the full range of available resources. They produce reports,briefs and assessments on an ongoing basis as well as in response to emerging areas ofconcern. Topics range across military, economic, technical, scientific and political areas.Defence Imagery and Geospatial Organisation (DIGO) includes a HQ at Russell Offices inCanberra and the Geospatial Information Branch in Bendigo. It acquires, processes anddistributes imagery and geospatial intelligence including maps and charts. DIGO also setstechnical standards for imagery and geospatial products.Defence Signals Directorate (DSD) collects and distributes classified foreign signalsintelligence (and is prohibited by law from collecting domestic intelligence) and providesinformation security advice, products and services to the Government and ADF. DSD has itsHQ in Russell Offices in Canberra and maintains collection facilities elsewhere.Defence intelligence collection and analysis activities support ADF operations, Defence policymaking including force development, and support wider Government decision making. Formore information see http://www.defence.gov.au/intelligence/.Security is also the responsibility of the Intelligence and Security Group, which is theorganisational element that largely aligns with this Output. A Branch is devoted to this task.

Issues:• The recent high operation tempo has placed additional pressures on Defence intelligence

resources.• The recruiting and retention of skilled personnel remains important.• The PBS mentions substantial investment in intelligence capabilities over the next decade

in a variety of areas, and the PBS implies that these initiatives are on track.

Past Performance: In 2001-02 the Intelligence output met somewhere between all and asubstantial number of their performance targets. See the most recent Annual Report for anextensive narrative.

66

2.3 Results for Government as Defence’s Owner [PBS Chapter 3]

Budgeted Financial Statements [PBS p.117–131]

A complete discussion of the budgeted financial statements appears in Section 6 ofthis brief.

Capital Budget [PBS p.133–155]

The Capital Budget section of the PBS describes Defence’s plans for capitalinvestment in new equipment, upgrades, facilities and other non-military capitalitems. It’s formally described in accounting terms in the Capital Budget Statement inTable 3.4 in the PBS although that is not very revealing.

Capital Investment ProgramIn an unprecedented move Defence disclosed details of their capital investmentprogram across the forward estimates in this year’s PBS Table 3.10, which we havereproduced below in Table 2.3.1. This provides a level of detail never before madepublic.

Table 2.3.1: The Capital Investment Program

2002-03Projected

2003-04 2004-05 2005-06 2006-07

Not Yet ApprovedMajor capital Equipment

24,614 358,339 636,797 1,763,053 2,627,376

ApprovedMajor capital Equipment

2,569,245 2,851,220 2,505,667 1,748,702 1,239,350

Capital FacilitiesApproved & Unapproved

336,569 375,600 392,500 363,400 332,400

Other Capital 535,104 481,393 439,452 452,025 459,380

Total Capital Budget 3,465,532 4,066,552 3,974,417 4,327,181 4,658,508

Operating Component 204,000 213,800 209,400 226,900 243,500

Total Capital InvestmentProgram

3,669,352 4,280,352 4,183,816 4,554,080 4,902,006

There are five components to the Capital Investment Program:

Not Yet Approved Major Capital Equipment: Major Capital Equipment projectsthat have not yet received final approval from Government to proceed. Major CapitalEquipment projects are of more than $20 million value and predominantly involve thepurchase of military equipment. In the past this was called the ‘Pink Book’. Thepreparation of these projects for approval is the responsibility of the Vice Chief of theDefence Force.

Approved Major Capital Equipment: Government approved Major CapitalEquipment projects. In the past this was called the ‘White Book’. The delivery ofthese projects is the responsibility of the Defence Material Organisation.

67

Capital Facilities: Approved and unapproved Capital Facilities Projects includingeverything from new barracks to upgrades of existing facilities. These projects areresponsibility of the Infrastructure Division in the Corporate Services andInfrastructure Group.

Other Capital: including Minor Capital Equipment (projects costing less than $20million), repairable items, non-capital facilities, plant and equipment, and softwareand intangibles.

These four items together make up the Total Capital Budget. In addition there is alsothe Operating Component of Capital which covers those funds treated as expensesin the process of acquiring the capital equipment or facilities. This includes, projectoffice costs, studies, research and development, travel, professional service providersand other overheads.

The identification of the Operating Component of Capital is a new development thatwill provide a better representation of how project funds are spent. It is important notto confuse this with the operating costs of the Defence Material Organisation andInfrastructure Division. Those costs are quite separate (and probably larger). Also, itis easy to confirm that the Operating Component of Capital has been estimated to beprecisely 5% of the Capital Investment Program across the four years. If theaccounting system is able to capture the actual costs incurred this might be anopportunity to look for reductions in project overheads over time.

The introduction of the Operating Component of Capital has resulted in the formalreclassification of funds previously identified as capital into operating costs by thatamount. This makes no difference at all to the money available for projects or overallDefence funding, but it will change future projections of the capital budget and giverise to an increase in Output prices.

Where does the Defence Capability Plan fit in?In 2001 the Government published an unclassified version of the Defence CapabilityPlan (DCP) its detailed plan for the development of Major Capital Equipment projectswhich underpinned the White Paper funding commitment. The bulk of the projects inthe plan at that time were yet to be approved but in the two years since then some 74projects, or phases of projects, have received approval to proceed from theGovernment. Consequently, the Not Yet Approved Major Capital EquipmentProgram represents those projects from the DCP which are yet to be approved, and theApproved Capital Equipment Program includes the projects in the DCP that havebeen approved plus many pre-existing projects that have continued from before theWhite Paper. The 2001-10 DCP and its 2002 supplement can be found on the Defenceweb site. Some care must be taken because in places the PBS appears to refer to theDCP as encompassing the entire Major Capital Equipment Program.

What’s all this about reprogramming and rescheduling?Projected spending on Major Capital Equipment for 2002-03 is $200 million belowestimates. Accordingly, the Government has determined that this money be held inDefence’s cash reserve pending review in 2004-05. The implication is that if Defencecan show it needs the funds by the time of the next budget they will get the moneyback. This is not the first time that Defence has been unable to spend all the moneyallocated to capital investment.

68

Notwithstanding accounting shifts that make it difficult to compare results from yearto year, and sometimes even difficult to compare between budget estimates and actualresults in a single year, the trend has been for Defence to underspend significantly onmajor equipment projects.

It is not surprising then that the Government decided in the 2003-04 budget toreschedule $645 million dollars of capital investment to beyond the forward estimates.Or more simply, they have cut the funds available for capital investment by thatamount over the next four years. This is not the first time that projects have beendeferred since the White Paper. In 2001-02 $60 million of project spending wasdeferred, and $150 million was rescheduled from 2002-03 to 2003-04 back in Maylast year.

The magnitude of the reprogramming, or ‘slippage’, compared with the size of thetotal capital budget is not large, as Table 2.3.2 below shows. The average reductionover the five years is only 4%.

Table 2.3.2: Percentage Reduction to the Capital Budget due to Rescheduling

$ m 2003-04 2004-05 2005-06 2006-07Capital Budget + Reduction 4,278,552 4,173,417 4,470,181 4,746,508Reduction -212,000 -199,000 -143,000 -88,000% of Capital Budget + Reduction -5.0% -4.8% -3.2% -1.9%

There are probably several reasons why the capital program has not been using fundsat the rate anticipated including:

• the White Paper set ambitious goals for the delivery of new capability well aboveanything previously achieved,

• the DMO has been undergoing a major restructure involving the amalgamation ofthe previously separate logistics and acquisition organisations, concurrent with theestablishment of geographically dispersed System Project Offices around thecountry,

• the Government is now reviewing individual projects one at a time rather than inan annual omnibus submission. This must add time to the process, although it hasthe added benefit that projects are much more closely scrutinised, and

• finally, it must be acknowledged that some measure of responsibility for thedelivery of capability resides with those contracted to deliver it..

The challenge now is for Defence to improve the timely preparation of projects forGovernment approval and to work with industry to ensure the timely delivery ofprojects once approved.

What are the trends in the Capital Program?The trend across the forward estimates is for a steady increase in the CapitalInvestment Program from $3.7 billion in 2002-03 to $4.9 billion in 2006-7. Withinthese amounts expenditure on Capital Facilities and Other Capital falls slowly whilethe total spending on major capital equipment grows strongly, Figure 2.3.1.

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The biggest jump being in 2003-04 were spending on Major Capital Equipment willrise by over $600 million or almost 24%, although $100 million or so of this mightrepresent the pay back of costs incurred in 2002-03 for the Iraq conflict. Fully $150million of this increase is due to the rescheduling of that amount from 2002-03 to2003-04 at the time of the 2002-03 budget. Whatever the reason, this is a big jumpthat will test the ability of the DMO to progress projects.

Figure 2.3.1 Planned trends in the Capital Budget

The Not Yet Approved Major Capital ProgramIn the past the Government has announced, or at least foreshadowed, those projectsthat it intends to approve in the coming year in the PBS. However, the DCP iscurrently under review to take account of changing strategic circumstances with arevised document is due out later this year. As a consequence, no indications of whichprojects are pending approval have been given.

However, the PBS does describe four projects that have recently receivedGovernment approval and which will be transferred to the approved capital equipmentprogram. These are:

• Air-to-Air Refuelling. This project will replace the ADF’s four aging B707 air-to-air refuelling aircraft with up to five more modern aircraft in that role. Theestimated cost is between $2 and $2.5 billion dollars. The project has met itsplanned year of decision (2002/03) but the in-service date has now been delayedby 12 months compared with the target in the unclassified DCP of 2006.

• Electronic Warfare Self-Protection for ADF Aircraft. This project will provideprotection from gun fire and missile attack for the ADF’s Black Hawk, Chinookand Sea King helicopters and C-130 Transport aircraft. This will involve acombination of ballistic protection, missile decoys including flares and chaff andelectronic warning systems. The estimated cost of this project is now over $250million compared with an initial estimate of between $150 and $200 million. Theproject has met its planned year of approval (2002/03) and is on track to meet itsin-service delivery date of 2004/05 with the first elements of capability enteringservice in 2004.

Trends in the Capital Budget

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2002-03 2003-04 2004-05 2005-06 2006-07

$ m

illio

n

Capital Equipment

Capital Facilities

Other Capital

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• Anzac Frigate Mine and Obstacle Sonar. This project will fit the Petrel mineand obstacle avoidance sonar to the eight Anzac frigates at a cost of $50 million.This is the last tranche of the Anzac Undersea and Surface War-fighting Program(USWUP) which has undergone a real cost increase from $150 - $200 million to$280 - $380 million. This project was approved before the White Paper but thiscomponent is only now being progressed. The delivery of the first system willoccur mid-2005 ahead of the original in-service date of 2007 for the USWUPproject.

• Joint Strike Fighter Studies. This project funds studies for the acquisition andsupport of the Joint Strike Fighter. It is worth over $30 million.

The PBS says that further projects will be considered for approval in 2003-04. Thoseprojects originally scheduled for approval in 2003-04 that might be underconsideration are listed in Table 2.3.3 below.

Table 2.3.3 Projects Planned for Approval in 2003-04

DCP Projects Currently Planned for Approval in 2003-04 Cost $m Planned DeliveryHornet F/A-18 Fighter Structural Refurbishment Phase 3.2 200-250 from 06/07Force Level Electronic Warfare 150-200 undisclosedJoint Intelligence Support System 30-50 undisclosedJoint Theatre Distribution - Logistics 150-200 2005Army Tactical Unmanned Aerial Vehicles 100-150 2007Military Satellite Communications Study <10 undisclosedJORN Over-the-Horizon Radar Enhancements 50-75 2006/7ADF Deployable Medical Capability 30-50 2006Weapon Locating Radar Life of Type Extension 20-30 2005/06Army Field Vehicle Fleet Modernisation 150-200 2007Seahawk Maritime Helicopter Mid-Life Upgrade Initial Design Activity 10-20 2003/04Maritime Communications & Information Management System 30-50 undisclosedThe ‘Top Twenty’ Projects

The PBS lists the top 20 major capital equipment projects by 2003–04 expenditure[PBS table 3.12] and provides a description of each. In addition, a further six projectssignificant by the scale of their overall project approval are given on page 3.13. Thisis a welcome improvement in the visibility of what is going on. In the past, somelarge projects that were not doing so well escaped scrutiny because they did not spendenough to make in into the top 20.

This year, ASPI has again commissioned a team of defence specialist journalists toprepare reports on what we thought the top 20 projects for 2003–04 would be (seeSection 5). We were unable to exactly anticipate all the projects so some additionalinformation has been collected. A collection of the recent publicly availableinformation on the status of the top 20 projects appears in Table 2.3.4. This covers allprojects in this year’s PBS along with some that appeared in the 2001-02 AnnualReport, 2002-03 PBS and 2002-03 PAES. Table 2.3.4 also includes the latestDefence’s assessment of each project’s achievement against goals set in 2001-02,which is the year for which the most recent Defence annual report is available. Theapproved project expenditure is taken from the most recent source we could find.

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Table 2.3.4 Recent Top 20 Defence Major Capital Equipment Projects

Expenditure ($m)Project

ApprovedProject

Expenditure

Est. Cum

.Expenditure to30 June 2003

2003–04B

udgetEstim

ate

2001–02Annual ReportAchievement

(againstin-year target)

$m $m $mArmed Reconnaissance Helicopter 1,869 139 526 AchievedF/A–18 Hornet Upgrade Phase 2 1,606 554 125 PartialAnzac Ship Helicopter 1,030 860 60 Not AchievedP-3C Update 916 761 59 SubstantialAirborne Early Warning and Control 3,617 934 515 AchievedANZAC Ship Project 5,333 4,650 226 AchievedFFG Progressive Upgrade 1,445 817 120 PartialEvolved Sea Sparrow Missile Phase 2B/3 299 111 88 PartialCollins Combat System – Phase 4A 454 23 85 -Lightweight Torpedo Replacement 293 46 55 -Collins Reliability Enhancement 349 73 50 -Minehunter Coastal Acquisition 1,242 1,087 45 SubstantialAnzac Underwater and Surface Upgrade 174 61 40 AchievedNew Heavyweight Torpedo 466 44 34 -Australian Light Armoured Vehicles 700 315 171 PartialAir-to-Surface Stand-Off Weapon 449 300 68 SubstantialAir-to-Air Weapons Follow-on Buy 193 111 32 SubstantialAir-to-Air Weapons Capability Phase 1 314 223 31 SubstantialJORN Over the Horizon Radar 1,227 1,051 45 SubstantialJoint Strike Fighter 269 13 36 -Bushranger Infantry Mobility Vehicles 329 Not AchievedCollins Class Submarine Augmentation 229 Achievede-Defence 108 -High Frequency Modernisation 587 266 14 Not AchievedLead in Fighter - Hawk 1,020 922 23 PartialMilitary Satellite Coms Payload 378 333 12 PartialNew Submarine – Collins 5,115 5,037 23 SubstantialPenguin Missile Project 200 AchievedStrategic Airlift C-130J 1,092 SubstantialTactical Air Defence Radar Systems 207 Partial

The good news is that the delivery of individual projects against performanceforecasts has improved substantially compared with the previous three years. Nearlytwice as many projects were reported as either being ‘achieved’, or ‘substantiallyachieved’, than was the case last year, Table 2.3.2. (Defence use a four level gradingof achieved, partially achieved, substantially achieved and achieved.) It is importantto remember that this is a measure of the achievement of projects against goals set for2001-02 rather than their long-term progress. It is an encouraging sign nevertheless.

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Figure 2.3.2 Recent Achievement in Top 20 Defence Major Capital Equipment Projects

So how are the individual projects going?As you might expect it’s very much a mixed bag. Newer projects like the ArmedReconnaissance Helicopter are doing well as are some of the older tried and truesuccesses like the Anzac ship project. Some old problem projects like the FFGupgrade aren’t doing so well with the delay now estimated at two years, and the HighFrequency Modernisation project continues to be a matter for concern.

The long term question that remains unanswered is whether the current crop of wellperforming recent projects are simply enjoying the benefits of youth or whether thenew ways of doing business in DMO are leading to better results. Only time will tell.

Two additional AEW&C aircraft – to buy or not to buy?However, we face a very interesting situation with the AEW&C project that’s worthexplaining in some detail.

There is currently a contract in place for four aircraft at a cost of A$3.6 million withthe option of two additional aircraft for only US$175 million (or around A$330million at the current exchange rate). This equates to a 50% increase in the number ofaircraft for less than a 10% increase in the price. A bargain by any measure. Thereason this option for the additional two aircraft is so cheap is that the current contractfor four AEW&C includes six complete mission packages (radar, processors and otherhigh tech equipment that performs the capability, ie everything but the airframe). Ineffect, all we have to pay for is two basic airframes and some integration costs, havingalready invested several hundred million dollars in the necessary mission packages.

Acheivement in Top 20 Defence Major Projects

0%

10%

20%

30%

40%

50%

60%

70%

80%

1998/99 1999/00 2000/01 2001/02

Not Achieved or Partially Achieved Achieved or Substantially Achieved

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The decision to acquire six mission packages came at the time of the contractrenegotiation after the delay imposed by the White Paper back in 2000. The problemwas that by the time the priority for the AEW&C aircraft was confirmed, the originaltender submitted by Boeing had lapsed. This was further complicated by the decisionto scale back the acquisition from six to four aircraft.

Boeing's original tender was based on subcontractor costs quoted for six missionpackages. The assessment was made that a scaling back to four mission packageswould have delivered much reduced saving once subcontractors amortised their nonrecurrent development costs across the smaller buy. Remember, the mission packagefor the AEW&C is being developed for Australia as lead customer - we pay the R&Dregardless of how many units we purchase. Consequently, the decision was made toaccept an offer from Boeing's to provide four aircraft and six mission packages. Thebenefit being that it left open the option to expand the buy for a marginal additionalcost.

The only problem is that the option for two additional aircraft runs out in June thisyear.

Is the Government’s Defence Capability Plan going to be delivered?In last year’s ASPI Budget Brief we addressed this question in a cursory mannerconfident that the next Defence Annual Report would report progress on the DCP asimplied in the 2002-03 PBS. However, the subsequent annual report did not detail theprogress made on delivering the DCP. Consequently, we have no alternative but to tryand answer this question on the basis of the fragmentary public information to dateabout newly approved and existing major capital equipment projects.

Of course it could be argued that there is little point in assessing the progress of theDCP given that it is being reviewed this year. We think not. The White Paper said thatthe DCP would be reviewed and updated on an annual basis. This is just business asusual. Just as an annual assessment of progress should be.

What we know:

• Project approvals ran largely on schedule for the first two years but things arelooking shaky with no projects foreshadowed in the PBS.

• The 2002–03 budget deferred $150 million of projects and the 2001–02 PAESdeferred a number of new asset acquisition projects to a value of $60 millionalthough it is unclear if this involved capital equipment or not.

• There was a couple of hundred million dollars of unspent capital funding last yearand another couple this year that has been transferred to the cash reserve pendingreview in 2004-05.

• No less than $642 million of capital investment funds have been rescheduled tobeyond the forward estimates period.

• Delays continue to arise in major capital equipment projects.

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• In the 2002 DCP supplement only one project underwent a real cost increase,seven projects were delayed and one was brought forward. Since then, theGovernment has decided to also accelerate the additional troop lift helicopterproject.

• Many new projects that were not in the DCP have been approved and commenced,although these tend to be small to medium in size.

What we don’t know:

• We do not yet know if the recently approved projects have required more or lessmoney than that allocated in the Defence Capability Plan, nor do we know if theirestimated future operating costs have grown or contracted.

• We do not know how much estimated costs have grown in the unapproved majorcapital equipment program.

• We do not know how many of the now approved projects are going.

On the basis of the point above its probably fair to conclude that it’s not all clearsailing. Although there was a rapid approval of many projects in 2001-02 and 2002-03, it must be the case that the timely delivery of at least some of the projects in theDCP is not going to occur. But without more information it is impossible to say whatthe impact is beyond to point out a couple of big projects that haven’t commenced:

• The $450 million - $600million C-130H Refurbishment (year of decision 2002-03) has been delayed by 12 months to allow overseas projects to be taken intoaccount.

• The $450 million to $600 million Soldier Combat System (year of decision 2002-03) has been delayed by 12 months to allow studies to be completed.

• The $450 million to $600 million ANZAC Anti-ship Missile Defence Project(year of decision 2001-02) has not commenced despite being foreshadowed inMay 2002.

The progress of the DCP is an important issue. Not just because its about developingcapabilities that have been judged as necessary for the future, but also because itsabout replacing our existing capabilities as they grow obsolete and unsupportable. It isimperative to avoid a delay in the delivery of many of the replacement capabilitieselse gaps will develop and skills will be lost. The delayed delivery of the Collinsclass after the Oberon class had begun to leave service severely disrupted thecapability well beyond the years when there were less boats in the water.

Facilities Projects [PBS pp.145–155]

The PBS lists 55 approved Capital Facilities Projects of which 16 are major projectsof more than $6 million value and 39 are medium projects of between $25,000 and $6million value. Expenditure in 2003-04 is planned to be $376 million of which $318 iscurrently approved.

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In the 2003–04 Budget the Government has foreshadowed eleven new major capitalworks projects for parliamentary consideration. These are listed in Table 3.15 of thePBS.

The PBS in Table 3.14 lists the sixteen major facilities projects currently approved.The largest of which are barracks redevelopments in Townsville ($322.2 million)followed by the development of facilities for the AEW&C aircraft capability atWilliamstown ($149 million), the redevelopment of HMAS Albatross at Nowra ($110million) with the RAAF Townsville redevelopment coming in fourth ($72.5 million).

Defence’s program of approved and yet-to-be-approved facilities projects is called theGreen Book. It can be found on the Defence web site.

The PBS provides financial information on all facilities projects by electorate [PBSTable 3.14]. As a general rule Defence facilities projects are delivered without theexcessive delays experienced in major capital equipment projects. This no doubt duein large part to their ability to purchase from a highly competitive and efficientcommercial construction sector.

Capital Sales and Receipts [PBS p.134]

The capital budget is funded in part through the proceeds from sales of property, plantand equipment and other capital receipts. On a year by year basis some or all of thismoney is returned to the Government through a capital withdrawal, see the discussionearlier in Section 6 on the Capital Budget Statement.

In recent years the Government has set ambitious goals for the sales of Defence assetsthat have not been met, mainly in the area of property sales. In 2002-03 theGovernment planned to sell $660 million worth of buildings and property. Table 2.3.9show the recently planned and achieved assets sales within the Defence CapitalBudget.

Table 2.3.9: Capital Budget Asset Sales

Planned ($m) Achieved ($m) Shortfall ($m)DRP to June 2000 – 77 –2000–01 820 87 7332001–02 1023 199 8242002–031 660 550 1102003–041 200

1 Property sales only.

The result for 2002-03 is a significant achievement given the poor performance inprevious years, especially when it is noted that this year’s short fall was caused inlarge part by the Government’s decision not to proceed with the sale and lease back ofthe Russell Offices.

76

What happened to the sale and lease back of Russell Offices? Media reports of the Government’s decision not to sell and lease back the RussellOffice complex have speculated on both the impediments of leasing high securitypremises and the underlying question of value for money. Although both these issueswould have come into play, there is a third possible factor that is worth examiningbecause it may prove critical to the feasibility of other Private Financing Initiatives(PFI) for Defence. Curiously, it has to do with the arcane rules of accrual accounting.

There are technically two classifications of lease under current accounting rules:finance leases and operating leases. There are several tests that decide into whichcategory a lease will fall. Roughly speaking, an operating lease requires that there befactors present that make it clear that the lease is not purely a financing arrangement.These include deciding where the risks and rewards primarily fall, whether a residualvalue for the item remains at the end of the lease, and that some possibility exists forthe lease holder to take up a alternative option. For example, the lease of SpecialPurpose aircraft for VIP use is an operating lease because the Commonwealth is freeto switch aircraft providers at some point in the future.

From an accounting perspective the difference between an operating lease and afinancing lease is the way in which expenses impact the bottom line. An operatinglease is treated as an expense on a year by year basis, whereas a finance lease requiresa lot more of the expense to be booked at the start of the lease, notwithstanding thatthe cash payments are spread over time. The result is that finance leases push theoperating result towards a deficit.

Given that Defence would have no alternative but to continue to lease the RussellOffices it is likely that any lease back arrangement would have been classified as afinancing lease that would have ultimately reflected badly in the Commonwealth’saccrual statements. This may have been one of the factors that came intoconsideration when the decision was made.

This was certainly a consideration when the decision was made not to proceed withthe proposed PFI arrangement for the patrol boats. To quote the press releaseannouncing the decision not to pursue a PFI option: “… there was uncertainty aboutwhether the requisite capability could be provided on a value for money basis whilealso ensuring that the transaction would be classified as an operating lease foraccounting purposes”.

This has important consequences for future PFI projects, and in particular for theplanned HQ Australian Theatre in Bungendore, which is being reviewed as an optionfor delivery through a private financing approach according to the PBS.

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2.4 Enabling business processes [PBS Chapter 4]

IntroductionChapter 4 of the PBS deals with a range of mainly management reform and efficiencyinitiatives. The most interesting of which is the program of administrative savings.

Program of Administrative Savings [PBS p. 169]The White Paper set goals for Defence efficiency savings in order to fund capability,and this year’s PBS adds another aggressive set of targets for further savings fromadministrative areas. These are listed below in Table 2.4.1

Table 2.4.1 Planned Savings Measures in Defence

$m 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 ongoing

White PaperSavings Initiatives

50 2001 200 200 200 200 200 200

AdministrativeSavings Targets

50 100 150 175 200 200

Total 50 200 250 300 350 375 400 4001 Originally $100m but boosted to $200 million at Additional Estimates.

This second set of savings is designed to offset ‘unavoidable cost pressures’including; salary, wage and military allowance costs above price augmentation to theDefence budget, rising Comcover premiums, and funding for infrastructuremaintenance.

The 2003-04 PBS says that the underlying White Paper efficiency initiatives will bemet ‘by re-baselining the non-capability-related elements of internal Group budgetsfrom 2003-04 onwards’. And that the further administrative savings will be achievedthrough four themes that are explained in more detail in the PBS;

• Rationalised Group support arrangements,

• Further (non-military) outsourcing activities,

• A range of ‘financial transformation’ projects, and

• Reductions in overheads.

The final theme includes reducing civilian personnel numbers, professional serviceproviders and travel Given the rapid growth and unplanned growth in all these areasduring 2001-02 and in civilian personnel during 2002-03, it is hard argue against sucha move. In addition there will be a reduction in non-operational Defence personnelposted overseas.

If effect, the entire savings for both programs appears to be coming fromadministrative areas, because what else is a ‘re-baselining the non-capability-relatedelements of internal Group budgets’ than an administrative saving. But perhaps thisshould have been obvious. There was never any question of cutting non-administrative, ie military capability, areas in the internal Defence budget.

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There are four observations to make about this:

First, the scale of savings is significant by any standards. Annual recurrent savings of$400 million per annum is full comparable with the roughly $600 million per annumannual saving claimed by the Defence Reform Program (DRP). But the DRP was adetailed program of initiatives that caused very substantial disruption to Defence for anumber of years.

Second, the delivery of the $200 million in White Paper savings from the ‘re-baselining the non-capability-related elements of internal Group budgets’ looks likethe work of the Magic Pudding. Could it be that all that has happened is that theexcess has been cut out of Group budgets that grew fat during 2001-02 when Defencereceived a substantial funding boost in the first year of the White Paper? The rapidand unplanned growth of expenditure on travel, professional service providers andcivilian personnel would fit this picture. If this is the case then it’s a good thing. Butit’s also important not to confuse the reinstatement of disciplined financialmanagement with long term efficiency gains.

Third, it is unclear where the $200 million in future White Paper savings will go.Will it been added to the capital investment program to fund new capability or to payfor additional military personnel, or will it too be used to cover cost pressureselsewhere in the budget. Back in 1996 when the Government directed $125 millionper annum in administrative savings (the Magic Pudding again) the redirected fundswere explicitly reported against the additional capital investment they funded.

Fourth, the new program of administrative savings is going to be used to offsetunavoidable funding pressures elsewhere in the budget. In effect, ‘avoidable’overheads are being cut to fund ‘unavoidable’ overheads. There is no net gain incapability, or to put it another way, there is no increase in productivity. For themoment at least this makes sense, given the difficulties Defence has had with itsfinancial management in recent years. But once greater control and discipline isestablished, and resources have allocated to address priority cost pressures, it will betime for Defence to look to absolute increases in productivity that can be used to fundcapability. A private business in Australia today that did not improve its productivityon a year-by-year basis would survive would not survive.

The last point to make about the efficiencies and saving programs is the need forgreater transparency, both of the mechanisms through which the savings will beachieved and the ways in which the savings are used.

Defence Management Reforms and Efficiencies [PBS p 161 – 168]

Budget Reform [p161]The PBS devotes two tightly written pages to detailing the range of reforms andinitiatives designed to improve financial management in Defence. A dedicated andcomprehensive program of improvements to financial management is long over due inDefence and we said as much in last year’s budget brief. For a number of years now,goals for improved management information systems and clearer internal budgetingarrangements have come and gone with only slow progress.

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However, there may be reason for cautious optimism that the reforms are finallygaining traction. Not because of the soothing words presented to assure the reader ofthis initiative or another, but rather the two things that are apparent from reading thePBS as a whole.

First, it is clear that substantial progress has been made in the area of Outputbudgeting and reporting as demonstrated by the detailed financial information givendown to the level of 29 Outputs.

Second, the several encouraging signs that Defence is now getting its overheads undercontrol through a more disciplined approach to budgeting, and the fact that are nowclearly using past experience to inform future budget estimates.

Of course, such optimism might be premature. We cannot be sure until we have theopportunity to look back of the current financial year and see how well the plannedfinancial performance has gone. In all likelihood 2002-03 will be a transition yeartowards tighter and more effective financial management. After all, the PBS freelyadmits that the process of budget reform is not complete.

If you are interested in an independent view of the progress being made towardscustomer/supplier arrangements and the linkage between resources and performancein Defence, the recent Audit Office Report on Navy Operational Readiness is a goodreference. Audit Report No. 39 2002-03. It is somewhat cautious in its in itsassessment of progress to date.

Defence Materiel Reform [PBS p.163]The DMO was formed on 1 July 2000 by bringing together the Defence AcquisitionOrganisation and Support Command Australia. Key elements of the accompanyingDefence Materiel Reform program include collocation of acquisition and supportelements near customers, a strategic approach to industry relationships and adoptionof commercial approaches and best practice.

As in 2001-02 and 2002-03 PBS, a list of initiatives has been given for the DefenceMaterial Reform program. These are not reproduced here. It is difficult to assess theprogress being made on the basis of public information. One the one hand we have therecent improvement of in-year project performance we discussed in the Section 2.3and the good progress being made on new projects like the AEW&C. On the other wehave the fact that money had to rescheduled from the capital budget because ofanticipated delays in the overall investment program of which capital equipment is abig chunk.

We can never be sure until such time as a rigorous and transparent performancereporting system is put in place and made public. In this regard we agree with theconclusions of the recent Senate Foreign Affairs, Defence and Trade ReferenceCommittee inquiry into material acquisition and management in Defence, see Section4 of this brief.

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An important point to make is that the Defence Material Reform program is focusedon the post-Government approval process. The pre-Government approval process hasarguably contributed at least equally to the past poor delivery of acquisition projects.It is unclear how much attentions this is receiving. Hopefully the independent DefenceProcurement Review that will report to the Minister later this year will address the fullspectrum of the capability development process.

Delivering Internal Services [p.165] and Information Environment [PBS p.167]These two section of the PBS deal with improvements to the delivery of internalservices by the Corporate Services and Infrastructure Group, and the plans for furtherdevelopment of the Defence Information Environment. In each instance thediscussion is so general it is almost generic. (The one exception is the breakdown ofexpenditure on products and services contracts which does provide a useful set offigures.) This further highlights the imperative to provide meaningful Group financialand performance information so that some assurance of efficiency is possible.

Commercial Support Program [PBS p.169] The Commercial Support Program is a long-standing Defence program that market-tests activities against commercial alternatives. There is nothing to add to this selfcontained except to point out the several interesting activities being examinedincluding especially the fully-contracted material support for Navy’s surfacecombatants and amphibious ships.

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2.5 People Matter [PBS Chapter 5]

Overview [PBS p175]The Overview of the ‘People Matter’ chapter outlines a diverse range of initiatives toimprove the management of personnel from a business and planning perspective, andto enhance the development, care, recruitment and retention of personnel.

While some of the narrative may seem overly laden with slogans, the fact is that therecruitment and retention of personnel has been steadily improving over the lastcouple of years. This is arguably due in large part to the range of initiatives describedalong with those of previous years. This began in 2001-02 when $400 million overfour years was allocated to deal with high priority personnel issues.

It’s important to recognise that improving ADF recruitment and retention has arisenagainst a background of a strong economy, which traditionally has made it moredifficult to recruit and retain personnel. This makes the progress achieved all thatmore impressive.

How big is the workforce?In 2003–04 Defence will employ an average of around 52,341 full time militarypersonnel; 17,377 civilians; and 20,445 Reservists. Estimated personnel numbers for2003-04 are given in Table 5.2 of the PBS (as average funded strengths). The long-term target is to build a force of around 54 000 permanent ADF personnel by 2010.Recent personnel numbers appear in Figure 2.5.1 along with the estimates for 2003-04.

Table 2.5.1: Workforce Summary

2000-01Actual

2001-02Actual

2002–03Projected

2003–04Budget

Target(2010)

Navy 12 396 12 598 12 828 13 000 14 000Army 24 488 25 012 25 624 25 941Air Force 13 471 13 322 13 652 13 400TOTAL 50 355 50 932 52 104 52 341 ~ 54 000Reservists 19 835 18 868 19,935 20 445Civilian 16 292 16 819 18,297 17 377

Source: 2001-02 and 2001-02 Defence Annual Report & 2003-04 PBS

How did we get to this point?In the decade following the Force Structure Review in 1991, ADF numbers droppedfrom around 70,000 to 50,000 permanent personnel. Over the same period civiliannumbers dropped from around 25,000 to 17,000. The bulk of these reductions weredue to out-sourcing under the Commercial Support and Defence Reform Programs. Infact, the initial goal of the Defence Reform Program was to reduce the strength of theADF to 43,500 but this was soon revised up to 50,000 thereby arresting the decline.This was done by re-directing DRP savings to buy-back the ADF positions, the goalbeing in effect to redirect personnel from support areas to the combat force. The 2000White Paper subsequently set permanent ADF numbers on their current growth pathtowards 54 000, as shown in Table 2.5.1 overleaf.

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Figure 2.5.1 Historical Defence Workforce

Source: 2000-01 and 2001-02 Defence Annual Report, 2001-02 Defence Budget Brief and 2003-04 PBS

What are the recent trends?The percentage year-on-year changes in the permanent ADF and civilian workforcesare plotted in Figure 2.5.2 below. The most surprising aspect is that in both 2001-02and 2002-03 the percentage rate of growth in the civilian workforce far outstrippedthat for the military.

Figure 2.5.x Defence Workforce: 1985/86 to 2003/04

Source: 1997-98 to 2001-02 Defence Annual Report, 2001-02 Defence Budget Brief and 2003-04 PBS

Permanent ADF NumbersThe good news is that Army and Air Force numbers are increasing and are predictedto keep doing so. In fact they are increasing faster than planned in the White Paper.Table 1.5 in the PBS shows where and how these increases are occurring. Rather thanarrest this positive trend, the Government has decided to provide an additional $103million over three years to capitalise on it. This is explained in more detail in Section2.1 of this brief.

Defence Workforce - Average Funded Strength 1985/86 - 2003/04

0

10

20

30

40

50

60

70

80

1985

-86

1986

-87

1987

-88

1988

-89

1989

-90

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

Pers

onne

l Num

bers

100

0's

Permanent ADF

Defence Civilians

Commercial Support

Defence Reform White Paper

Annual % Change in Size of Defence WorkForce

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04

Ann

ual %

Cha

nge

ADF

CivilianDefence ReformProgram Reductions

White Paper Growth

Unplanned Civilian Growth

83

Unfortunately, Navy numbers are not increasing as quickly as desired but theGovernment has responded with a $40 million self-funded budget measure to redressthe problem. Overall these are a sensible pair of initiatives that address the currenttrends.

In terms of the individual Services, Army numbers will increase by 317. This includesthe establishment of the Special Operation Command as well as those positionsfunded to take account of favourable recruitment and retention. Air Force hasreceived funding for 188 additional personnel, although absolute numbers will reduceby 252 positions due to planned out-sourcing of support functions. Navy will increaseby 172 positions, which will bring them to within 1000 of the White paper target of14,000. Of all the Services, Navy has traditionally had the most difficulty inmaintaining its numbers. This will not have been made any easier by the recent highoperational tempo of the fleet.

Civilian NumbersAlthough civilian numbers fell quickly under the Defence Reform Program they havegrown back very rapidly in the first two years of White Paper implementation – threetime more quickly than military numbers have grown. What is more, this growth hasbeen largely unplanned with the rise in 2001-02 exceeding budget estimates by 5.8%and the current projection for 2002-03 exceeding budget estimates by 5.6%.

The explanation given in the 2002-03 PAES for the rapid and unplanned growth incivilian numbers involved the ongoing civilianisation of military positions, additionalstaffing for new capital equipment projects & through-life support, increasedscientific staff to support ADF operations and an increased intake of universitygraduates.

However, in January 2003 a civilian hiring freeze was imposed within Defence after itbecame clear that the projected number of civilian personnel would exceed the revisedestimate given less than two months earlier. Indeed, the projected result for 2002-03 isstill more than 350 above the revised estimate from December last year even after theimpact of the hiring freeze.

Subsequently, in April 2003, the freeze was lifted but direction was given to maintaincivilian numbers at current levels. This action to stem the rise in civilian numbers isunderstandable given that additional personnel must be funded from within currentDefence funding levels unless linked explicitly to a specific funded Governmentinitiative.

The 2003-04 PBS says that increasing civilian numbers contributed to anunsustainable growth in overheads, and outlines plans to reduce civilian numbers by920 over the next year. These positions will come from the already plannedrationalisation of the Defence Integrated Distribution System (DIDS), new ADFrecruiting arrangements, and efficiencies achieved under the program ofadministrative savings. About two thirds of these positions will go as a result of thedelayed out-sourcing of the DIDS. It is not know where the remaining reductions willoccur nor how they will be achieved.

84

Reserve Numbers – Turning the CornerThe PBS reports that active Reserve numbers are expected to increase by 510 positionor 2.5% between 2002-03 and 2003-04. This follows an anticipated increase from2001-02 to 2002-03 of around 970 personnel or 6% compared with a decline ofaround 1000 (5%) in the previous year. Comparisons with earlier years areproblematic because data prior to 2000-01 includes an unknown number of inactivereservists. Nevertheless, a consistent comparison is possible within this earlier dataand it reveals drops of around 2000 (8%) and 3000 (12%) in the years immediatelyprior to 2000-1. Thus, the anticipated increases in 2002-03 and 2003-04 represent awelcome reversal of a persistent and adverse trend.

There are probably many reasons for this, not least of which being the moreimmediate and relevant role allocated to the Reserves in terms of sustaining andsupporting the permanent ADF on operations. This has already taken effect with over670 Reservists having deployed on operations to East Timor as of March 2002. Inaddition, the Government has been active in providing improved legislative protectionthrough the Reserve Services (Protection) Act 2001 and substantial support toemployers of Reservists through the Employer Support Payment Scheme.

How much do personnel cost?Personnel expenses in 2003–04 will be around $6.6 billion rising to $7.2 billion in2006–07 [PBS Table 3.1]. This represents around 42% of the Defence budget.

In the past, growth in military personnel costs has created a pressure on the Defencebudget, not because the growth in remuneration has been out of step with communityoutcomes, but because supplementation has been inadequate. This was hopefullyremedied in the White Paper when a provision for 2% real growth in per-capitamilitary personnel costs was built into the ten year funding projection.

Separate military and civilian personnel expenses have appeared in the last two annualreports and the 2003-04 PBS, Table 2a & 5.1. This allows us to calculate the recentand estimated per capita cost of civilian and military personnel over a seven yearperiod. The results of this calculation appear in Table 5.3.2 & 3 where we haveassumed that each Reserve member is equivalent to one-sixth of a full time ADFmember, and that Reserve numbers remain static past 2003-04. The per-capitaexpenses include salaries, allowances, superannuation, health, redundancies, housing,fringe benefits tax and worker compensation.

Figure 2.5.2 Per-capita military personnel expenses

ComparisonMilitaryNumbers

Expense$ 000’s

Per Capita NominalGrowth CPI Wages NFGDPD

2000-01 53,661 4,430,211 $82,5592001-02 54,077 4,658,812 $86,152 4.35% 2.90% 3.25% 2.00%2002-03 55,427 4,836,926 $87,267 1.29% 3.25% 3.25% 3.00%2003-04 55,749 5,298,139 $95,036 8.90% 2.75% 4.00% 2.25%2004-05 56,037 5,360,365 $95,658 0.65% 2.50% 3.75% ~2%2004-06 56,202 5,535,781 $98,499 2.97% 2.50% 3.75% ~2%2006-07 56,300 5,762,203 $102,349 3.91% 2.50% 3.75% ~2%2007-08 average 3.68% 2.73% 3.62% 2.65%Source: 2000-01 and 2001-02 Defence Annual Report and 2003-04 PBS

85

Figure 2.5.3 Per-capita Civilian Personnel Expenses

ComparisonCivilianNumbers

Expense$ 000’s

Per Capita NominalGrowth CPI Wages NFGDPD

2000-01 16,292 956,661 58,7202001-02 16,819 1,086,118 64,577 9.97% 2.90% 3.25% 2.00%2002-03 18,297 1,199,282 65,545 1.50% 3.25% 3.25% 3.00%2003-04 17,377 1,291,583 74,327 13.40% 2.75% 4.00% 2.25%2004-05 17,377 1,377,516 79,272 6.65% 2.50% 3.75% ~2%2004-06 17,377 1,393,509 80,193 1.16% 2.50% 3.75% ~2%2006-07 17,377 1,441,125 82,933 3.42% 2.50% 3.75% ~2%2007-08 average 6.02% 2.73% 3.62% 2.65%Source: 2000-01 and 2001-02 Defence Annual Report and 2003-04 PBS

The percentage growth rates are nominal (not corrected for inflation) but we havelisted the actual and projected CPI, wages and implicit Non-Farm GDP Deflator(NFGDPD) rates for each year to allow comparison. The NFGDP deflator isimportant because it is the deflator used to maintain the buying power of Defencefunding. We have subtracted the 2003-04 administrative saving of $50 million fromthe civilian personnel expense in that year because the PBS says that the civilianpersonnel expenses have not yet been reduced for that impact. This will tend tounderestimate the civilian per-capita cost in that year.

Military per-capita TrendsStrong per capita cost growth in 2001-02 is followed by weak growth the followingyear below the prevailing CPI inflation rate. Then in 2003-04 we see a very rapidjump that far outstrips the 2% real per-capita boost provided by the White Paper.However, the seven year average delivers a nominal growth of less than 4% which iswithin the funds available from the projected price adjustment (NFGDPD) plus the2% real growth provision in the White Paper.

Civilian per-capita TrendsWe have calculated the projected civilian per-capita figures assuming that numbersremain at the 2003-04 level for the remainder of the forward estimates. This may notbe valid so it is best to focus attention on the period 2000-01 to 2003-04. The PBS p.179 explains the strong growth in civilian personnel expenses in 2003-04 as the resultof the full-year effect of the new Defence Employees Certified Agreement andchanges in the contribution rates for civilian superannuation. Even so, the nominalgrowth of 13.4% from 2002-03 to 2003-04 seems large compared with any crediblesalary increase. And the supplementation for increased superannuation costs in thisbudget was only $19.7 million, which does not make a significant difference (ofcourse it may be that Defence was only partially supplemented for this cost). Otherpossible explanations are the increased Comcover insurance premiums mentioned onp. 159 of the PBS and the payment of redundancy packages in the process of down-sizing the civilian workforce.

The 2001-02 Annual Report allows us to look in detail at the rapid growth comparedwith the previous year. We find that by far the greatest driver was a 17% increase insalaries and wages, due in small part to a disproportionate rise in the number ofcivilians at executive and senior levels Table 2.5.4. Overall though, we cannot claimto understand why civilian per-capita costs are rising so quickly.

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Personnel StructuresThe breakdown of ADF personnel by rank, and civilians by level, appears in Table 5.3of the PBS.

Military RanksAs the ADF has contracted over the last decade the number of officers has remainedmore or less constant so that the percentage of officers in the permanent ADF hasgrown from 17% to around 23%, Figure 3.5.4. The result is that there are now lessthan 3.5 enlisted men for every officer. In comparison, recent figures for the UK andUS are around 19% and 16% respectively although it should be noted that they bothhave very much larger ‘economies of scale’.

Figure 2.5.3: Permanent ADF Numbers as at 30 June 1989 - 2002

Source: Defence Annual Reports 1999-89 to 2001-02.

Generals and MandarinsThe recent trend in star rank, senior executive, and senior officer numbers is shown inTable 2.5.4. Changes in reporting account for the gaps and lack of earlier data.

Growth at the senior level has been strongest on the civilian side. Between 2000-01and 2002-03 the number of civilian senior officers increased by 14% while thenumber of civilian senior executives increased by over 24%. (Nevertheless the ratio ofSES to civilian officers is largely consistent with Australian Public Service normshaving been lower than average in the past.) Next year, the number of senior officerswill fall by 10% but the number of senior executives will only reduce by 1.5%.

The growth in military senior officers (Lt Colonel and Colonel ranks) between 2000-01 and 2002-03 was only 7% – half the growth rate exhibited by civilians. And thenumber of star rank officers remained largely static over the same period. Next yearthe number of senior military officers will fall by 1.5% and the number of star rankofficers will rise by 5%. Compared with similar sized militaries, the number of star-rank officers seems reasonable. For example, in 1996, the Canadian Forces (then61 600 strong) had 80 Star level officers and the Netherlands (then 53 500 strong) had112 Star level officers. However, such comparisons are problematic because ofdifferences in rank structure between armed forces.

Permanent ADF - Offices & Other Ranks

0

10

20

30

40

50

60

70

80

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Pers

onne

l 100

0's

Other Ranks

Officers

87

Table 2.5.4 Numbers of Senior Ranks and Executive Levels

1989–99Actual

1999–00Actual

2000–01Actual

2001–02Actual

2002–03Projected

2003–04Budget

CivilianSeniorExecutives

100 106 103 117 128 126

Senior Officers1 – – 3,317 3,554 3,767 3,396MilitaryStar Officers 110 – 120 119 122 128Senior Officers2 1,360 – 1,415 1,467 1,509 1,487

1 Executive Level 1 and 2 Levels.2 Colonel and Lt Colonel Ranks.

What’s going on with Professional Service Providers?In recent years there has been a steady increase in expenditure on Professional ServiceProviders (PSP) – contracted personnel that undertake specialist roles in Defence,Table 2.5.4. Unlike the remainder of Defence’s workforce their numbers gounreported and unlike consultants their remuneration is not reported, nor is theiraverage tenure.

Table 2.5.4: The Growing Cost of Professional Service Providers

The boost in 2001-02 may reflect the uncovering of PSP expenditure previouslyreported as capital investment, because the 2001-02 Annual Report saw around $250million of expenditure previously listed as capital investment reclassified as operatingexpenses. If this is the case, and we cannot be sure either way, it implies that a largeslab of spending on PSP has occurred within DMO.

While it is a routine part of modern business practice to contract in specialist skills itis worrying that such a rapid a growth in costs has occurring. Last year’s expenditureof close to $273 million is more than 45% of the claimed recurrent Defence ReformProgram savings that mainly came from personnel reductions. The question must beasked as to whether these positions are now being resurrected as more highly paidcontract staff? And more generally, does Defence have the skilled personnel it needs?

The 2003-04 PBS says that expenditure on overheads, including civilian personnelnumbers and professional service providers have been growing at unsustainablelevels, and has targeted unspecified reductions in these areas was part of a program ofadministrative savings.

Consultant and Professional Service Provider Expenses

050

100150200250300

1998-1999 1999-1900 2000-2001 2001-2002

$ m

illio

n

Professional Services Consultants

88

It is difficult to fault this new more disciplined approach, although reversing thegrowth in expenditure on PSPs and the recent increases in civilian numbers willrequire very substantial gains in productivity.

There is also an outstanding question of the demarcation between consultants andPSPs. The 2001-02 annual report goes to lengths to explain the difference betweenthe two categories on p. 268 prior to disclosing the details of the $7.4 million spent onconsultants during 2001-02.

However, a few moments on the Government’s Gazette web-site quickly reveals ahost of Defence contracts during 2001-02 listed as consultant services that did notmake in into the annual report. Indeed, without much effort we soon found twocompanies that together had received money under the heading of consultancyservices in the Gazette during 2001-02 totalling $4.8 million, of which less than$600,000 was disclosed in the Annual Report. Both companies were also listedelsewhere in Gazette as having provided professional services to Defence. No doubtfurther effort would have been rewarded with more examples.

It may be that the Gazette and Defence use different definitions of ‘consultancy’ and‘professional services’, if so they need to be aligned in the interests of consistentpublic disclosure.

Finally, increased transparency of the cost and employment of PSP is long overdue. Itis simply anomalous that consultants are reported in detail in the annual report, as arecivilian and military personnel numbers, but details of PSP employment remainundisclosed. The rapid growth in PSP expenditure and the confused public disclosureof consultancy work in Defence make this all the more imperative.

Whatever happened to the goal of 65% combat related personnel?

One of the outcomes sought by the Defence Reform Program was to boost thepercentage of combat and combat-related personnel in the ADF from the 42% thatprevailed in 1996 towards a goal of 65%. We think that this is both a laudable goaland an excellent measure of the efficient employment of ADF personnel.

Unfortunately, the last time a figure was given for the percentage of combat/combat-related personnel in the ADF was twelve months ago. Since then we have seenadditional combat personnel added for a variety of measures including the secondTactical Assault Group, the Incident Response Regiment and the additionalCommando Company; not to mention the overall growth in the size of the ADF whichhopefully has been focused at the sharp end.

Table 2.5.5 displays the publicly available figures that have been given in variouspress releases and the 2000-01 annual report. The shaded figure for 1991 has beencalculated using the quoted percentage and the actual average funded strength in1990-91 and 1991-92. We have not tried to fill in the other gaps because the impliedfigured often do not reconcile with the known ADF at that time.

89

As we pointed out last year, the claim made in the 2000-01 annual report that thenumber of combat positions in the ADF increased by 7,400 personnel is very difficultto reconcile with the number of positions made available by the DRP. Moreover, thedata released in May 2002 for the percentage 1991 shows a surprising drop in the sizeof the combat force between 1991 and 1996 although this may has been an outcomeof the Force Structure Review and the subsequent establishment of the now disbandedReady Reserve.

Table 2.5.5: The Teeth to Tail Ratio for the ADF

Year 1991 1996 1996 2000-01 Sep-01 May-02 May-03Media

Release219/02

MediaRelease385/01

AnnualReport2000-01

AnnualReport2000-01

MediaRelease385/01

MediaRelease219/02

?

ADF 68,402 - - - - 52,341Combat Force 27,361 24,000 31,700 - - -Percentage 40% 42% 42% 60% 62% 62.40% ?

It would be good to have visibility of how the combat force has grown since 1996 ona year by year basis including some idea of where the new positions have been added.Given the recent addition of combat positions in a number of areas there is probably avery positive story to be told.

If the goal of 65% were to be attained along with the White Paper target of a 54,000strong ADF, that would mean a combat/combat-related force of 35,100 which is anincrease of 11,100 on the number back in 1996.

90

91

SECTION 3 – THE COST OF WAR

Introduction

In recent years the cost of ADF operations has emerged as an important public policyissue. From the start of the INTERFET deployment in 1999 when a War Tax wasmooted, through the controversial use of major naval platforms in border protection in2001-02, to the war in Iraq in 2003, the question has become; what will it cost? Thischapter explores the issue of operational costs and tries to explain what goes intomaking up the figures which often total many hundreds of millions of dollars.

What do we mean by the cost of a war?

As a rule Defence is supplemented for the net additional cost of any major militaryoperation. This makes good sense because, in principle at least, it ensures thatDefence does not have to compromise peacetime training to fund operations andavoids them having to maintain a contingency reserve to cover unanticipated costs.

Figure 3.1 shows how the net additional cost of an operation is calculated. Often, allthat is disclosed is the aggregate net additional operating cost, the total value of newcapital investment and the amount recovered from 3rd parties. Rarely are theindividual components itemised and almost never are offsets identified.

Figure 3.1 Calculating the ‘Net Additional Cost of War’

NetAdditional

Cost ofWar

=Net

AdditionalOperating

Cost +

NetAdditional

CapitalInvestment

Where:

= − −Net

AdditionalOperating

Cost

Additionalcosts above

normalpeacetime

expenditure

Offsettingsavings dueto cancelledpeacetimeactivities

Costsrecovered

from3rd parties

Net additional operating costs include the additional cost of personnel allowances,shipping & travel, repair & maintenance, health & inoculations, ammunition,contracted support, fuel, inventory, consumables etc. Offsetting savings includemoney saved from foregone activities like the cancelled Exercise Crocodile 99 &Avalon Air Show in 1999/00 due to East Timor. Those costs recovered from 3rd

parties include the partial recouping of costs from the UN when participating in a UNpeacekeeping operation.

Net additional capital investment usually represents the accelerated filling ofcapability gaps specific to the operation. Recent examples include the purchase ofnuclear, chemical and biological detection equipment for use in the Gulf, and therapid acquisition of the Javelin missile for Afghanistan. The capital cost sometimesalso includes modifications to platforms and additional inventory purchases.

92

Finally, it’s worth being specific about what is not included. The net additional costof an operation does not include pay and allowances that would normally be incurred,nor does it include the cost of operating platforms within the planned peacetime rateof effort. Thus, aside from additional items like new equipment, ammunition,transport and contracted services, the net additional cost is the marginal cost ofincreased ADF activity due to an operation.

What does it all cost?

Table 3.1 lists the net additional cost of recent ADF operations as given in PBS,Annual Reports and testimony to the FAD&T Senate Legislative Committee. It’simportant to note that many smaller operations, and even the extensive support givento the Sydney Olympic games, occur without any supplementation.

The figures in Table 3.1 for East Timor exclude the ‘force generation’ costs includedin the original special appropriation. The original intention was that for the period ofthe deployment Defence would receive additional funds to increase Army and RAAFpersonnel numbers to 26,000 and 13,500 persons respectively to ensure that sufficientpersonnel would be available to sustain the rotation of troops in theatre. However, itwas subsequently decided in the 2000 White Paper to expand the size of the ADF toencompass these aforementioned additional personnel. Accordingly, the 2002-03 PBSsays that ‘from 2004-05 Defence will retain the $431m a year currently used togenerate and maintain the existing force levels raised for East Timor. This will ensurethat Defence can establish and maintain the Government’s commitment to an Armywith six full-time battalions, and an enhanced operational support group in Air Force’.The allocated funds and approximate additional personnel numbers appear in Table3.2. We have not tried to remove those additional personnel funded under separateinitiatives like the new Special Forces Command.

Table 3.2 East Timor ‘Force Generation’ Supplementation

Personnel NumbersFundingArmy Air Force Increase*

1999-00 DAR $97,994 24,089 14,0512000-01 DAR $339,024 24,488 13,471 1,9592001-02 DAR $383,863 25,012 13,322 2,3342002-03 (estimate) $431,000 25,624 13,625 3,2492003-04 (estimate) $467,000 25,941 13,400 3,341Target 26,000 13,500 3,500*These increases in personnel numbers are relative to the pre-White Paper baseline towards which theADF was being scaled back to in 1999; 23,000 personnel for Army and 13,000 for Air Force.

The UN reimburses countries providing troops and equipment to UN operationsaccording to a set schedule. The funds received by Australia for participation in theUNTAET peacekeeping mission to East Timor appear in Table 3.3 where the averagethen prevailing US-Australian exchange rate has been used to convert the figure toAustralian currency. These funds are returned directly to Government, which passesthem on to Defence through the supplementation provided for the operation.

As an aside, some developing nations actually gain net revenue through UNreimbursements for participation in peacekeeping operations. This is certainly not thecase for modern force like the ADF where the reimbursements are well below costs.

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Table 3.1 Supplementation Received for the Cost of Recent ADF Operations, $ M

OperationNet

AdditionalOperating

Cost

NetAdditional

CapitalInvestment

Duration(months)

Description

East Timor1999-00

429.7 70.4 9 A peak of 6000 personnel reducing to 1600 inJune 2000. Included 12 Blackhawk plus atroop of Kiowa helicopters, plus extensive airlift(Caribou and C-130) and sealift support.

East Timor2000-01

335.9 123.5 12 1610 personnel in theatre. Included 4Blackhawk and a troop of Kiowa helicopters,Caribou detachment plus airlift and sealiftsupport.

East Timor1

2001-02280.9 0 12 1470 personnel. Included Battalion Group,

troop of Kiowa helicopters plus airlift/sealiftsupport. (Blackhawk & Caribou use unknown.)

East Timor2002-03

195.12 0 12 1250 personnel. Included Battalion Group,troop of Kiowa helicopters plus airlift/sealiftsupport.

East Timor2003-04

260.72 0 12 As above.

Bougainville1998-99

233 0 12 Unknown number of personnel plusairlift/sealift.

Bougainville1999-00

18.33 0 12 Unknown number of personnel plusairlift/sealift.

Bougainville2000-01

40.23 0 12 176 personnel plus airlift/sealift

Bougainville2001-02

103 0 12 35 personnel plus airlift/sealift

Bougainville2002-03

10.13 0 12 35 personnel plus airlift/sealift

BorderProtection2001-02

12.4 6.3 10 Undisclosed but included Frigates, AmphibiousTransport Vessels, Patrol Boats, HydrographicVessels, P3C Maritime Patrol Aircraft, SpecialForces & other Army personnel.

BorderProtection2002-03

19.6 2.7 12 Undisclosed.

BorderProtection2003-04

12 Undisclosed.

War on Terror& MNIF2001-02

180 140 9 1100 personnel. Included 2 Frigates, 1 LPAAmphibious Vessel, 4 F-18 Fighters, 2 B707Air-to-Air Refuelling Aircraft, 2 P3C MaritimePatrol Aircraft, C-130 Transport Aircraft, 150Special Forces plus command elements.

War on Terror& MNIF4

2002-03

169 30 MNIF 9Afghan 3

1100 personnel. Included 2 Frigates, 1 LPAAmphibious Vessel, 2 P3C Maritime PatrolAircraft. C-130 Transport Aircraft, 150 SpecialForces plus command elements.

Iraq4 5

2002-03 to2004-05

412.5 232.2 unclear 2000 personnel. Included 2 Frigates, 1 LPAAmphibious Vessel, 14 F-18 fighters, 3 C-130Transport Aircraft, 2 P3C Maritime PatrolAircraft, 2 x Chinook helicopters, 500 SpecialForces, Clearance Diver Team plus commandelements.Reducing to 700 – 1200 personnel after 4months.

1 Estimated from figures in PAES & Defence Annual Report for 2001-02; 2 2001-02 PAES figures with $95.4million payback announced in 2003-04 PBS included. 3 Supplementation was not provided to Defence forBougainville in every year. 4 In March 2003 the Multinational Interception Force (MNIF) in the Gulftransitioned to the Iraq operation and along with it ADF assets. 5 Capital and operating components estimatedfrom available but incomplete data, and cash reserve spending has been included.

94

Table 3.3 UN Reimbursement for East Timor Operations

Year Reimbursement from UN1999-00 US$27.4 million = A$43.8 million2000-01 US$55.6 million = A$104.6 million2001-02 US$35.9 million = A$68.4 million2002-03 & 2003-04 -

Why do operations cost what they do? – What we know.

Aside from aggregate costs for individual operations very little is publicly availableon what goes into making up the figures. However, in answering a question on noticein February 2002, Defence provided a detailed breakdown of the net additionaloperating and capital costs of the first nine months of the War on Terror in 2001-02including the activities of the Multinational Interception Force in the Gulf. Theinformation is reproduced in Table 3.4.

Table 3.4 Net Additional Costs of the War on Terror 2001-02

Operating Costs $m

Deployment and travel allowances 46.2Additional inventory consumption (eg fuel) and maintenance 73.8Additional communications 11.5Deployment and airlift support to area of operations 44.0Additional health services 3.3Costs associated with Defence attache activity 3.9Identified offsets from within initiatives –2.7Subtotal 180Capital Costs

Nuclear, biological and chemical detection equipment for ships 134.2Electro-optic systems for all P-3C aircraft 14.9Identified offsets from within initiatives –9.1Subtotal 140Total Net Additional Cost 320

This information provides a valuable insight into the net additional costs incurred byDefence for the War on Terror in 2001-02. The net additional capital costs are self-explanatory being those additional pieces of equipment needed to provide the militarycapabilities sought for the operation (although it is unknown what the offsets mighthave been). The various components of the net additional operating costs listed aboveprovide a key to understanding such costs in general.

Personnel AllowancesA surprisingly large component of operational costs comes from the allowances paidto personnel. There is no set policy but the trend has been to pay $125 per day forpeace-making/keeping warlike operations, and $200 per day for higher intensityconflicts. These allowances translate into a monthly cost per thousand personnel of$3.8 million and $6 million respectively. On top of this, the Government has to forgotax revenue for ADF personnel operating in warlike conditions, but this is a problemfor Treasury not Defence.

95

Additional Fuel, Inventory Consumption and MaintenanceAny time that a plane, ship or vehicle is operated beyond its funded peacetime rate-of-effort additional funding is required to cover the cost of unfunded spares, fuel andcontracted maintenance. To a first approximation, a reasonable estimate of themarginal cost of operating equipment can be calculated via a pro-rata of annualspares, fuel and maintenance expenses. This is certainly sensible for small variations(up to 5%-10%) to the total annual rate-of-effort but can break down if thresholdsdemanding additional major servicing are required. And in an accrual budgetingcontext there are some subtle issues to be resolved as to which expenses to count.Perhaps this is why Defence does not make public the marginal cost of increasing, ordecreasing, the rate-of-effort of any of its platforms.

Sometimes the so-called ‘direct cost’, or alternatively the ‘full cost’, of operatingADF platforms is used in trying to independently estimate the cost of ADFdeployments. These costs come from Defence’s ‘Schedule of Rates and Charges’which is used to determine cost recovery levels when ADF platforms provide aservice to other parts of Government or third parties. Unfortunately, neither the‘direct cost’ nor ‘full cost’ equals the marginal cost of additional flying hours orsteaming days.

As near as we can determine, direct costs include the personnel time required to planand execute the task, fuel and rations, but critically not spares and maintenance. Incontrast, full costs include direct operational costs plus through-life expenses involvedwith the operation of an aircraft, including deeper maintenance and depreciation, aswell as a sizable component of embedded overheads. Thus ‘direct costs’ probablyunderestimate, and ‘full costs’ most certainly overestimate, the marginal cost ofadditional rates-of-effort. Indicative values of the ‘direct’ and ‘full’ costs assembledfrom a variety of sources appear in Table 3.5.

Table 3.5 Defence Cost Recovery Rates – Direct & Full

Equipment Direct Cost1

$/flying hour$/steaming day

Marginal Cost FullCost1

$/flying hour$/steaming day

FA-18 Fighter 7,912 - 55,033F-111 19,414 - 76,277C-130 4,133 - 17,269Chinook Helicopter 1,167 - -Anzac Frigate 215,479 - -FFG Frigate 279,826 - -LPA - - 480,228HMAS Tobruk - - 291,075

Sources: Responses to various Senate FAD&T Legislative Committee Questions, and ParliamentaryLibrary Current Issues Brief No. 24 2002-03 War in Iraq: Preliminary Defence and Reconstruction Costs.

Fortunately, it is not always necessary to provide supplementation for additional ratesof effort because operational activities often replace, rather than augment, peacetimeones. Consider Table 3.6 that shows the planned and actual rates of effort for the fourairborne workhorses of the INTERFET deployment in 1999-00 and the three aircraftused in the War on Terror and Border Protection operations in 2001-02.

96

Table 3.6 Impact of Deployments on Key Flying Hour Rates

Platform Budgeted PeacetimeRate of Effort(flying hours)

ActualRate of Effort(flying hours)

% Difference

1999-00 (period including East Timor INTERFET operation)Blackhawk 9,260 8,179 -11.67%Kiowa 8,985 8,379 -6.74%C-130 16,762 13,144 -21.58%Caribou 5,080 4,356 -14.25%2001-02 (period including War on Terror & Border Protection operations)C-130 14,000 13,102 -6.4%F-18 13,000 11,287 -13.2%P-3C 8,660 9,624 +11.1%Sources: Defence Annual Reports and Portfolio Budget Statements for 1999-00 and 2001-02.

Of the seven platforms listed in Table 3.6 only one exhibited an increased rate ofeffort despite all making significant contributions to operations. Consequently, onlythe P-3C would have constituted a cause for supplementary funding from theGovernment due to an increased rate of effort. Unfortunately, comparable figures arenot available for Navy vessels, although anecdotal evidence is that they regularlydeliver substantial numbers of additional steaming days in support of operations wellabove peacetime rates-of-effort.

Deployment – Sealift & AirliftAustralia has a limited strategic airlift capability and sometimes has to contract incommercial airlift to support operations. This can be expensive with a RussianAntinov aircraft costing in the vicinity of US$1 million for a single flight. Similarly,the ADF often makes use of commercial sealift. For example, in June 2001,whenasked to list all the shipping companies that had been used for transport between EastTimor and Australia, Defence listed fifteen contracts with a total value of almost $6.5million. At the same time defence had a $4.5 million contract in place for twelvemonths of air freight and passenger movement between Dili and Darwin. Fordeployments further afield, sea and air transport costs rise quickly.

Communications, Catering and other Contracted ServicesDefence often uses contracted services on operations when security considerationsallow. This can include such diverse items as garbage collection, catering, securityguards and communications infrastructure. Communications especially can be asignificant expense when bandwidth is purchased from commercial providers.Additional communications for the first ten months of the war on terror in 2001-02cost $11.5 million dollars.

Miscellaneous Expenses Including Health and Diplomatic CostsBehind every military operation there is a range of enabling steps that have to beundertaken. Troops need to be inoculated and arrangements need to be put in place todefine the legal status of deployed forces in foreign countries. For every operationspecific new costs will arise many of which are impossible to anticipate.

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Why do operations cost what they do? – What we don’t know.

While we understand many of the net additional costs incurred in ADF operations itremains unclear why some operations cost so much. Take for example the costsassociated with the East Timor UNTAET peacekeeping deployment. The averageannual expenditure for 2000-01 and 2001-02 was $308 million, which maintained anaverage of 1540 personnel in theatre. This equates to two hundred thousand dollarsper person per annum, or close to $550 per day per person.

On the basis of the discussion so far we can build up an independent estimate for thenet additional operating cost of the UNTAET deployment. Allowances for 1540personnel over a 12 months period comes to $70.3 million. We do not have anyfigure for the cost of food and provisions but assuming that it costs a generous $150per day per person this adds another $84.3 million. Given the known contracts let forfreight and transport there’s another $11 million. And assuming that communications,health and miscellaneous expenses are similar to the war on terror we can add afurther $20 million.

Fuel, spares and maintenance of the four Blackhawk and troop of Kiowa helicopterswill be but a small proportion of the $187 million spent on Army’s total fleet of 109helicopters and 5 fixed wing aircraft in 2000-01. Let’s assume that it accounts for agenerous 10% of the total cost or around $19 million. The net additional cost ofoperating Caribou transport aircraft can be ignored because they failed to achievetheir peacetime rate of effort by around 16% in both years. Although we have nofigure for vehicle running costs we do know that damage to equipment in 2000-01 inEast Timor cost $0.6 million and in February 2001 Defence said that 807 vehicles hadbeen repaired after returning from East Timor at a cost of $9.6 million. Accordingly,we will assume that vehicle repair & maintenance due to the East Timor costs around$10 million per annum.

These various cost components are brought together and compared with the fundsreceived by Defence to pay for the deployment in Table 3.7. Frustratingly, we canonly readily account for around 70% of the credited net additional cost reflected in thesupplementation received by Defence. And this is before we subtract the offsets dueto foregone training activities by the deployed force. Consequently, there must bevery substantial additional costs that our analysis has missed.

Or perhaps our estimate is closer to the mark than we had any right to expect giventhe very rough inputs. This budget announced a hand back to the Government of$95.4 million in East Timor supplementation for 2002-03. It may be that the initialestimates of net additional costs made back in 1999 were too large. After all, therewas no way of predicting in early 2000 just what the exact size and shape ofAustralia’s commitment to East Timor would be three or four years later. Moreover, itis likely that Defence has been refining its costing methodology in the meantime asmore experience has been gained. Of course, this then begs the question of how muchof the allocated supplementation was spent in 2000-01 and 2001-02, and moreimportantly, raises the question of what supplementation will be for 2003-04.

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Table 3.7 Estimated Average Annual Cost of UNTAET (East Timor) for 2000-01 and 2001-02

Cost Component Net Additional Cost($ million)

Allowances @ $125 per day per person 70.3Rations & Consumables @ $150 per day per person 84.3Freight & Transport 11Helicopter operating costs 19Vehicle operating costs 10Communications, Health & Miscellaneous 20Estimated net additional cost 215Average total supplementation 308Cost unaccounted for 93

Do we need to know more?

Yes, unless operational costs become more transparent we have no assurance thatDefence isn’t absorbing the cost of operations to the detriment of sustaining long-termcapability, nor alternatively can we be sure they are not receiving unnecessary funds.While security considerations limit the forward disclosure of anticipated costs indetail, there is no reason preventing a full and complete accounting of operations costsafter the event. This could easily be achieved by providing for each operation:

• A breakdown of costs as per Table 3.4 including a detailing of additional platformoperating costs and associated rates of effort; and

• An itemisation of offset savings including cancelled exercises and forgonepeacetime training activities, along with the amounts received from 3rd parties byway of reimbursement.

To assist in understanding the costs of operations it would also be useful to get someidea of marginal cost of additional flying hours and steaming days for ADF platforms– although as noted earlier this may be easier said than done. If this occurred, itwould help remove the sometimes misleading speculation based on the direct and fullcost rates from the ‘Schedule of Rates and Charges’.

Also, it would be very helpful if the annual number of steaming days for Navyplatforms was reinstated into the Annual Report. The current practice of reporting thenumber of ‘unit ready days’ is valuable but complementary information to the actualrate-of-effort achieved. If for no other reason than to understand the apparentlyincreasing demands being placed on Navy personnel by frequent operations, thenumber of steaming days is of legitimate public interest.

So what about the cost of the war in Iraq?

Given the uncertainty over what the $645 million to be spent on the net additional costof the war in Iraq does and does not cover (see Section 2.1), and the clear indicationthat this is in any case a preliminary estimate, it is probably not helpful to try anddissect the figures at this stage. That can await the refined estimate promised in the2003-04 PAES.

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SECTION 4 – IMPROVING DEFENCE BUDGET TRANSPARENCY

Introduction

The White Paper outlined a new approach to Defence funding and management that itclaimed would, among other things, provide an improved basis for accountability byDefence to Government and the public for the efficient and effective use of defencefunds (Defence 2000, p.120). It expressed the principle that ‘the public should havethe information required to assess the efficiency and effectiveness of the use ofdefence funds’. With that in mind, we proposed a series of options for improving thetransparency of the Defence budget in last year’s ASPI Defence Budget Brief. At thattime there was substantial room for improvement with the PBS giving only sparsevisibility of many important aspects of Defence spending

This year’s PBS is a very marked contrast. Not only has the amount of financial andperformance information increased substantially but also the presentation is clearerand more systematic than any before. We would like to think that we had some smallinfluence on the shape of these improvements, but it must be said that in some areasDefence has gone beyond the level of disclosure we suggested.

Nevertheless, this year we continue our focus on budget transparency by tracking theprogress to date and further exploring options for improvement. With $15.8 billion ofpublic money at stake its still worthy of close examination. In doing so, we arecareful to respect the limitations imposed by official secrecy and commercialconfidence.

Progress over the Last 12 Months

The improvements have been in four key areas:

• The Resourcing section of the PBS has been greatly expanded and betterpresented. The Total Defence Funding can now be read simply from a tablewithout any need for a separate calculation. The White Paper funding figures forthe decade are provided explicitly, and a reconciliation of budget measures andadjustments going back to 2000-01 has been provided. On top of this, the budgetmeasures and adjustments for the current year have been detailed and explainedmore completely that in the past. The complex funding arrangements for the Iraqconflict have been made clear and a good deal of effort has gone into explainingthe management of Defence’s cash reserves. Finally, the PBS even includes a veryhelpful discussion of different methods of presenting the budget as they appearelsewhere in the Commonwealth’s budget papers.

• The previous 29 Defence sub-Outputs, which were largely invisible, have beenelevated to the status of Outputs with a corresponding increase in disclosure. Thisis perhaps the most important improvement of the many that have occurred.

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• At the Output level the price is now broken down in terms of various expensecomponents rather then simply being presented as a single figure. This includesemployee expenses, suppliers (including inventory) and depreciation. At the sametime, activity rate performance targets for aircraft, and availability rateperformance targets for vessels, have been reinstated. In future years, as abaseline of data accumulates, this will allow trend analysis to be undertakenlinking activity and expenses.

• The Capital Budget is better explained than ever before and now includes abreakdown in terms of the actual capital investment programs, not just formalaccounting categories. Along with this, the top twenty projects have beensupplemented by a discussion of other significant major capital equipmentprojects.

In addition, the capital use charge has been discontinued thereby eliminating a highlyartificial construct that obscured much more than it ever informed.

Further Opportunities to Improve Budget Transparency

While laudable progress has been made in many areas, we still think some furtherimprovements are possible. In the remainder of this section we further developoptions for improving budget transparency.

Making the Goal Clear – The OutcomesA clear and content-rich statement of the Government’s intended outcomes is thefoundation of the whole outcomes and outputs framework. The framework cannotfunction unless the outcomes are expressed in terms which are clear enough to allowgenuine assessment of the extent to which they are achieved, and of the extent towhich outputs have contributed to their achievement.

Last year we argued that the single Defence Outcome The Defence of Australia andits National Interests was too general and unspecific to provide an adequatefoundation for the framework, and a basis for performance evaluation. Indeed, weargued that the single, broad outcome set out for Defence The Defence of Australiaand its National Interests was not much more than a feel-good slogan; and no basisfor a year-by-year evaluation of the success of the Defence organisation in doing whatthe Government wants.

This year there are seven Defence outcomes. The first six of which are little morethan a rewording of the previous six outputs, and the seventh covers administeredappropriations. In reality, little has changed. For example, the Output previouslyknown as Navy Capabilities is now designated the Outcome Navy Capability for theDefence of Australia and its Interests. Little has been gained in terms of clarity orusefulness at the Outcome level.

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At the risk of repeating what we said last year, a better approach would be torecognise that the Government has several different outcomes that it seeks from theDefence function. These outcomes need to reflect the slightly paradoxical nature of alot of Defence activity: the Government wants to maintain capable defence forces butdoes not want to use them. It would rather maintain an environment in which it doesnot need to use them. But when it does use them it wants them to be successful.

Developing a set of more meaningful outcomes for Defence would take a littlethought, but just to provide an example of what might be possible, we offer thefollowing suggestions:

• Having armed forces ready for operations to meet Australia’s needs;

• Maintenance of a favourable strategic environment; and

• The successful conduct of military operations as directed by Government.

Making Effectiveness Clear – OutputsLast year we reported on the substantial decline in Output and sub-Output levelinformation disclosed in the PBS since 1999-00. Pleasingly, this trend was reversedwith the release of the 2002-03 PAES and the improvements have been built uponsubstantially in the 2003-04 PBS. Table 4.2 details the level of output information thathas been disclosed over recent years. We ignore the material included under what isnow Output 7 for administered funds.

Table 4.2: Output Information Contained in the Defence PBS/PAES

Year Price Expensesdetailed

Dates forcompletion ofinitiatives

Quantitativeperformancetargets

Quantifiedpricevariations

1999–2000PBS

One for eachof 22 outputs

Yes, for eachof 22 outputs

Yes Yes, for manyof the22outputs

No

2000–01PBS

One for eachof 5 outputs

Yes, for eachof 5 outputs

Yes Yes, for eachof 28 sub-outputs

Yes, for eachof 5 outputs

2001–02PBS

One for eachof 6 outputs

No Some No Not quantified

2002–03PBS

One for eachof 6 outputs

No Some No Partial, foreach of 6outputs

2002–03PAES

One for eachof 30 sub-outputs

Yes, for eachof 6 outputs

Some Yes, for manyof the 30 sub-outputs

Partial, foreach of 6outputs

2003–04 One for eachof 29 outputs

Yes, for eachof 29 outputs

Some Yes, for manyof the 29outputs

Yes, for eachof 6 outcomes

Trend: Improved Improved Static Improved Improved

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While substantial improvement has occurred, there remain several ways to improvethe transparency of the Outcomes and Outputs including:

Provide More Information Down to the Output LevelThe disclosure of Output prices and performance targets in the 2003-04 PBS is apositive step forward in improving budget transparency. However, price variations,and the discussion of risks and risk mitigation, only appears at the Outcome level.

The Outputs constitute the basic building blocks of capability, and it is at that levelthat all financial and performance information should be given. Last year’s annualreport provided useful detail on the problems arising down at what is now the Outputlevel. It would be good if this same level of detail was included in the PBS in terms ofrisks and limitations. And similarly for the variations to price at the Output level.

Further Develop Measurable Output Performance TargetsPerhaps the most serious shortcoming in the 2001-02 and 2002-03 PBS was theabsence of quantified performance targets. Since then, both the 2002-03 PAES andthe 2003-04 PBS have reinstated many of the performance measures used in previousyears at the sub-output level. And the 2001-02 Defence Annual Report provided the2001-02 targets albeit after the event. This is a very welcome development. Withoutclear performance targets it is impossible to judge how well the organisation isperforming.

However, there is still some scope for further development in the areas of activityrates, availability rates and preparedness targets. We explore these possibilities below.

Activity RatesAlthough we now have targets for the number of ‘flying hours’ for ADF aircraft, nosimilar targets is given for the number of ‘sea days’ planned for Navy vessels nor‘track miles’ planned for Army armoured vehicles. In the case of Navy it was routineto provide targets for both the number of sea days and vessel availability prior to1997-98. All that we have today is a target for the number of Unit Ready Days(URD) which refers to the time that a vessel is able to perform in accordance with itsdesigned capability, whether it does so or not. That is, availability not activity.

There are three reasons to introduce activity rate targets for Navy vessels in terms ofdays spent at sea, and for Army armoured vehicles in terms of ‘track miles’:

Firstly, activity performance targets relate directly to the accrual framework whichitself focuses on activities rather than cash. Many of the expenses that appear in theStatement of Financial Performance will rise and fall with activity levels.Consequently, visibility of activity levels is ‘the other half of the equation’ inunderstanding the financial statements. As discussed in Section 3, this is particularlyimportant when assessing the additional cost of deployments.

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Second, activity rates can be a useful pointer to management problems and issues. Forexample, in 2000–01 Navy planned to undertake 4450 Seahawk helicopter flyinghours in a year but only achieved 73% of that target. This indicated that Navy had notachieved some 1189 hours of training and exercises previously deemed necessary forthe delivery of their output. Unless some more efficient way of delivering the outputwith less flying hours had been found, it was difficult to escape the conclusion that theoutput has not been delivered in full. In fact it transpired that there were problems inpersonnel shortages including insufficient instructors.

Thirdly, and somewhat specific to Navy, the numbers of planned versus achieved seadays is a direct measure of the additional demands being shouldered by the men andwoman of the RAN (and their families) when operational demands boost time at seaas has occurred over the past few years.

Availability RatesWith the use of URD targets for Navy ships and submarines, we now have a measureof the availability for tasking within planned readiness requirements. This isimportant because it measures the effectiveness of Navy’s personnel, training andlogistics systems in maintaining vessels and their crews ready for action. For exactlythese reasons the same sort of measures should be applied to ADF aircraft andarmoured vehicle based capabilities, and indeed to any unit that has a preparednessgoal.

Moreover, the acquisition of capabilities is increasingly moving towards specifyingthe average number of platforms to be mission capable per day. This is how both theAerial Reconnaissance & Fire Support Helicopter and Hawk Lead-in-Fighter projectsdefined their goals. If this is how we are going to specify future capabilities, it makessense to plan, measure and report against similar targets.

Table 4.1 draws together proposed performance measures for various ADF platformsin terms of activity and availability targets.

Table 4.1: Possible Activity and Availability Rate Measures for ADF Platforms

Platform Activity Rates Availability RatesShips & Submarines sea days per annum vessels FMC days per annum*Planes & Helicopters flying hours per annum* aircraft FMC per day per annumArmored Vehicles track miles per annum vehicles FMC per day per annum

* Performance measures currently used in the Defence PBS and Annual Report.

Preparedness TargetsPreparedness is a capability’s readiness to under take and sustain operations. It isperhaps the key deliverable for the Defence organisation.Explicit in the PBS, and explained in detail on page 186, is that preparedness ismeasured relative to the targets in the Chief of the Defence Force’s PreparednessDirective. A qualitative assessment of preparedness achievement at what is now theOutput level was included in the 2000-01 and 2001-02 Annual Reports. And thisyear’s PBS includes some of the very general preparedness goals for Army Outputs.

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Security considerations would inhibit the publication of very much more detailedpreparedness targets and achievements, but there is probably room to expand thisgeneral approach to the Navy and Airforce outputs.

Finally, we would encourage the option of providing classified preparedness targetsand performance information to Parliamentary Committees, as occurs in the USCongress. This would require some detailed development as a policy proposal.

Making Efficiency and Accountability Clear – The GroupsGroup financial and personnel data been absent from the PBS since 2000-01. And inJune 2002 Defence refused point blank to provide the Senate Foreign Affairs, Defenceand Trade committee with Group budget information, citing that Group budgets are aninternal management mechanism not used for performance measurement andreporting purposes.

This is disappointing. Many Defence Groups are larger than most Commonwealthagencies, and it is within the Groups that most management decisions are made andaccountability lies. But their budgets, staffs and performance targets are not reportedto the public.

For example, we think that the Defence Science and Technology Organisationconsumes something like $250 million a year – but we are only guessing. This iscomparable to the current funding for the Australian Research Council. Yet the PBSincludes only seven vague dot-points on p.15 to explain how that money will be spent.Defence’s initiatives for Science, Technology and Industry make no mention of whatthey might cost or what the Research and Development budget is. In contrast, othernations look to their investment in military Research and Development as a keymeasure within the make up of Defence spending.

In fact, the groups are the real business units of Defence. Quite simply, withoutpresentation of group financial, personnel and performance targets, it is very difficultto assess the efficiency of Defence at other than the most aggregate level. To make acommercial analogy, Defence is a sole-source provider and there needs to be an ‘openbook’ contract to ensure value-for-money.

Ultimately, the absence of a benchmark for the price of Defence outputs, anyassurance of efficiency must reply on an analysis of group performance.

Options for the presentation of group information include:

• Reinstate the dual presentation of groups and outputs that was provided in the PBSof 1999–2000. This included much useful discussion of the financial interrelationbetween groups and outputs. But that presentation could be expanded to includepersonnel, financial and performance targets for the groups, based upon theorganisational performance agreements described on page 162 of the PBS.

• Use the Customer Supplier Arrangements that are being set up in Defence toprovide transparency of the services provided to the output groups by the enablinggroups. This would yield a powerful insight into the delivery of in excess of$5 billion of services to the outputs.

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Making Investment ClearThis year’s PBS provided a very valuable and systematic description of the financialaspects of the Capital Investment Program, and there was also an expansion of thematerial provided covering individual major capital equipment projects.

Nevertheless we think that the presentation of Defence’s budget would be greatlyimproved by the development of a uniform program of performance targets for themajor capital equipment investment program. In this regard we agree with therecommendation of the Senate Foreign Affairs, Defence and Trade Committee 2003Inquiry into Material Acquisition and Management in Defence that:

The Senate requests the auditor general:

(a) To produce, on an annual basis, a report on progress in major defence projects,detailing cost, time and technical performance data for each project;

(b) To model the report on that ordered by the British House of Commons andproduced by the UK Comptroller and Auditor General; and

(c) To include in the report such analysis of performance and emerging trends as willenable the parliament to have high visibility of all current and pending majorprojects.

The latest report by the UK Comptroller and Auditor General can be found athttp://www.nao.gov.uk/publications/nao_reports/.

In another recommendation the Committee recommend that during Budget Estimatesthe DMO table before the Senate FAD&T Legislative Committee an audited summaryof the feedback provided by industry to the DMO via the 360-degree scorecardprocess. We think this is an excellent idea.

Making the Personnel Picture ClearThere are four ways that the presentation of personnel information could be mademore transparent in the PBS:

• Details of ADF permanent, Reserve and Civilian personnel should be available foreach output;

• Recruiting and retention targets for the upcoming year could be given. Andreported figures should identify separations that are management initiated;

• Targets and expenses for the planned use of ‘professional service providers’ couldbe given to complete the workforce picture; and

• The planned combat/combat-related component of the ADF for the upcoming yearcould be given on the basis of the 1996 DRP baseline. This would help trackprogress towards the Government’s goal of a 65% combat force.

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SECTION 5 – TOP 20 PROJECTS

Complied by:

Gregor FergusonDaniel CotterillTom Muir

Editor and Senior writers of Australian Defence Magazine

Contents

1. Airborne Early Warning and Control (Air 5077)

2. Air to Air Weapon Capability (Air 5400)

3. Air to Surface Stand-off Capability (Air 5398)

4. ANZAC Ship Project (Sea 1348 Phase 2)

5. ANZAC Ship ASMD Upgrade (Sea 1448)

6. ANZAC Ship Helicopter (Sea 1411)

7. ANZAC USWUP (Sea 1348 Phase 3)

8. Armed Reconnaissance Helicopters (Air 87)

9. Australian Light Armoured Vehicle - ASLAV (Land 112)

10. Bushranger (Land 116)

11. Collins Capability Improvements/Augmentation (Sea 1439/1446)

12. E-Defence (JP 2054)

13. Evolved SeaSparrow - (Sea 1428)

14. FFG Progressive Upgrade (Sea 1390)

15. High Frequency Modernisation (JP 2043)

16. Jindalee Operational Radar Network - JORN (JP 2025)

17. Lightweight Torpedo - (JP 2070)

18. M-113 Upgrade (Land 106)

19. Military Satellite Communications - Milsatcom (JP 2008)

20. Minehunter Coastal (Sea 1555)

21. P-3C Upgrade Implementation (Air 5276)

22. Replacement Patrol Boat (Sea 1444)

Caution: inflation and currency exchange rate fluctuations can result in apparentchanges in budget values without necessarily a change in project scope and cost inreal terms.

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Airborne Early Warning and Control

(Air 5077)

Project Overview and Key Issues:

The airborne early warning and control (AEW&C) aircraft to be acquired by Australiaare based on Boeing’s 737-700 twin-engined airliner fitted with a radar of over 400kmrange being developed by Northrop Grumman.

Airborne radar can see much further than ground based systems in much the sameway that a better and more distant view is obtained from the top of a hill.

Operating the radar at an altitude of 10,000 metres or so results in coverage of a largearea such that enemy aircraft are detected early and cannot launch a surprise attack byflying in low beneath the coverage of ground based radar systems. Mounting the radaron a fast moving, long-range aircraft also increases its coverage and the system’soverall flexibility.

The control function is crucial to the overall AEW&C system’s effectiveness.Airborne controllers aboard the AEW&C aircraft will be able to direct fighters andother ADF assets, thus maximising the fighting power of a modest defence force.Hence the AEW&C system is seen as a crucial force multiplier.

It was originally intended to buy six AEW&C aircraft but this was reconsidered in thelead-up to the 2000 Defence White Paper and the contract covers four machines withoptions for up to a further three.

Critics of this decision suggest that Australia is now buying four aircraft for the priceof six as the high level of non-recurring development expenses has pushed up the unitprice. However, six sets of AEW&C equipment are part of the initial order, indicatinga strong likelihood that two more aircraft will eventually be procured.

The cost to purchase aircraft five and six is $US175 million for the pair, while the costto purchase aircraft seven will be a maximum of $US250 million. A decision onexercising these options is due no later than June 2003, but according to Defence nodecision has yet been made.+

The project’s budget approval in 2000 was $3,110.5 million and is currently $3,623million.* The project budget is adjusted yearly to compensate for movements in thecost of labour and materials and foreign currency exchange rates (principally againstthe US dollar), and according to Defence this is the sole reason for the variation fromthe original approval.

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Any large and technically complex military procurement project carries an element ofrisk and AEW&C is no exception. Major airframe modifications are necessary to fitthe radar, but the most challenging area is likely to be in the development of the radarand mission system computer software.

Recent project achievements include delivery of the first unmodified aircraft inOctober last year, completion of the airborne mission segment design last December,and commencement of modification of the first aircraft in April this year. Milestonesexpected over the coming year include delivery of the second unmodified aircraft,delivery of the first radar, finalisation of modifications to the first aircraft, completionof the mission support segment design, and construction of the No 2 SquadronHeadquarters building at RAAF Base Williamtown. Air 5077 has been running aheadof schedule in many areas.

Australian Industry Involvement (AII):

Under the original plan to buy six aircraft, five of them would have had the necessaryairframe modifications performed here by Boeing Australia. However, the reducedscope of the project saw this opportunity lost and this work will now be conductedexclusively in the US.

Boeing Australia and BAE Systems Australia are the main local companies involvedin an AII program that comprises over $400 million in local content and over $800million in strategic industry development activities. While a specified percentage hasnot been set, the local content program represents about 18% of the contract price.

+Sep 98 price, which is the original Contract baseline plus project costs. After June2003, additional AEW&C aircraft can still be purchased, but at a price to benegotiated based on the commercial price at the time.*Additional Budget Estimates 2002/03

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Air to Air Weapon Capability

(Air 5400)

Project overview and key issues:

The Air to Air Weapons project was established to enhance dramatically the combatcapabilities of the RAAF’s fleet of F/A-18A/B Hornet fighters. Under this projectDefence has ordered the AIM-132 Advanced Short Range Air to Air Missile(ASRAAM), manufactured by MBDA in Europe, and AIM-120B and AIM-120CAdvanced Medium Range Air to Air Missile (AMRAAM), manufactured by UScompany Raytheon.

These weapons will replace the Hornets’ original but now obsolescent armament fit ofshort-range AIM-9M Sidewinder and medium-range AIM-7M Sparrow missiles,respectively. The Hornets were in danger of being outclassed by regional air forcesoperating or ordering advanced western aircraft such as the F/A-18C/D/E/F and F-16C/D, and Russian aircraft such as the Mig-29 and Sukhoi-27 armed with Russia’sformidable inventory of short and medium-range air to air missiles.

To restore and maintain the RAAF’s regional capability edge until the Hornet retiresin 2012-2015, the Hornet upgrade project (Air 5376) is implementing the radar andavionics changes necessary to exploit the full capabilities of both AMRAAM andASRAAM. These weapons and associated platform improvements will transform thecombat capability of the Hornets, re-establishing their regional primacy until theirplanned retirement date.

The RAAF bought the AMRAAM from the US Air Force under a Foreign MilitarySales (FMS) purchase deal. This is a faster, more agile and longer-range weapon thanthe Sparrow with a more advanced guidance system. Integrated with the upgradedHornet’s new Raytheon APG-73 radar, it is a true ‘fire and forget’ weapon, whichallows a single aircraft to engage several adversaries simultaneously from a far greaterdistance than was possible before. AMRAAM has been proven repeatedly in combatservice with the US Air Force, Navy and Marines and with the UK’s Royal Navy andAir Force.

Deliveries of the AIM-120B missile are complete and this is now in operationalservice, while deliveries of the AIM-120C variant are currently under way. Theslightly enhanced AIM-120C incorporates minor aerodynamic modifications so somefinal verification test flights will be required this year before it is declared operational.Singapore, Thailand, Korea, Japan and Taiwan are other AMRAAM users in ourregion.

The RAAF ordered the ASRAAM in 1998 from European missile house MBDA (oneof whose shareholders is BAE Systems) in a commercial contract of undisclosedvalue.

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The ASRAAM is much faster than the Sidewinder, more agile, with a considerablygreater range and is far more resistant to counter-measures and decoys. It is alsodesigned for use with a helmet-mounted sight, which confers an added advantage indogfights; the RAAF will acquire a helmet-mounted sight as part of the Hornet HUG.

ASRAAM is the first guided weapon acquired in the last generation to whichAustralia has been granted full technology access. The UK and Australia willcollaborate on future development of the missile to allow both partners to fieldenhancements faster and cheaper.

Deliveries to the RAAF were delayed for approximately 18 months by a contractualdispute between MBDA and the UK Ministry of Defence in early-2001 overASRAAM’s performance. The RAAF has slightly different performance requirementsfrom the UK, but wants missiles of the same software configuration and buildstandard.

A Dispute Resolution Agreement (DRA) struck in January 2002 enabled ASRAAMdeliveries to the UK MoD, and the Royal Air Force declared the missile operational inJanuary this year, in time to serve during the Iraq campaign. MBDA will deliverincremental enhancements in missile performance through successive software loads.

The Commonwealth and MBDA have agreed a revised delivery schedule and amissile configuration based on a planned RAF software configuration, which meetsthe RAAF’s requirements. The Commonwealth will begin formally evaluating theperformance of the ASRAAM capability offered by MBDA in July this year (2003).This process, including RAAF live test firings at Woomera, is expected to take somemonths, with production deliveries due to begin in late-2003.

The RAAF is the first export customer and the first Hornet operator to orderASRAAM. The project cost included a lengthy integration and flight test process, byHornet manufacturer Boeing in the US, supported by the US Navy, and by the RAAFin Australia.

Australian Industry Involvement (AII):

AII Target: AMRAAM – none. ASRAAM: MBDA and its Australian sub-contractorBAE Systems Australia are developing a proposal to establish and operate a missilesupport facility, most likely in Adelaide, including a software support and computermodelling centre to facilitate weapon enhancements in partnership with DSTO; thecompany will also carry out maintenance and integrated logistic support of theweapons. A decision on these in-country capabilities will be made towards the end ofthis year.

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Air to Surface Stand-off

Capability (Air 5398)Project overview and key issues:

This project is acquiring and fielding the AGM-142 medium-range air to surfacemissile which will allow the RAAF’s F-111C strike aircraft for the first time toengage targets with great accuracy from ‘stand-off’ range – that is, from safelyoutside the range of most targets’ own defences, so reducing risks to both aircraft andcrew.

Delays incurred integrating the missile and its data link with the F-111C airframe andmission computer have pushed back the in-service date by several years to late-2004;this date hasn’t slipped further in the past 12 months. However, some of this delay canbe attributed to mission system software and aircraft wiring modifications, which willenable the F-111 to carry future generations of stand-off weapon as well as the AGM-142.

The AGM-142 is a 1,363kg rocket-powered missile designed by Israeli armamentscompany Rafael and manufactured in the US under a joint venture agreement withLockheed Martin. Already in service with the Israeli Defence Force and the US AirForce, the missile can use either a blast/fragmentation or a penetrating warhead; theseare selected and fitted before take-off to suit the target. It has an imaging infra red(IIR) guidance system for day and night operations. It can be used in the ‘fire andforget’ mode, or steered to its target by the aircraft navigator via a secure data link. Itsexact range is classified but is in the tens of kilometres.

Once in service the AGM-142 will significantly increase the striking power of the F-111C fleet while reducing its vulnerability to modern air defence weapons. Except forthe more expensive Boeing Harpoon anti-ship missile which arms its F-111Cs and P-3C Orions, the RAAF currently has no air-to surface stand-off missile capability ofany kind.

During the 1990s Air 5398 laboured under the weight of an earlier plan to acquire afamily of stand-off weapons, optimised for different types of target, in successivephases of the project.

Acquiring and fielding an armoury of weapons able to attack point targets on land,ships at sea, ground-based radars and communications sites, semi-hardened targetsand area targets would have resulted in an expensive and diverse weapons inventoryand high non-recurring acquisition and integration costs.

Most of these successive phases were transferred in 1998 to a separate Follow-OnStand-off Weapon (FOSOW) project whose year of decision is 2004/05.

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The slimmed-down Air 5398 saw the RAAF order an undisclosed number of AGM-142 air-to-surface missiles from the US Air Force under a Foreign Military Sales(FMS) agreement in December 1998 to arm its F-111Cs. This will be the RAAF’sonly multi-role stand-off weapon until the FOSOW enters service in or after 2008.

One of the biggest challenges for the RAAF has been to modify the F-111C strikeaircraft to operate both the AGM-142 and the subsequent FOSOW family of weapons.This process has been slow and expensive. To launch and guide these missiles, the F-111C requires additional wiring to the aircraft hard points as well as integration of theAGM-142’s own software and associated data link pod with the aircraft’s missioncomputer. This is the first time such a complex integration task has been carried outentirely in Australia. Boeing Australia Ltd is prime contractor for the integration workat Amberley.

Australian Industry Involvement (AII):

There were no AII targets associated with the acquisition of the missiles themselves;however, their integration with the F-111C represents an important investment in thedevelopment of indigenous software and aerospace engineering skills necessary toupgrade the F-111C, of which the RAAF is now the sole operator, and maintain andsupport new capabilities through their life of type.

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ANZAC Ship (Sea 1348 Phase 2)

Project overview and key issues:

The ANZAC Ship project has been a genuine success story for Australia’s defenceindustry, but overshadowed by widely publicised problems afflicting other high-profile acquisition projects. The ship acquisition project was established in the late1980s to replace the RAN’s six River-class Destroyer Escorts with eight modernfrigates, but of similarly modest capability, and to build them in Australia.

Following competitive tenders for two different ship designs, the German MEKO 200and the Dutch M class, a contract was awarded in 1989 to what is now Tenix DefencePty Ltd to build ten ships to a modified MEKO design, including two for the RNZN.(New Zealand did not exercise an option to buy ships 11 and 12 at the end ofproduction.) ANZAC ships are being assembled at the company’s dockyard inWilliamstown, from modules built elsewhere in Australia and New Zealand.

At 3,600 tonnes displacement the ANZAC is somewhat larger than the standardMEKO 200 platform and its combat system specified by the RAN is unique to theANZAC class. The ships were armed originally with NATO Sea Sparrow short-rangeair defence missiles and a 127mm (5-inch) gun. The mix of imported sensors andweapons is integrated with a Swedish-designed tactical data system that wasextensively developed in Australia by what is now Saab Systems.

The ships’ modest combat capabilities were limited by the ceiling price of $3,807million and left the question of the ships’ undersea and surface warfare capabilities tobe further considered – in the jargon of the time they were ‘fitted for but not with’more capable weapons and sensors.

Subsequent capability enhancements include equipping the ships with the Nulkaactive missile decoy and the more capable NATO Evolved Sea Sparrow Missile(ESSM) - an ESSM was successfully fired from HMAS Warramunga earlier this year- and current upgrade programs include provision for Anti-Ship Missile Defence(ASMD), yet to be approved and additional undersea and surface warfare capabilities,the former under a separate project. The acquisition of Super Seasprite helicoptersunder another project (now experiencing software delays) will enhance the ships’surveillance and surface and anti-submarine warfare capabilities.

Six ANZAC ships are in service with the RAN and RNZN, Ship 06 (Stuart) wasdelivered in June 2002, Ship 07 (Parramatta) is fitting-out and will be delivered inJune this year, Ship 08 (Ballarat) will be delivered in July '04 while Ship 09 is ontarget for delivery in July '05. Ship 10, the last of class, is scheduled for delivery inJune 2006.

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Ship 07 Parramatta will be the first to be fitted with the new Centaur ElectronicSupport Measures (ESM) system. The system will be retrofitted to all delivered shipsby December 2004 and fitted to the remainder during construction.

Tenix Defence and Ship Designer Blohm + Voss (Germany) have developed asolution to the bilge keel cracking in the ANZAC Class. The solution has beencompleted on all delivered ships and will be implemented on ships 07 – 10 duringconstruction. The Shipbuilder has fitted strain gauges inside the bilge keel to provideverification that the new design will last the contracted life of the ships. Thisverification process is being supported by DSTO.

While costs have been held in general through minimising major design changes, thedelivery schedule has slipped by mutual agreement between customer and contractorto incorporate new capabilities and legitimate claims for delay under the contract.

By any standard the ANZAC Ship Project has been successful. Price and quality havebeen held to contract standards and there have been few problems of any significance.Much of this success has been due to the very close interaction of contractor andcustomer.

Australian Industry Involvement (AII):

For this major shipbuilding activity Australian New Zealand Industry Involvementhas been of critical importance, with a core industrial capability established forproduct through life support and the 70 per cent local content target has been achievedto date. Studies sponsored by the DMO and Australian Industry Group (AIG)identified significant capability and national economic benefits from building theseships in Australia.

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ANZAC Ship ASMD Upgrade

(Sea 1448)

Project overview and key issues:

The Anzac ship class was initially contracted with a modest surface and underwaterself-defence capability limited by the ceiling price, leaving the ships’ future surfaceand subsurface warfare capabilities to be considered later. The Anti-Ship MissileDefence (ASMD) upgrade program (and a separate Undersea Warfare UpgradeProgram) address these limitations with the objective of enhancing the ships’capability against current and medium term threats.

An earlier attempt to define and implement a comprehensive upgrade for the Anzaccombat system, the Warfighting Improvement Program (WIP), was based oncombining Anti Ship Missile Defence with an Area Air Defence capability, includinga potential growth path to such capabilities as Theatre Ballistic Missile Defence,which would have transformed the Anzacs from frigates into major warships.

WIP failed because it was over-ambitious for the platform, the contractors employedas a team to define the requirement were clearly competing with each other for theirsolution, and funds were simply not available. But important lessons were learned andDefence initiated a combined Defence/Industry study to assess the feasibility andeffectiveness of several capability options, focussing on defence against missileattack, a major capability shortcoming of the Anzac. DSTO then assessed theproposed enhancements in more stressing environments using simulation andmodelling techniques. The study product was input into the Defence decision process.

The Anzac Alliance, comprising the Commonwealth, Tenix Defence and SaabSystems, was tasked with implementing the findings of the study and to determine ifthe modelled capability could be procured, integrated, introduced into service andsupported within the program budget and, subject to future approval, implemented.

The ASMD project could include the addition of the following: an Infra Red Searchand Track (IRST) missile detection system that detects thermal energy radiated bymissiles; a capability enabling near simultaneous launch of more than one EvolvedSea Sparrow Missile (ESSM) against identified incoming threats, referred to as asecond channel of fire; a very short range air defence missile (SHORAD) system as asecond defensive layer; and an option to upgrade the existing SPS-49 surface searchradar to improve its small target detection and track capability. Link-16 will beinstalled under a separate project.

The ships’ existing tactical data system, built by Saab Systems, will require furtherdevelopment to enable it to integrate the functionality of the new equipment andprocess the increased information flow. The Anzacs’ Nulka active missile decoy andother decoy systems are retained.

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The Alliance last year issued tenders for the IRST and the SHORAD missile systemand will draw on the SPS-49 radar upgrade under the FFG Upgrade Program.Enhancements to the tactical data system will be carried out in-house by the Alliance.

Following evaluation of responses the Alliance sought comment from DSTO on theshort listed equipment prior to seeking and receiving endorsement by the DefenceCapability Committee last year. Approval to proceed with the ASMD implementation,including funding for the purchase of long lead items, now depends upon the reviewof the Defence Capability Plan.

Australian Industry Involvement (AII):

As would be expected there will be considerable involvement by Australian industryin the ASMD program through the integration, development, test and verification ofthe capability using existing shore-based facilities operated by the Alliance membersTenix and Saab, and in the installation and through life support of equipmentincluding software maintenance.

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ANZAC Ship Helicopter (Sea 1411)

Project Overview and Key Issues:

Defence is in the process of acquiring 11 Seasprite helicopters for its eventual fleet ofeight ANZAC Class frigates. The helicopters are to enhance the ships’ surveillanceand offensive capabilities and are equipped with radar and other sophisticated sensorsalong with torpedoes and anti-ship missiles. Flight simulator and support facilities arealso being acquired.

Deliveries of fully compliant aircraft were to have commenced in late 2000 and becompleted by August 2001. Currently, 10 of the Seasprites are in Australia with fivehaving been fully assembled and completed post-production test flying. The other fiveare still in various stages of assembly and testing while the eleventh aircraft isengaged in a software test program in Connecticut, USA. The delivery of fullyfunctional helicopters will begin in December 2004#.

The main cause of the delay is the failure of major sub contractor Litton IntegratedSystems to successfully develop the integrated software package necessary to run thesensors, avionics and weapons. The radar, datalink capability and the Penguin anti-ship missiles are not yet integrated with the mission control system. Without thissoftware the helicopters cannot fulfil their intended role.

Progress is being made, however, and there is optimism that initial flight trials andtraining could begin in August this year, and possibly initial shipboard trials as wellon HMAS Stuart using build one software. Defence is currently briefing governmenton its options.

The main criticisms of this project have been that Defence’s project managementteam should have prevented this state of affairs, and that the contract should have hadmore effective penalty clauses to encourage contractor performance. Defence pointsout however, that it was prime contractor Kaman Aerospace International’s job tomanage Litton, and that it was the Defence project team which advised Kaman ofproblems with subcontractor performance early in the contract execution. The realproblem was more to do with the suitability of the chosen prime contractor andcontracting strategy for this highly developmental, software-intensive project.

Head of the Defence Materiel Organisation, Mr Mick Roche, told a Senate EstimatesCommittee last year that "…the contract is not the sort of contract that we would wishto draw up these days”.A broader question is whether Defence should seek to buy “Australia only” solutionson projects like this with only a small production run; a path that incurs significantdevelopment costs and increases exposure to high levels of technical risk.

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According to Defence the aircraft will be delivered late but will achieve 100% of therequired capability. However, challenges remain to be overcome before the originallyspecified capability can be achieved.

Australian Industry Involvement (AII):

Kaman is teamed with Tenix Defence, CSC Australia, Scientific ManagementAssociates and Safe Air NZ. CSC Australia and Northrop Grumman InformationTechnology of San Diego have taken over the major software sub-contract abandonedby Litton and are providing systems engineering and software development andsupport.

Scientific Management Associates’ involvement covers logistics analysis and supplysupport functions, and providing training and documentation. Safe Air of NewZealand is providing design services, aircraft assembly, maintenance and overhaul.Safe Air will also design and manufacture aircraft ground support equipment.

The contracted AII obligation is $A 229.7 million and Kaman are reportingachievement to date of $A188 million with projected achievement of $A310.8million.

The RFT for the project was issued in October 1995, a source selection made inJanuary 1997 with a contract signed in June that year. The original project budget was$745.6 million in February 1996 dollars and currently stands at approximately $1030million.* The difference is due to price and exchange rate fluctuations.

# After aircraft acceptance in Dec 04 there is a requirement to conduct both contractorAT&E and Naval OT&E. Acceptance into Naval Service may occur in 2006 and isdependent on ship and weapons range availability.

*Current budget figures from Seasprite project office

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ANZAC USWUP (SEA 1348 Phase 3)

Project overview and key issues:

This project covers improvements to the surface and anti submarine warfarecapabilities of the ANZAC frigates operated by the Royal Australian Navy.

Sea 1348 Phase 3 was approved in 1997, at a value of $146 million in December 1997dollars, and covered four separate capabilities for the ANZAC ships within itsapproval. These were:• Harpoon anti-ship missile system, including the fire control system and

canisters for each ship (the missiles were procured under JP1);• Torpedo Self Defence;• Mine and Obstacle Avoidance Sonar; and• Integration of the torpedo tubes to enable the ships to fire lightweight torpedoes.

The Shipbuilder, Tenix Defence, was engaged to undertake preliminary studies intothe implementation of all four capabilities. Revised cost estimates developed throughnegotiations between Defence and Tenix in early 2001 indicated that the project wassignificantly under-funded. Further investigations were undertaken to find a way todeliver all four capabilities within the approved project cost, however this was notachievable.

Consequently, the integration of the torpedo tubes was removed from the scope of theproject and is now being pursued through a separate project (JP 2070), and the otherthree capabilities were split into separate sub-phases:• Phase 3A Harpoon;• Phase 3B Torpedo Self Defence System; and• Phase 3C Mine and Obstacle Avoidance Sonar.

Harpoon was the highest priority and was approved in the 2001/02 budget at a cost of$167 million. The approval of Harpoon left a balance of only $30 million inDecember 2001 dollars to complete both other phases, a level of funding well short ofthat needed to complete these two elements of the project.

The ANZAC frigates currently have no mechanism to warn of mines or otherobstacles in the ship's path other than the standard navigational sonar system. TheMine and Obstacle Avoidance Sonar was assessed as the higher priority andincorporated in the Defence Capability Plan for a 2002/03 year of decision and hassince been approved.

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The Torpedo Self Defence System has been deferred for consideration later in theDCP. This deferral has reduced the opportunity for cost savings that might have beenmade by fitting the same Torpedo Self Defence System as being fitted to the RAN’sFFG frigates as part of the one, larger and more cost effective order. Cost savings inthrough-life support of a common system are still possible.

The technical risk facing phase 3A of this project has largely been mitigated and theissue most likely to cause delay stems from the RAN’s current high level ofoperational engagement and the availability of ships to undergo the upgrade. Thecurrent schedule for Phase 3A will see the first operational capability in late 2004with all ships complete by 2007.

The successful implementation of this program will result in a significant and muchneeded enhancement to the ANZAC ships’ offensive capabilities against surfacetargets and the vessels’ ability to defeat torpedo attack and avoid mines and otherobstacles.

Australian Industry Involvement (AII):

The ANZAC Ship Alliance is managing the Phase 3A upgrade. The ANZAC ShipAlliance is a ‘virtual’ company formed to implement these upgrades andenhancements to the ANZAC frigates. The participants in the Alliance are TenixDefence, Saab Systems and Defence, represented by the DMO’s ANZAC SystemProgram Office.

The Alliance will perform the installation on the first ship and will tender theinstallation on subsequent ships. The installation will be performed at either TenixDefence’s Williamstown Shipyard or at Tenix Marine in Henderson WA.

AII for Phase 3A amounts to $36,347,766* while the level of AII has not yet beenfinalised for phases 3B and 3C.

*Current figure from DMO.

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Armed Reconnaissance Helicopters

(Air 87)

Project overview and key issues:

In 2004 the Army will start fielding 22 Eurocopter Tiger Armed ReconnaissanceHelicopters (ARH). Acquired under the $1.64 billion Project Air 87 these will providea modern airborne reconnaissance capability which the Army sorely lacks, along withan armed escort for troop-carrying Blackhawk and Chinook helicopters and aerial firesupport to the land force.

Built largely from carbon fibre composites with armour and Electronic Warfare Self-Protection (EWSP) systems, the aircraft carries a pilot and ‘battle captain’ – thetactical coordinator and aircraft commander. It is armed with a 30mm gun, and cancarry 70mm rockets and Hellfire anti-armour missiles.

Equipped also with infra red, electro-optic and passive electronic sensors, it willreplace the Army’s lightly armed, Vietnam-era Bell UH-1H Iroquois gunships and theunarmed Bell 206 Kiowa reconnaissance helicopters, which carry no sensors and self-protection systems, in the reconnaissance role.

Based closely on the French Army’s HAP variant, Australia’s ARH will be the firstTiger variant to carry US-made Hellfire precision-guided missiles. Theircommunications suite also includes US-built ARC-210 secure tactical radios. USgovernment export clearance for the missiles and secure radios, and for theirintegration with the French-built mission system, has been granted. Procurement ofthe missiles under a US Foreign Military Sales (FMS) agreement remains on track.

Prime contractor for the project is Australian Aerospace Pty Ltd, a wholly-ownedsubsidiary of Eurocopter, which in December 2001 signed the $1.3 billion contract for22 aircraft and a suite of aircrew and ground crew simulators after a very rapidtendering process by the DMO. Australian Aerospace will assemble 18 of the aircraftat an all-new facility in Brisbane; first deliveries are scheduled for December 2004.

Changes to the Tiger HAP’s sensor mission computer and tactical data link systemshave been minimised to reduce project risks. These will gather and exchange tacticaland surveillance data with Army’s Battlefield Command Support System (BCSS)through the medium of a customised Ground Mission Management System (GMMS).Similarly, the aircrew flight simulators will be largely off the shelf devices, modifiedslightly to reflect the Australian configuration.

However, a 12-month delay in signing the flight simulator sub-contract with ThalesTraining & Simulation may result in a four month delay in the delivery of this systemwhich was scheduled for commissioning at the Army Aviation Centre at Oakey, Qld,in April 2005. Any delay may require Army to implement an interim aircrew trainingregime, possibly including conversion training in France, pending final delivery of the

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simulators. Defence’s position is protected to some extent by a liquidated damagesclause relating to late delivery of the simulator.

However, this is not expected to affect deliveries of the aircraft themselves; twoaircraft are ahead of schedule on the Marignane assembly line in France andconstruction of the first Australian-assembled aircraft has begun in Brisbane. . TheCritical Design Review (CDR) for the Tiger ARH is scheduled for June 10, 2003.This is about two months behind schedule owing mainly to minor delays incurred byAustralian Aerospace in establishing its ARH Tiger company operations in Australiaand a resultant accumulation of delays in the technical review program. If the CDR issuccessful this slight delay is considered easily recoverable over the subsequent 12months.

The risk of delay caused by the creation of an all-new company and factory inBrisbane seems now to be receding. Notwithstanding possible delays to the deliveryof flight simulators, there is no reason at this stage to think that the aircraft’s serviceentry will be delayed. The end of 2008 will achieve a fully operational capability,with two trained squadrons based at a new facility in Darwin’s Robertson Barracks.The Commonwealth government’s Public Works Committee is scheduled formally toconsider the construction of the new Robertson Barracks facility in July 2003.

Australian Industry Involvement (AII):

AII Target: In-service support capability, especially for sensors, mission and EWsystem software and airframe and mechanical repairs.

AII Achievement: The Tigers will be assembled by Eurocopter’s subsidiary,Australian Aerospace Pty Ltd in Brisbane; this will be their logistics support base,sustained by an assembly line for Eurocopter’s EC-120 Colibri light turbinehelicopter. ADI Ltd will be responsible for the systems integration and softwaresupport aspects of the contract; Thales Training and Simulation will supply the flightsimulators; and Haliburton KBR Pty Ltd will be responsible for delivering aircrewand groundcrew training except for tactical training which will be provided byuniformed personnel.

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Australian Light Armoured Vehicle

ASLAV (Land 112)

Project overview and key issues:

The Australian Army has begun taking delivery of its third batch of Australian LightArmoured Vehicles (ASLAV). It operates 113 of these vehicles in the lightreconnaissance role, and deliveries of a third batch of 144 vehicles ordered in 2001began earlier this year.

The ASLAV is a variant of the 2nd generation Light Armoured Vehicle (LAV 2), ofwhich over 2,000 have been manufactured by General Dynamics Land Systems(GDLS - formerly General Motors Defense) in Canada. The hulls of all ASLAVvariants are manufactured in Canada; their 25mm gun turrets are manufactured inAdelaide, as are the Mission-Role Integration Kits (MRIK) which configure thebaseline LAV 2 vehicle for Australian requirements.

ASLAV is an 8x8 wheeled all-terrain light armoured vehicle. In its troop carriervariant it can carry nine troops and a driver. The three-man armed variant carries a25mm gun in an electrically powered turret with gunner and commander’s day/nightsight. A Recovery/Fitter’s variant is also being acquired as part of the third batch.

Army ordered 126 ASLAV, worth $382 million, in the two previous phases of thisproject and all have been delivered. The Phase 3 contract is worth a further $364million; this phase will also retrofit the earlier ASLAVs to an enhanced commonstandard with Phase 3.

First used operationally by the Australian Army in East Timor, ASLAV has proved areliable and effective reconnaissance, surveillance, patrol and mounted infantry rapid-response asset.

The DMO and GDLS’s Australian subsidiary are negotiating a further amendment tothe prime contract. To be signed by the end of 2003, this will outfit between 10 and 25vehicles – to be known as the ASLAV-S variant - for battlefield surveillance. Theirso-called Multi-Spectral Surveillance Suite (MSSS) will incorporate a mast-mountedAMSTAR battlefield surveillance radar, electro-optic and infra red sensors and a laserrangefinder, all integrated by Tenix Defence. In-service date is 2005.

The project has been a relatively low-risk undertaking. All ASLAVs use the baselineLAV 2 hull/drive train/turret package. The MRIKs, designed and installed by Tenix,are a low-impact modification to this basic design

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Planned, but unapproved, future phases of the project seek to maintain thesurvivability and capability edge of ASLAV through regular upgrades. Furthervehicles might be acquired as part of the Light Armoured Vehicle Armoured MortarSystem (LAVAMS) Project (Land 135), decision date FY04/05.

Australian Industry Involvement (AII):

AII objectives for Phase 3 were not framed in work share or capital value percentageterms but aligned instead to Army’s long-term support needs and the establishment ofa sustainable industry support base. In the model developed by the DMO and GDLS,the company’s subsidiary in Adelaide, General Dynamics Land Systems - AustraliaPty Ltd (GDLSA), has established a factory which manufactures the 25mm gunturrets for most variants of the LAV family sold worldwide. GDLSA has alsoestablished logistics and maintenance bases in Adelaide and Darwin to support theArmy. A facility similar to that in Darwin is planned for Brisbane to provide a similarcapability in support of ASLAV and Bushranger.

Tenix Defence Land Systems Division manufactured and will install the MRIKs forPhase 3 under a sub-contract worth $34 million.

ADI Ltd is developing a Behind-Armour Commander’s Weapon Station (BACWS)for the turret-less personnel carrier variant of ASLAV, which may have significantexport potential. Development has halted temporarily because the DMO project officeis not staffed at present to progress this element of the project.

Before being acquired by GDLS, General Motors Defense set up an accreditationprocess with local sub-contractors which has seen some 23 primary and over 90secondary components suppliers in Australia and New Zealand accredited as membersof General Motors’ global supply network. GDLSA is also pursuing potential ASLAVexport orders in South East Asia and the Middle East.

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Bushranger (Land 116)

Project Overview and Key Issues:

Project Bushranger was created to increase the mobility of Australia’s infantrysoldiers by equipping their units with four-wheel drive armoured vehicles that offerprotection against small arms fire and mine blasts.

This class of vehicle is referred to as an Infantry Mobility Vehicle (IMV) and its roleis to deliver foot soldiers to their area of operations in relative comfort and safety sothey are fresh and ready to fight. An IMV is not a tank or armoured fighting vehicle.

A $200 million contract was signed with ADI Ltd on June 1, 1999, for the supply of350 of their Bushmaster IMVs in six variants including troop transports, commandvehicles and ambulances.

Production was then expected to commence in mid-2000 with the first vehiclesentering service two years later. However the project has been beset with delays anduncertainty and was almost cancelled by recommendation of the Defence Capabilityand Investment Committee at the end of 2001.

At issue are concerns over the long-term reliability of the Bushmaster and somechanges in specification. The reliability problems are mainly in the vehicle’s drivelineand concern the durability of axles, drive shafts and hubs. A Bushmaster has an all-upweight of about 14,000kg and as such imposes comparatively high loads on thesecomponents.

Major changes to the design since contract signing have included both the engine andtransmission. Other variations have included a larger back door and relocated hatches,a tenth seat, fitting the vehicle "for but not with" a grenade launching system, fittingan automatic fire and explosion suppression system and "run flat" inserts for the tyres.An additional internal appliqué armour kit has also been under consideration

However through all the changes to the project and contract, the project’s budget hasnot experienced any Real Price Increase and the current budget is $329 million.Although the renegotiated contract resulted in a reduced number of vehicles with aneffective 19% unit cost increase. A total of only 299 vehicles will now be procured.

Defence and ADI began a reliability growth program last year that has not yetconcluded. This program comprises an ADI sponsored “test analyse and fix” activitydesigned to enhance the reliability of the vehicle prior to a contractual reliabilityqualification test. ADI passed a qualification test in late 2002 using reworkedprototype vehicles, and low rate initial production of a small batch of vehiclescommenced soon afterwards.

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The next and final component in the reliability growth program is a productionreliability acceptance test due to commence in November and be completed by late-March 2004. The production acceptance test will utilise initial production vehicles. Areliability growth program review meeting is scheduled for late May 2004 after whicha decision will be made on whether or not full production will commence.

An initial production vehicle is scheduled for delivery in late August 2003, while thefirst Company group of vehicles (15) are scheduled to be delivered to 7 Brigade inMay 2005. The last vehicle to be delivered is scheduled for December 2007, and thisis the capability in-service date.

The two main causes of this project’s original problems were insufficient time beingallowed to get a prototype vehicle into production, and signing a production contractprior to the completion of Army’s specification. This has been rectified through thenew contract and is currently on track for successful delivery.

Australian Industry Involvement (AII):

ADI Ltd has been contracted to achieve AII levels of 69 per cent, and the vehicles willbe manufactured at ADI’s Bendigo facility in Victoria. At the time of contract signingADI estimated that the project would create 40 new jobs, mainly among shop floorpersonnel.

Delivery will be co-ordinated with respective logistic support arrangements. Throughlife support for the IMV fleet is expected to include extensive commercial supportservices contracted to ADI.

*Current budget figure from DMO.

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Collins Capability Improvements /

Augmentation (Sea 1439/1446)

Project overview and key issues:

SEA 1439 is a wide ranging multi-phased project aimed at maximising the capabilityof the Collins-class submarines by rectifying deficiencies in their platform and combatsystems, enhancing their sensor and communications systems and finally introducinga program of continuous improvement.

The original Collins submarine construction project (SEA 1114) sought to provide anadvanced submarine capability for the RAN out to 2015 and beyond. But due toshortfalls in the capability of the delivered submarines a new project—SEA 1446Collins Class Augmentation—was introduced as an interim measure to bring threesubmarines, the First of Class, HMAS Collins, Dechaineux (04) and Sheean (05), toan enhanced level of operational capability for which funding of $266m wasapproved.

This project was concerned essentially with short term improvements and, as the‘trials platform’, Collins underwent propeller and hull improvements and someaugmentation of the combat system with much of this work drawing upon the USNavy’s expertise and equipment. (The USN had encountered similar data handlingproblems in the combat systems of their Los Angeles-class SSNs and had developedaugmentation packages for this purpose).

Under the ‘fast track’ program Dechaineux and Sheean were brought to the MLOC(Minimum Level of Operational Capability) standard with measures to provideimproved self protection, self defence, discrete high speed communications and bettermechanical reliability. The program was subsequently widened and the functionalityof the combat systems of Dechaineux and Sheean was augmented beyond thatprovided for Collins and a $72 million further upgrade of Collins (02) together withan upgrade for Rankin (06) was approved involving modifications to their propellersand improvements to hydraulic systems and propulsion.

While solutions to meet platform systems shortcomings have been implemented onthe two ‘fast track’ submarines, these and other capability enhancements need to beimplemented on the remaining four submarines as opportunity permits, noting that themany of these issues still require design and support development. This activity,together with overall infrastructure improvements has been approved under Phase 3 ofSEA 1439.

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Also approved is Phase 4B, which comprises enhancements to the submarines’sensors including sonar, electronic surveillance and towed array processing as well asimprovements to the communications functions. But a major hurdle to achieving fulloperational capability has been the unacceptable performance of the combat systemdue to major shortcomings in sonar processing and data integration. It was initiallyproposed to replace the combat system with a commercial off the shelf (COTS)system and following integration studies and the issue of a formal request for tender,systems proposed by STN Atlas and Raytheon were evaluated.

However this process was cancelled in favour of a collaborative arrangement with theUS Navy under which much of the combat system technology will be sourced fromoverseas with local industry involved in the integration and installation of the systemas well as supplying some components and specific support activity. This acquisitionstrategy is considered a significant risk mitigation factor in that most of the equipmentwill be non-developmental and in service with the USN.

An Initial Design Study involving Raytheon, STN-Atlas and Thales UnderwaterSystems, ie those companies participating in the earlier COTS acquisition proposal,together with DSTO, was completed in 2002. It detailed the cost, schedule and risk ofacquiring, integrating and installing the new combat system and peripheral systems.

On 13 September 2002, the Government announced a $400 million project topurchase a replacement combat system for the Collins-class submarines based on theRaytheon CCS Mark II tactical command and control system currently in use with theUS Navy. As part of the program, the sonar augmentation currently installed into theaugmented submarines Sheean and Dechaineux will also be extended to the remainingsubmarines.

Placement of contracts for the key items of equipment is expected by mid-2003.Delivery of the first system to the land based test facility is expected about 18 monthsto two years thereafter. It is anticipated that the first submarine will be fitted with thenew combat system in 2006 with the program to upgrade all submarines to completeabout 2010-11.

Australian Industry Involvement (AII):

Involvement of Australian industry is a key requirement of this project and the levelof AII is expected to be higher than in building the submarines when 70% of theplatform work and 45% of the combat system work was performed in Australia.While the capability enhancements and improvements to the Collins submarine fleetinvolve overseas sourcing of major equipment items there is very considerable scopefor the continued involvement of Australian industry in the integration, installation,and long term support of the submarines and their equipment as well as ongoingopportunities for the manufacture and supply of components.

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E-Defence (JP 2054 – Phase 1)

Project overview and key issues:

Defence’s ‘Knowledge Edge’ delivers military advantage at three levels: on thebattlefield and at higher levels of command, through the application of ‘Network-Enabled Warfare’ (NEW), and in the efficient administration of the AustralianDefence Organisation generally.

Increasingly each area exploits similar types of information and communicationstechnology (ICT) in much the same way – to pass information and instructions, toaccess databases, and to conduct business transactions of different types, bothinternally and with external agencies and foreign allies.

JP2054 – e-Defence, is designed to upgrade Defence’s ICT environment to enablemodern business and NEW command processes, using commercial-standard ICTtools, in complete security.

Defence’s current internal messaging system is becoming increasingly expensive tooperate and only supports text-based messaging. It no longer meets the needs ofmodern Command Support and administration systems, which increasingly exploit thesame types of complex documents, spreadsheets, graphics and video clips whichcommercial e-mail systems are designed to carry.

Furthermore, to enhance interoperability and the general functionality of theircommand systems, Canada, Australia, New Zealand, the UK and the USA haveagreed to migrate to an e-mail style defence messaging system based on commercialmessaging and directory standards with suitable security enhancements to meetmilitary requirements.

Against this background the Commonwealth approved JP2054 Ph.1 in late-1997 andin May 2001 signed a $37.11 million contract with Canberra-based systems integratorCSC Australia to implement it. The system will provide secure email and the enablinginfrastructure for the Department to embrace e-commerce in all aspects of itsoperations, from acquisition to personnel management.

The e-Defence system doesn’t replace existing communications infrastructure such asthe Defence Switched Data Network, Defence Wide Area Communications Network,and HF radio and Satellite networks. It will use this existing infrastructure to carry themessage traffic, but with the security and certain other features essential for militarycommunications.

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When complete, the e-Defence system will include an integrated corporate directoryfor the Defence Organisation, secure messaging gateways to enable desktop-to-desktop communications with allies, and smart card technology which identifies usersproperly and enables appropriate levels of access to buildings, secure areas andinformation and communications networks.

This robust level of security will be achieved using cryptographically based PublicKey Infrastructure/Certificate Management Infrastructure (PKI/CMI) technology.This will underpin Defence's trust framework, the core components of which will be acertificate management operations centre. The system will also include provision forhigher levels of security and user authentication employing future and emergenttechnologies.

A pilot version of the baseline system was rolled out initially to five sites on theDefence SECRET network earlier this year, with Defence-wide roll-out of theCorporate Directory on the RESTRICTED and SECRET networks due for completionby end of quarter 3, 2003. Requirements for further development and deployment ofsecure e-mail and messaging capability are currently under review by the projectsponsor and the Chief Information Officer’s organisation.

The rapid evolution and growth of ICT globally has resulted in a number of changesin the scope and schedule of the e-Defence project in order to dove-tail with otherDefence IT programs and to exploit emergent technologies and opportunities.

One of these so-called “Efficiency Opportunities” is to dramatically extend the smartcard functionality beyond the original scope of e-Defence, but at a very economicalcost.

Similarly, delaying some elements of e-Defence by a few months to exploit thebenefits of Defence’s planned adoption of the Windows XP computer operatingsystem, might actually make e-Defence quicker and cheaper to implement across theorganisation as a whole. Both options are still under consideration by Defence.

The second phase of this project has a Year of decision of 2008/09 and an indicativebudget of $100-$150 million, but the rapid changes in ICT technology, andconsequently in user requirements, may see changes in the scope, schedule and budgetof this phase.

Future e-Defence scope may include workstation to workstation interoperability withallies and secure interconnection of Defence’s SECRET and RESTRICTED networksusing multi-level security technology. The scope and schedule for these activities willbe determined in part by the evolution of ICT and of coalition IT interoperability andsecurity requirements, and the availability of COTS security devices providing therequired level of security.

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Australian Industry Involvement (AII):

The e-Defence project goes to the heart of Defence’s operations so there is a clearimperative for this work to be carried out in Australia by Australian companies.

The AII goals for this project were 70 per cent Australian industry involvement; and30 per cent of the work was to go to local Small to Medium Enterprises (SMEs).

Both targets have been exceeded: CSC Australia is supported by PKI and e-securityspecialist SecureNet, which is also a local agent for UK e-security specialistBaltimore Technologies; military messaging and security operations specialistCompucat Research; Communications Design and Management (CDM); and TotalLogistics Management (TLM).

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Evolved SeaSparrow (Sea 1428)

Project overview and key issues:

The Evolved Sea Sparrow Missile (ESSM) program is an international cooperativeventure undertaken by the ten of the thirteen nations of the NATO Sea SparrowConsortium to develop and produce an improved version of the RIM-7P NATO SeaSparrow Missile.

The ESSM's performance is greatly superior to that of the Sea Sparrow, providinglonger range and greater manoeuvrability in the terminal phase of flight, close to anevading target. Like Sea Sparrow, ESSM is a semi-active radar homing missile,requiring target illumination, but it also has an IR seeker to provide a passive homingcapability. ESSM is also capable of 'quad-packing' in the 8-cell Mk 41 VerticalLaunching System.

The goal of the program, which will see nearly 3000 missiles distributed to the tenconsortium nations, is to develop an effective defence against the next generation ofhigh-speed, manoeuvring anti-ship missiles.

Australia's involvement in the ESSM program has being conducted under Project Sea1428, concerned with the development and production phases of the program, andprovision of the ESSM capability to the RAN’s ANZAC and FFG frigates, 14 ships intotal.

Following completion of the initial phases, comprising engineering andmanufacturing development tasks on the missile and the associated quad packcapability, the program has progressed to the integration of the ESSM into theANZAC Class ship combat system, the modification of three ANZAC ships (05, 06and 07) and the acquisition of missiles for both the ANZACs and FFGs. Integration ofESSM into the FFG class is being performed under the project Sea 1390 FFGUpgrade.

In September 2002 Raytheon Missiles Systems, prime contractor for the internationalESSM program, delivered the first ESSM, from an initial production batch of 255, tothe RAN, Australia being the first consortium nation to receive the missile. Fourmonths later HMAS Warramunga successfully fired the missile against a towed targetoff the West Australian coast. The Warramunga firing was the first outside the USA,the first from a manned ship using a non-Aegis combat system and the first to test theESSM’s self-destruct capability. The firing followed a series of test firings from theUS Navy’s Self Defence Test Ship and a risk reduction firing from the USS Shoup inJuly '02.

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The remaining phases of the program centre upon the integration of ESSM into theremaining five ANZAC ships and the acquisition of additional missiles to meetarmament stockholding requirements.

Australian Industry Involvement (AII):

A highly capable, international team of companies has been involved in the ESSMdevelopment and production process. The team was developed around the conceptthat a successful program required mutual design and production efforts which woulddevelop the industrial bases of all participating countries, utilise the expertise andtechnological skills of each participant, and maximize each country’s return-on-investment.

There has been considerable Australian industry involvement in the developmentproduction and implementation phases of the program. BAE Systems Australia asdesign agent for the ESSM's aerodynamic and thrust vectoring performance has beenthe lead Australian contractor in the missile program. In the production phase, BAESAustralia has also been responsible for manufacturing the computer and othercomponents of ESSM's guidance section.

Tenix has been responsible for the ANZAC missile integration including overallsystem design, system performance, integration and test and firing trial support, andhas subcontracted SAAB Systems, BAE Systems and CSC Australia for this project.The ANZAC ship combat system (CS) has been redesigned to interface directly to theMk41 VLS and to a new Solid State Continuous Wave Illumination Transmitterdesigned and built by CEA Technologies.

The CS software also incorporates Australian-developed engageability data andexploits advanced operating modes of the missile during engagement to enable areadefence, high value unit protection and crossing target capabilities to be exploited.

ADI Limited has provided design services and the manufacture of elements for theinternational ESSM program as well as the development and manufacture ofelectronic test equipment for the ESSM launch system. ADI is also responsible forintegration and installation of the ESSM into the FFG.

An interesting spin-off to the Australian program has been the local development byCEA Technologies and Saab Systems Australia of an advanced air warfare system formedium sized frigates with the 100 or so ships of the ESSM consortium navies inmind.

According to Defence Budget figures by June 2002 some $320 million had been spenton the initial phases of the project (1 and 2A) with a further $280 million approved forthe current Phase 2B/3, concerned with the integration of ESSM into the remainingfive ANZAC ships and the acquisition of additional missiles. Estimated expenditurefor the acquisition of additional missiles under the final (and as yet unapproved) phaseof the program (Phase 4) is $30m to $50m.

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FFG Progressive Upgrade (Sea 1390)

Project overview and key issues:

The RAN has six US-designed Oliver Hazard Perry-class guided missile frigates(FFG-7), four of which were built in the US and two in Australia, joining the RANbetween 1980 and 1993. Their modest combat capability includes anti-air and anti-ship missile systems, a 76mm gun and torpedo tubes, further enhanced through theaddition of Seahawk helicopters and the Nulka anti-missile decoy.

The FFGs’ sensor and weapon systems have remained largely unchanged and theircapability for operations in a more complex regional threat environment hasprogressively diminished. The ships have also experienced supportability problemsthrough component obsolescence and the high maintenance cost of some equipmentand systems.

The upgrade aims to restore their parity against regional capabilities through upgradesto their air defence, anti-submarine and anti-surface warfare capabilities. There isspecific emphasis on improved self-defence against anti-ship missiles - a significantperformance shortcoming. Platform remediation work will extend the service life ofthe first four ships out to 2013-2017 and the two younger Australian-built ships out to2017-2020.

Following completion of design and documentation studies by ADI Limited andTenix Defence Systems the request for tender for the upgrade implementation contractwas released to both companies in June 1997. The $897 million prime contractsubsequently signed with ADI in June 1999 was later increased to $962m (both in Feb’98 dollars) with the incorporation of enhanced Electronic Warfare (EW) and otheroptions. The FFGs will be modified progressively at ADI’s Garden Island facilityduring ship Self Refit Activity (SRA) periods, depending on fleet availability. Thefirst ship was to be upgraded this year with the last completed in 2006, however thisschedule has slipped.

Teamed with ADI are principal subcontractor Lockheed Martin (combat systemupgrade), Gibbs & Cox (platform systems design) and Thales Underwater Systems(underwater warfare programs). ADI is responsible for detailed installation design andlast year assumed design authority for the combat system from Lockheed Martin. TheUS Navy is responsible for modifying software for the Weapon Control Processor, theheart of the MK 92 combat system.

Software development and integration exercises are progressing well in the LandBased Test Site at Garden Island which is being used to progressively replicate andvalidate the ships’ combat system. Upon completion of the upgrade this facility willbe reconfigured as a Weapons System Support Centre to provide through life supportfor the upgraded combat system.

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Extending the life and reliability of the platform is not considered unusually difficult,but improving the ships’ combat capability is a much more complex undertaking andprogram delays are already evident with the final design yet to be approved.

The Australian Distributed Architecture Combat System (ADACS) has successfullypassed the Critical Design Review and systems already tested and integrated withADACS include the electronic surveillance system, automatic radar detection andtracking system, underwater warfare system and the onboard training system. ADACSwill provide considerably enhanced situation awareness and tactical functionality

The Upgrade is behind schedule due to a number of factors including software designdelays. To mitigate risk of schedule delays a major schedule replan has beenconducted and revised subcontractor arrangements have been put in place

The contractor has adopted a progressive approach to software delivery. Under thisarrangement Baseline 1 software will be delivered with the first upgraded ship andBaseline 2 software will be delivered with the second upgraded ship. The first shipwill be upgraded to Baseline 2 at an operationally convenient time. With shipavailability delayed due to the tempo of naval operations lead ship handover has nowbeen agreed for September 2003.

The 2002-03 Defence Portfolio Budget Statements indicate estimated cumulativeexpenditure on this project totalling $669m by June 2002 with a further $165mestimated for 2002-03. This is close to 60% of approved project expenditure.

This represents investment in long lead items and in the normally costly designdevelopment phases. However it also suggests little leeway to absorb additional costsarising from program delays or design variations that may yet occur.

Australian Industry Involvement (AII):

ADI is contracted to achieve AII levels of 52% of the contract value of the program,and will establish a manufacturing capability for the upgraded Mk92 Mod 12 firecontrol system in Australia. Local support and maintenance of new operationalsoftware is an important component of AII.

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High Frequency Modernisation

(JP 2043)

Project overview and key issues:

When completed JP2043 High Frequency Modernisation will provide a modernisedhigh frequency radio communications system (MHFCS) for the command and controlof deployed Australian Defence Force (ADF) assets. It is being delivered in two majorstages:Stage 1 (the Core Network) which will, in addition to the Core Network capabilities,provide a replacement capability for the existing Navy and Air Force high frequencycommunications networks, andStage 2 (the Final Network) which will provide enhanced information transfercapabilities to some ships, ground mobile stations and aircraft.

The network will comprise a fixed high frequency radio communications network offour stations in the Riverina, Darwin, Townsville and North West Cape withcentralised control being exercised through main and backup network managementfacilities in Canberra. The new system will be backwards compatible with the existingsystems and will retain interoperability with Australia's allies.

Background:

The High Frequency Modernisation Project was derived from the DefenceCommunications Corporate Plan (August 1991) and will rationalise existing sites inCanberra, Darwin, North West Cape, Sydney, Townsville and Perth.

Deployed ADF forces are critically dependent on long range communications forcommand and control and the timely dissemination of intelligence. High Frequencyradio and communications satellites provide these long-range communications. HighFrequency radio is an essential complement to satellite communications systems.Although High Frequency radio has a lower capacity to pass information thansatellites, it has the advantages of being under national control, on Australian territoryand covers a larger geographical area than any single satellite.

Until the ADF has a mature satellite communications capability, HF radio willcontinue to provide primary and survivable long range tactical communications.Thereafter, High Frequency radio, with its greater survivability, will provide anessential redundant capability should satellite communications be disrupted.

Project Approval was given in the 1996/97 budget and contracts for $385 million withBoeing Australia were signed on 31 December 1997. The equipment contract valuewas $312 million and the Network Operation and Support Contract $73 million inDecember 1997 prices.

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Stage 1 of the Prime Contract will replace existing single service high frequency radiofacilities by the second half of 2004 allowing the closure of some existing fixednetwork stations in Canberra, Sydney, Townsville Darwin and Perth. The capabilityprovided at the end of Stage 1 is known as "Core".

Stage 2 of the Prime Contract will provide, in addition to the Core Networkcapabilities, enhanced capabilities over high frequency radio such as automatic linkestablishment, secure digital voice, facsimile, imagery and data. Provision of theseenhanced facilities and upgrades to some HF radio equipment in ships, aircraft andland mobiles is expected to be completed in late 2005/early 2006. This capability isknown as "Final".

As a software-intensive project delays have been experienced with systemdevelopment. To help resolve the issues, which led to the development delays, BoeingAustralia has called on experienced managers from its parent Division in the BoeingCompany in the US to assist.

Defence assesses that Stage 1 will be delivered to the ADF during the second half of2004 and Stage 2 will be completed in 2006. Notwithstanding these delays, the projectis expected to be completed on budget from a Defence perspective. Much of thephysical infrastructure for the new network is in place and is currently undergoinginstallation testing prior to being commissioned for network testing. It is expected thattest transmissions with aircraft and ships will be carried out during the second half of2003.

The new system will employ automatic techniques and improved communicationsprotocols to provide higher quality connections than have been achievable in the pastwithout the need for skilled operators. It will also provide higher capacitycommunications links than the present high frequency system.

Australian Industry Involvement (AII):

Contract implementation is being carried out using an integrated product teamapproach rather than the more conventional functional organisation. The teamsinvolve both contractor and Commonwealth personnel. The equipment contractrequires AII amounting to approximately 75% of the contract price.

During the period between completion of Stage 1 and Stage 2 ADF operators will begradually phased out. The Network Operation and Support Contract will providecivilian operators and maintainers and is for a period of five years from finalacceptance of the network. There will be an ADF headquarters element forcommunications planning and supervision as well as some Commonwealth personnelfor the handling of sensitive information.

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Jindalee Operational Radar Network

JORN (JP 2025)

Project overview and key issues:

The Jindalee Operational Radar Network (JORN) project formally commencedoperations on April 2 this year, some five years late after enduring well-publiciseddelays and technical difficulties. These have been resolved and JORN is now workingat and in some areas beyond the originally contracted level of performance.

JORN is an over the horizon radar (OTHR) system with a range of 3,000km anddelivers a unique and strategically critical operational capability. The two JORN radarand antenna sites near Laverton, WA, and Longreach, Qld, between them can detectand track ships and aircraft across an arc from the mid-Indian Ocean to the south-westPacific, including all of Australia’s northern maritime approaches and the archipelagobeyond.

The system is derived from DSTO’s experimental Jindalee OTHR near Alice Springs,which demonstrated the military value of such a sensor system during the 1970s and‘80s. The Jindalee radar, now dubbed Jindalee Facility Alice Springs (JFAS), is stilloperational and serves as both a development test bed for DSTO and, between R&Dcommitments, a supplement and alternative to the two main JORN sensors.

The JORN transmitter emits high frequency (also known as short wave) radar signals,which bounce off the ionosphere, high on the edges of earth’s atmosphere, to striketargets a great distance away and then return to the JORN receiver along the samepath.

To cope with ionospheric anomalies and weak radar echoes from small and distanttargets, JORN relies heavily on sophisticated signal processing and data fusionsoftware and target detection algorithms; software development lies at the heart of thetechnical difficulties the project encountered.

In 1990 JORN was the biggest software development and integration project in theSouthern Hemisphere. After evaluating two rival tenders, Defence awarded TelstraCorp the $680 million JORN prime contract. Commissioning was scheduled for July1997.

With hindsight Defence and Telstra under-estimated the management and technicalchallenges the JORN project presented. However, the radar sites were completed withlittle trouble and hardware performance is not an issue, despite the fact the design ofthe digital receivers was and remains at the leading edge of high frequency radartechnology.

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The JORN Coordination Centre (JCC) at RAAF Base Edinburgh, SA, was alsocompleted without difficulty. The JCC controls the radar sites remotely; themethodology for achieving this was developed and demonstrated using JFAS, whichhas been operated remotely from the JCC since 1999.

The lengthy delays on this project through the mid-1990s stem principally fromsoftware development and integration difficulties, compounded by poor projectmanagement. In February 1997 RLM Systems Pty Ltd, a Tenix-Lockheed Martin jointventure, assumed responsibility for JORN, and later prime contractorship. Thecontract with Telstra, which was novated to RLM Systems in 1999 on a fixed pricebasis, has protected the Commonwealth to some degree – Telstra paid a significantproportion of the cost for RLM to complete the project. Ironically, Lockheed Martinwas part of the unsuccessful bid for the JORN prime contract back in 1990.

However, the scale of the software development task meant RLM Systems couldn’tmeet the revised goal of delivery in December 2001. The Longreach and Lavertonradars underwent operational testing in late-2002 and early 2003 and the JORNnetwork was formally commissioned in April at a total project cost of $1.2 billion.Final acceptance of JORN, in the configuration set out in 1990, is still scheduled forJune 2003.

In parallel with the JORN program DSTO has been developing software andprocessing enhancements using JFAS as a test bed. A new phase of JP2025, scheduledfor approval in 2003/4, will see these transferred across to JORN under a $75 millionproject (DCP figures), to the extent the different physical configurations and systemsarchitectures of JORN and JFAS permit. A further phase, whose year of decision is2010/11, will focus on hardware refurbishments and technology upgrades worth anestimated $200 million.

Australian Industry Involvement (AII):

Nothing like JORN existed anywhere else in the early-1990s and the strategicimportance of having such capabilities under direct Australian control drove thedecision to go ahead with the project in-country. Apart from the UK-designedtransmitter and receiver modules, which were built by BAE Systems, all of the radarhardware including the antennas has been designed and manufactured in Australia.

RLM Systems has written most of the JORN software and established integration andsoftware support facilities in Melbourne and Adelaide. The company, in closecooperation with DSTO and BAE Systems Australia (which has a long-term JFASsupport contract), will support ongoing software and system development throughJORN’s life from a facility co-located with the OTHR Systems Project Officeadjacent to RAAF Base Edinburgh.

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Lightweight Torpedo (JP 2070)

Project overview and key issues:

Joint Project 2070 aims to upgrade the anti-submarine capabilities of the ADF byintroducing a new generation of lightweight torpedo. It has also become a ‘pathfinder’for the concept of Alliance Contracting by Defence, the DMO and industry and hastherefore attracted considerable scrutiny.

The principal drivers for this purchase include the obsolescence of the ADF’s existingMk46 lightweight torpedo and the proliferation within our region of quiet diesel-electric submarines well-suited to the warm, shallow regional and archipelagic watersplied both by merchant shipping and the ADF.

In 1999, after a competitive tender, Defence selected the Eurotorp MU90/Impact toreplace the Mk46 lightweight torpedo which is carried by RAN frigates andhelicopters and RAAF AP-3C Orion maritime patrol aircraft.

The MU90 is a versatile, highly capable weapon with a quite different propulsionsystem from the Mk46, which promises greater performance but requires less logisticsupport. It is 3m long, weighs 300kg, has a range of up to 10km and is designed totrack and attack submarines at depths ranging from 25m to more than 1,000m. Thenavies of France, Italy, Germany, Denmark and Poland have selected it also. Itsmanufacturer, Eurotorp, is a joint venture between French naval and systems housesThales and DCN and Italian torpedo manufacturer Whitehead Alenia SistemiSubacquei.

The alliance contract was signed between Defence and the Australian subsidiary ofThales Underwater Systems in 2000 and the project is now into the second of fourphases.

The first Phase was a Project Definition Study to determine the program’s scope,costs and risks. Phase 2, approved in the 2001 defence budget at approximately $260million, will see initial acquisition of the MU90 and associated logistic support, andthe integration of the weapon into the RAN’s ANZAC and upgraded FFG-7 frigatesand the RAAF’s AP-3C Orions, followed by the Seahawk and Super Seaspitehelicopters. Initial operational capability is scheduled for 2005.

Weapons acquired under Phase 2 will be manufactured in Europe. However, thisphase will also establish an in-country MU90 Torpedo Final Assembly Facility, whichwill be used to assemble torpedoes acquired in Phases 3 and 4 and to support andupgrade the torpedo through its life of type. The as-yet-unapproved Phases 3 and 4will acquire the full war stock of MU90 weapons.

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While there seems little doubt the MU90 will serve the ADF successfully, theAlliance Contracting approach has attracted both scrutiny and criticism, principallyfor the slow progress in finalising the financial aspects of Phase 2. This can beattributed in part to the lack of an Australian template for such a complex Defence-Industry business and contractual relationship, and the cultural/organisationaldifferences between the players in their work methods and structures.

By mid-2003 the Djimindi alliance members believed the project was demonstratingthe benefits of having a multi-disciplinary team operating as a single organisation: inidentifying and implementing cost- and time-saving strategies which would have beenimpossible for a more orthodox project architecture, and in developing a culture thatabandons unproductive cultures and work practices which act as barriers to asuccessful project outcome.

Project delays attributable to the Phase 2 negotiations are not believed to have delayedsignificantly the introduction of this new capability. The project schedule is driven inpart by platform integration and availability issues and has been robust enough toabsorb a significant proportion of the delays so far, but the current schedule allows forno further delays.

Alliance Contracting and Australian Industry Involvement (AII):

Alliance contracting is designed to create a formal partnership between Defence andindustry in order to make the acquisition process cheaper, faster and more outcome-focused.

The project stakeholders agreed in 1999 that JP2070 lent itself to the AllianceContracting philosophy – in large part because of the need to manage and mitigate thesignificant risks associated with integrating the new weapon onto five quite differentADF platforms. However, the DMO’s confidence that it could work positively andconstructively with the Industrial partners on the project was another key factor in thedecision.

Lessons learned on this project are now being applied to other Alliance Contractingprojects, and also to candidate projects to determine whether Alliancing is the mostappropriate approach to these projects.

The lightweight torpedo Alliance, now dubbed Project Djimindi, has its own projectoffice in Canberra. The Alliance partners are the DMO, Thales Underwater Systemsand EuroTorp. Three sub-partners also play key roles: ADI Ltd will be involved in themanufacture of the MU90 and in FFG-7 integration; CSC will coordinate theintegration of the torpedo onto the helicopters; RLM Systems will integrate thetorpedo onto the Orion aircraft.

In addition, the ANZAC Alliance (DMO, Tenix Defence and Saab Systems) and theDjimindi Alliance have formed an integrated project team to integrate the MU90 ontothe ANZAC-class frigate.

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Thales Underwater Systems (TUS) has already established an Australian productionfacility for the MU90 homing head transducers and electronic boards and is currentlybuilding 575 of these items for the MU90’s European customers on a sole-sourcebasis. This investment resonates with the ‘global supply chain’ philosophy whichDefence is increasingly applying to AII considerations and recognises the competitiveadvantage of TUS's Australian-based design and production capability. This assemblyfacility will provide a sustainable, local through-life support and upgrade capabilityfor the MU90.

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M113 Upgrade (Land 106)

Project overview and key issues:

This project will carry out a comprehensive upgrade on 350 of the Army’s M113armoured personnel carriers.

The role of an armoured personnel carrier is to take soldiers into battle in comparativesafety from landmines, shrapnel and small arms fire. A major advantage of a trackedvehicle such as the M113 is its ability to traverse extremely rough and difficult terrainand to advance close behind artillery fire support. An armoured personnel carrier isnot a tank.

The upgraded M113s will have thicker armour and improved mine blast protectionwhile a new Australian-designed and manufactured turret will provide for greater andmore accurate firepower from its .50in machine gun. The vehicles’ mobility is to beenhanced through replacement of the drive train and suspension; while its habitabilitywill be improved through heat mitigation in the passenger compartment along withbetter seating and equipment stowage.

There have been extensive delays encountered over several years in actually gettingthis project underway. Reasons for this include:• Changing from a multi phase project schedule that commenced with a minimum

upgrade first approved in the 1993/94 Budget to a single phase comprehensiveproject approved in 1999.

• A misunderstanding between the Commonwealth and its prime contractor Tenixover the amount of available budget.

• Difficulties in reaching a final specification for the vehicles.• Development problems with the turret.• The need to have the project re-approved after White Paper driven acquisition

priorities were enunciated in 2000.

To manage development risk, which the DMO has assessed as medium, the project isplanned in three stages:• Stage 1 for two demonstration vehicles to demonstrate the concept, perform gross

level performance testing, and obtain user feedback, due for completion December2003.

• Stage 2 for 14 initial production vehicles to prove production processes andperform complete performance and reliability testing, due for completion inJanuary 2005; and

• Stage 3 for full production, which is due for completion in 2010/11.

The scheduled initial in-service date is December 2006 and this covers one completecompany group. The Defence White Paper sought an initial in-service date of 2005.

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However, during project definition it became clear that this was not achievable and aninitial in-service date of 2006 was agreed by Government when the project wasapproved. Planned life of type for the upgraded vehicles is 2020.

Current budget approval is for $549.9m in 2002/03 dollars.* The original budget forthe revised project in the Defence White Paper was $500m in 2000/01 dollars.However, the DMO says there has been no real cost increase with the only variationbeing for inflation and variation in exchange rates. According to the DMO this projectis presently on schedule and within budget.

Risks facing the project include the need for the DMO’s system program office torecruit a number of personnel so it can meet its obligations, while on the technicalfront there is the possibility of design difficulties in the new armoured turret, beingdeveloped from scratch by Tenix. However, the design so far is said to be satisfactory– representing a good balance between the performance requirements and theconstraints of space and weight imposed by the vehicle. The main aspect of thedesign still to be assessed is optimisation of the ergonomic effectiveness for the crew,which can only be fully judged after production of a full turret, but this is notconsidered to be a major risk.

Australian Industry Involvement (AII)

According to the DMO AII will represent 47 per cent of contract value and comprisevehicle design and testing, turret design and manufacture, external fuel tank designand manufacture, and vehicle assembly. The new engine and transmission will besourced from Germany.

*Current budget figure from DMO.

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Military Satellite Communications

- Milsatcom (JP 2008)

Project overview and key issues:

Joint Project (JP) 2008 was introduced in the early 1990s for the development ofmilitary satellite communications (MILSATCOM) capabilities. The project is beingprogressively implemented in a series of phases to meet the ADF's growing demandsfor flexible, mobile, high data rate communications to support its increasinglydispersed operations within and beyond Australia.

Furthermore, evolving changes in the operational command of the ADF, and the needto share strategic and tactical data in increasing volumes from the soldier in the fieldto higher level commanders have also emphasised the need for such a satellite-basedsystem. All these factors have made difficult the task of defining a long-lastingoperational requirement, securing funds for it and acquiring the products of therequirement. These evolving requirements coupled with changes in technology havegiven rise to the project being developed and implemented through many phases.

Early phases provided an initial limited capability satellite communications system forthe ADF, using purchased services on the soon to be replaced Optus B1 and theIntelsat and Inmarsat satellites. These capabilities provide voice, fax and data servicesfor land elements and selected RAN ships and RAAF aircraft. The satellite groundterminals for this network are provided by Defence and Telcos with terrestrialdistribution provided by a range of existing networks that are also owned by Defenceor leased from Telcos.

A key element of Phase 2 is the Defence Mobile Communications Network (DMCN)that provides a real time satellite mobile communications capability at strategic,operational and tactical levels to all ADF Services. With the completion of the initialand interim stages the mature DMCN has been transitioned into service. DMCNamply demonstrated its value during the East Timor action with the extensive fieldingof a large number of terminals. It was also used at the Sydney Olympics.

Phase 3 will provide an initial MILSATCOM capability under the control of the ADF.This will use the Optus C-1 satellite, the launch of which has been delayed until June2003. The C-1 satellite will incorporate a Defence payload comprising four X-band(60Mhz), four Ka-band (33MHz) and five UHF (5kHz and one 25kHz) channels and anumber of littoral, earth and steerable spot beam antenna footprints.

The satellite’s footprint will essentially provide coverage from Sri Lanka in the westto Hawaii in the east, the littoral coverage will support operations in mainlandAustralia and the littoral zone and the steerable spot beams will provide up to2,000km diameter of coverage anywhere in the satellite footprint.

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Phase 3C has also seen the development by DSTO of a high bandwidth TheatreBroadcast System (TBS) Technology Demonstrator using Ku-band services on theOptus B-1 satellite. This equipment was used in East Timor with excellent results andis currently undergoing an extensive trials program by the DMO, in order to developthe requirements for the mature TBS capability.

Phase 3E is for the provision of the terrestrial satcom infrastructure needed to fullyutilise the Defence payload on the Optus C-1 satellite. Key activities include theadoption of the Theatre Broadcast System, an indigenous development superior toother systems, the introduction of a fleet satcom command and control capability andprovision of selected ground infrastructure.

The provision of a fleet capability will involve major expenditure, including the desireby Navy to have a common antenna for X and Ka bands within the limited space andweight constraints of major surface combatants. Much of this will be achievedthrough the Advanced Satellite Terrestrial Infrastructure System (ASTIS) split intoseparate contracts, negotiations for some of which are currently under way.

Phase 3F is the final activity in this phase and concerns further development toimprove the robustness and capability of the initial system delivered under Phase 3E.

Future Phases 4 and 5, with Years of Decision of 2007/08 and 2010/11 respectively,are for the progressive introduction of an ADF-owned mature capability for which anumber of options are emerging including a capability provided through a satelliteconsortium, a military ADF-owned payload in a commercial satellite, or participationin an allied military constellation. To date, there has been very limited cost assessmentof any of these three approaches.

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Minehunter Coastal (Sea 1555)

Project overview and key issues:

The RAN’s Minehunter Coastal project has been a success story for the RAN, DMOand Australian industry. The six sophisticated minehunters constructed under thisproject by ADI Ltd in Newcastle, NSW, have been delivered with only minor agreedschedule variation, within budget and with their key sensors and combat data systemsworking at or close to their full potential.

The Huons, and their associated mine warfare command and control facilities, are acritical operational capability for Australia. They provide a robust counter to the threatof naval mines, which remain a cheap and relatively simple way of seriouslydisrupting naval operations and maritime trade.

The Huon-class Minehunter Coastal (MHC) is a 52.5-metre, 720 tonne vessel made ofglass fibre-reinforced plastic (GFRP) with a crew of 38. It is equipped with a minehunting sonar capable of detecting mines in both shallow coastal waters and on thecontinental shelf. This can be lowered to varying depths below the keel to hunt fortethered and ‘ground’ mines laid on the seabed itself.

Once a mine has been detected the MHC deploys one of its two remotely-operatedvehicles carrying its own sonar and TV camera to identify the mine and a demolitioncharge to destroy it. The Huons also carry a recompression chamber and otherfacilities to embark clearance divers in support of minehunting operations.

The Huon-class ships, like the US Navy’s Osprey-class minehunters, are based on theItalian Gaeta-class design. The Huon-class vessels are the first from the Gaeta familyto be equipped with the Thales Underwater Systems Type 2093 variable-depth sonarand BAE Systems Nautis IIM Tactical Data System.

Significant software development and systems integration had to be undertaken forthese systems. The first of class, HMAS Huon, was delivered with her mission-criticalsystems operational. The remaining 5 minehunters have all been delivered with thelast, HMAS Yarra, delivered in December last year. The Commonwealth and ADInegotiated a four per cent increase in the scope of the contract, but this resulted inonly a one per cent slip in the original schedule.

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The DMO, RAN, ADI and its subcontractors addressed the most risky element of theproject – combat/mission system software development and integration - quite earlyon. Operational Test and Evaluation has exposed some areas of marginal systemperformance as well as highlighting potential well beyond what was contracted for.Although the MHCs are successfully performing operational tasks, formal AcceptanceInto Naval Service may not be achieved until late this year, pending resolution ofperformance issues identified in testing.

Australian Industry Involvement (AII):

The contracted AII target was for 68.7 per cent local content in the constructionphase, and the establishment of in-country support capabilities for the platform,sensors and combat system. These targets have been met, with ADI carrying out asignificant proportion of the detailed design work in Australia.

The establishment of local construction and support activities has reduced repair turnaround times and equipment and spares holdings as well as creating a sustainablecapability to perform software support and development through the life of the ships.

A study by Tasman Economics, sponsored by the DMO and Australian IndustryGroup (AIG) Defence Council, has identified significant operational capability andnational economic benefits from building these ships in Australia. The study foundthat the nine-year construction program for the minehunters contributed up to $887million to Australia’s GDP, maintained over 1,800 full-time equivalent jobs each yearthroughout Australia, and boosted the technology base, management skills and exportprospects of participating companies.

151

P-3C Upgrade Implementation

(Air 5276)

Project overview and key issues:

The RAAF’s fleet of P-3C Orion Maritime Patrol Aircraft has been undergoing asubstantial upgrade, prolonging the operational life of the aircraft (to around 2015) byreducing their operating weight and enhancing their maritime surveillance capability.This is being achieved by replacing outdated and difficult to maintain systems withmodern, much more capable systems. The complex software development task,particularly in the Data Management System (DMS), has resulted in delays exceedingthree years in the delivery of the upgraded aircraft.

The program involves almost a total avionics and mission system upgrade, providingthe crew with a comprehensive suite of tools to enhance the effectiveness of theirmission and thus the effectiveness of Australia's maritime surveillance. The primecontract includes the development of ground based support facilities including anOperational Mission Simulator (OMS) for crew training, a Systems EngineeringLaboratory (SEL) for software maintenance and technical research, and a missionanalysis facility for crew briefing/debriefing. As they are upgraded, aircraft in thefleet will be designated AP-3C to reflect their unique Australian capability.

E-Systems (subsequently Raytheon and now L3 Communications) was selected aspreferred tenderer in July 1994 with a fixed price low-risk proposal of $US360m(equivalent to $A545m at the time of the bid). Contract negotiations were protractedwith the contract finally signed in January 1995 by which time the Phase 2 contractprice had risen to $A671m.

Two other phases of Air 5276 also contribute to the life extension of the P-3 Orion.These are Phase 2B, which provided for the acquisition and modification of three ex-USN P-3B aircraft into TAP-3 (Trainer Aircraft P-3) aircraft (to reduce training hourson the upgraded fleet), and Phase 3, Advanced Flight Simulator. The $37.7m contractfor the simulator was awarded to Wormald Technology, subsequently ThalesSimulation & Training, in October 1998. Stage 1 of the flight simulator has beencompleted. As yet unapproved phases include acquisition of EW self-defencesystems, enhanced electro-optic detection systems, upgraded data links and finallyAP-3C replacement or remanufacture.

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Under the contract with Raytheon the first aircraft underwent prototype modificationsand testing at their Greenville, Texas facility, with the rest of the fleet modified inAustralia. The first aircraft was inducted into the program in January 1997 andunderwent initial flight trials in the US in May 1999, and after further modificationand testing it arrived in Australia in December 2000. The aircraft then underwent anextended period of testing in Avalon, Victoria, as each new and improved version ofthe software was installed. It wasn’t until October 2001 that the prototype aircraft,together with the first of the aircraft to be modified in country, were delivered to theRAAF.

Design and development of this software-intensive system has been a very complextask resulting in significant delays. The Commonwealth loaded final versions of theDMS software in May 2002 prior to formal acceptance of the aircraft in July 2002.The Operational Mission Simulator (OMS) was delivered to the Commonwealth inSeptember 2002 and the Software Integration Facility (SIF), which is one half of theSoftware Engineering Laboratory (SEL), was delivered in November 2002. DuringExercise RIMPAC 2002 in Hawaii, the AP-3C conducted two successful AGM-84Harpoon launches.

Supplemental Type Certification and Service Release for the AP-3C was granted inNovember 2002 and the OMS was accepted by the Commonwealth in December2002. Eight aircraft have now been delivered the last in May 2003. It is anticipatedthat the program will be completed by mid-2005. Stage 1 (ready for training) of theAP-3C Advanced Flight Simulator (AFS) was completed in January 2003.

Australian Industry Involvement (AII):

Worth some 55% of the contract value, Australian industry content in this program isconsiderable. Aircraft modification kits are assembled and installed in the aircraft atAvalon by L-3 Communications Australia which is also responsible for flight andacceptance testing of the aircraft from 02 onwards. BAE Systems Australia isundertaking the design, systems integration and development of the OMS, providingenvironmental simulation suites and installing the SEL in the Integrated Test &Training Facility at RAAF Edinburgh. The wiring looms are being manufacturedlocally as are some acoustic components.

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Replacement Patrol Boat (Sea 1444)

Project overview and key issues:

This project aims to acquire a fleet of simple, lightly armed patrol boats, to be knownas the Armidale-class. These will replace the RAN’s existing 15-strong fleet of 42-metre, 220-tonne Fremantle-class patrol boats which, although crewed by the RAN,are the principal maritime patrol and response element of Australia’s CivilSurveillance Program, which is managed by Coastwatch in consultation with theRAN. The Fremantle-class patrol boats have a crew of 22.

The RAN’s Patrol Boat Force carries out surveillance, interception, investigation,apprehension and the escort to port of vessels suspected of illegal fisheries,quarantine, customs or immigration offences. The Replacement Patrol Boat Force willfulfil the same civil capability as well as being deployed to regional countries forexercises and cooperative operations. As strategic circumstances demand, the forcewill contribute to the protection of our harbours and coastal shipping. Neither theFremantles nor the RPBs are required to operate in the Southern Ocean.

A planned eight-year life of type extension for the Fremantles was cancelled in 1999because it was found to be more cost-effective simply to replace them. A two-stageRequest for Tenders was issued in August 2001 and an estimated nine firms orconsortia responded in November. Tenderers were invited to submit their credentials,capabilities, a broad description of the goods and services they were proposing tomeet the requirements of the RFT, including indicative pricing information fordelivery of the patrol boat capability under either of two options: a privately financedarrangement (PFI) or through direct purchase.

Rather than specifying the number of vessels required, the tender documents statedthe required capability and rate of effort and invited tenderers to provide innovativeand cost effective solutions to meet it.

The project schedule has slipped since early-2000 due partly to White Paperdeliberations and to intense scrutiny of the cost/benefits of PFI by both Defence andthe Department of Finance and Administration.

The Government decided in 2002 to purchase the boats directly. Three shortlistedtenderers - ADI, Tenix, and Defence Maritime Services partnering with Austal -advanced to Stage 2 of the tender evaluation and source selection process, whichclosed on 19 November 2002. This stage saw these companies submit detailedtenders which were evaluated against the criteria set out in the RFT.

The preferred tender will be selected on the basis of best value for money. A sourceselection decision was imminent at the time of writing, with a contract signature due

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around mid-2003. The DMO stated in May that the timing of the final source selectiondecision and contract signature is on track to meet the White Paper commitment forthe Armidale-class Patrol Boats to enter service from Financial Year 04/05 with finaldelivery during the 2007/08 financial year.

The Armidale-class Patrol Boats will be significantly bigger than the Fremantles, buttheir armament, equipment and crew size will be little different. They will have twoRigid Hull Inflatable Boats for conducting boarding operations instead of theFremantles’ single boat and will have a relatively simple sensor and communicationssuite designed for para-military surveillance. They will be armed with the same M242Bushmaster 25mm gun as the Army’s ASLAVs, though on a Typhoon naval mountdesigned by Israeli firm Rafael; the guns were ordered from General Dynamics LandSystems in November 2002.

The technical risks are slight – these boats will be constructed to merchant rules, witha simple sensor suite. Australia’s marine industry is more than capable of designing,building and maintaining such boats. They are expected to have a service life of 15years.

The estimated value of the contract is about $380 million, plus an estimated $20million/year for 15 years to support the fleet in service.

Australian Industry Involvement (AII):AII Target: The DMO would prefer the boats to be built in Australia, at an existingfacility, with the maximum cost-effective Australian content, including the sensor andcommunications suite. The essential AII target is for the RPBs to be supported,maintained, repaired and modified in Australia by Australian industry.

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SECTION 6 –THE FINANCIAL STATEMENTS EXPLAINED

Section 6.1: Defence ResourcingTotal Defence Resourcing has been clearly summarised at Table 1.2 in the PBS.While much of the Defence Budget can be understood without recourse to thefinancial statements, it is through the financial statements that the key financialaspects of the Budget are consolidated, including the impact on future years.Therefore it is useful to understand the relationship between Total DefenceResourcing as presented in the PBS and the budgeted financial statements.

Table 1.2 [PBS p.19] shows that Defence receives funding in a number of differentways, and pays money back to Government in several way as well. The Governmentpurchases 29 Outputs from Defence, which are grouped into six Outcomes. A seventhOutcome/Output covers administered appropriations. The price Government pays forthese Outputs is the Output Appropriation. Additional funding for the Outputs comesfrom Defence’s own source revenues. Defence also receives funds to invest in capitalassets. This comes from the Government’s equity injection and from net capitalreceipts being the proceeds of sales of existing assets after capital withdrawal byGovernment.

PBS Table 1.2: Total Defence Resourcing

2002–03Projected

Result

2003–04Budget

Estimate

2004–05ForwardEstimate

2005–06ForwardEstimate

2006–07ForwardEstimate

Seria

l No

$’000 $’000 $’000 $’000 $’000

Departmental

1 18,230,325Revenue from Government for Price ofOutputs 14,398,319 14,816,839 14,553,171 15,154,819

2 995,201 Equity Injection 1,020,524 778,580 1,295,154 1,653,2143 19,225,526 Total Revenue from Government (1+2) 15,418,843 15,595,419 15,848,325 16,808,0334 330,316 Own-Source Revenue 280,945 280,209 285,816 291,4445 109,482 Net Capital Receipts 106,484 66,480 40,000 40,0006 439,798 Sub-Total (4+5) 387,429 346,689 325,816 331,4447 19,665,324 Total Departmental Funding (3+6) 15,806,272 15,942,108 16,174,141 17,139,477

Real Year-on-Year per cent Growth 4.7% 2.5% 1.5% 6.0%Administered

8 2,236,481 Administered appropriation 2,236,481 2,336,481 2,336,481 2,436,4819 21,901,805 Total Defence Resourcing (7+8) 18,042,753 18,278,589 18,510,622 19,575,958

The key sources of funding for Defence are explained in more detail as follows:

Revenue from Government for Price of Outputs (Output Appropriation): In2003–04 the Government will appropriate $14 398 million towards the price of theDefence Outputs. This is the ‘Price to Government of Defence’s Outcomes’ in PBSTable 2a. In 2002-03 the projected appropriation for outputs is $18 230 million andincludes $5 056 million associated with the capital use charge that has beendiscontinued from 2003-04. It appears as Appropriations from Government inRevenue in the Budgeted Statement of Financial Performance PBS Table 3.1.

Equity Injection: In 2003–04 the Government will appropriate $1 021 million tosupplement investment in specialist military equipment ($3 552 million) and land andbuildings, vehicles and other equipment ($514 million). The equity injection is shownin the Budgeted Statement of Cash Flows PBS Table 3.3 and also appears in theCapital Budget Statement PBS Table 3.4.

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Own Source Revenue: In 2003–04 Defence has budgeted to raise $281 million of‘own source’ revenue and is made up of sale of goods and services $239 million andother revenue $42 million. In 2001–02 a total of $433 million was raised including$15 million in interest, $103 million in housing and other property rentals, $38 millionin rations and quarters charged to personnel, $44 million from fuel sales to foreigngovernments, $42 million from sales of other goods and services and $59 millionreceived for Federation Fund activities. Own source revenue appears as Revenue inthe Budgeted Statement of Financial Performance PBS Table 3.1.

Net Capital Receipts: In 2003–04 Defence have budgeted to receive $306 million incapital receipts from the sale of assets (mainly buildings and property). The capitalreceipts appear as cash receipts from investing activities in the Budgeted Statement ofCash Flows PBS Table 3.3 and within the Capital Budget Statement PBS Table 3.4.

Defence will only retain about $106 million of these sales, after the Government takes$200 million through a capital withdrawal in 2003-04. This is the mechanism throughwhich the Government as owner takes back some of its equity in Defence and is usedwhen assets like property are sold.

Administered Appropriation: These are ‘administered’ resources that Defencesimply passes onto the military superannuation schemes and housing supportschemes. The budgeted appropriation for 2003-04 is $2 336 million and appears asExpenses Administered on Behalf of Government within the Schedule of BudgetedRevenues and Expenses Administered on Behalf of Government PBS Table 3.6.

Figure 6.1.1 shows the flows of these resources between the Government andDefence. This illustrates the linkage between output revenues and the capital budgetvia operating receipts. These operating receipts include the left over cash from outputrevenue (price) due to non-cash expenses like depreciation and inventoryconsumption. (Figures not exact due to correction for GST, banking and timing shift.)

Figure 6.1.1 Defence Funding Schematic

DEFENCE

h. Capital Budget$4067 m

(i + e + g – f)

e. EquityInjection$1021 m

g. CapitalReceipts$306 m

f. CapitalWithdrawal

$200 m

a. Output PriceAppropriation

$14 398 m

c. Output Revenues$14 679 m

(a + b)

GOVERNMENT

i. OperatingReceipts$2940 m

b. Own SourceRevenue$281 m

Operating Activities*$11 739 m

Capital Investment$4067 m

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Accrual AccountingAccrual accounting is activity driven. It accounts for all resources when they are consumedand not necessarily when the corresponding cash is transacted. This can result in non-cashexpenses such as depreciation and inventory consumption resulting from the consumption ofresources previously paid for. Accrual accounting also includes expenses associated withunpaid obligations like creditors and employee entitlements.

The first step to understanding accrual accounting is to understand the language used. Someof the terms are obvious but others are not.At the most basic level are the resources that are used in Defence. This includes cash,inventory (eg bullets, soap and uniforms), capital assets (eg tanks, buildings, and evensoftware), the labour of staff and goods and services from the market place.The earning of income is called revenue. Defence earns revenues through sales, interest andthe output appropriations from the Government. The consumption of a resource is called anexpense.Some resources are paid for and used within the accounting period (eg salaries); other non-cash expenses arise through the use of resources previously paid for called assets such asinventory, which is consumed. Another non-cash expense arises when capital assets areconsumed through their depreciation in value over time. This yields an annual expenseroughly equal to the value of the capital asset divided by its economic life. The differencebetween revenues and expenses is called the net operating result. A positive operatingresult is a profit, and a negative result is a loss. Defence budgets for a zero operating result.The subtraction of expenses from revenues is done in the Budgeted Statement of FinancialPerformance [PBS Table 3.1], more commonly called the Operating Statement or Profit andLoss Statement. Resources that are presently owned are called assets. These can be eitherfinancial (eg cash, investment or monies owed) or non-financial (eg capital assets, inventory).Obligations to pay for resources in the future are called liabilities (eg accumulated employeeentitlements and bills to be paid). This includes liabilities associated with non-cash relatedexpenses such as increases in employee entitlements (long service leave) which have arisenthrough the use of resources which have not been paid. The difference between assets andliabilities is the net assets or equity.The subtraction of liabilities from assets to calculate equity (net assets) occurs on theBudgeted Statement of Financial Position [PBS Table 3.2], more often called the BalanceSheet. The balance sheet captures resources not yet used (assets) and resources used but notyet paid for (liabilities).Even in the accrual framework cash is important. The Budgeted Statement of Cash Flows[PBS Table 3.3] often called the cash flow statement tracks the flow of cash through Defence.It reports on the cash received and used for the operating activities that deliver the Defenceoutputs. It also reports on the cash used for investing activities like the purchase of tanks,buildings and other capital assets, as well as the cash received from the sale of assets. Finallyit reports on the financing activities that include cash received from, and paid to,Government. This includes the equity injection, capital use charge and capital withdrawal.These peculiar artefacts of the framework are explained on the next page.The Defence financial statements also include a Capital Budget [PBS Table 3.4] that reportsthe expenditure of cash on capital assets. It also reports on how the capital assets are fundedand reports on the cash receipts gained from the sales of capital assets, and the variouspayments to and from Government associated with capital investment. As with the cash flowstatement, all the entries refer to cash transactions. The Capital Budget provides insight intothe investing and financing aspects of the Statement of Cash Flows.

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6.2 Budgeted Financial Statements Explained [PBS Chapter 3]

The financial statements provide some insight into the planned financial performanceof Defence for the current year 2003-04 as well as the impact on future years.

While public sector agencies such as Defence do not have a profit imperative, it is stilluseful to discuss the financial statements as if Defence was a profit-making company.Defence, as an organisation, must manage such issues as ‘what is the correct price tocharge the Government for the delivery of services (outputs)’ and ‘what is anappropriate level of capital to hold in the business to sustain operations’, just as aprofit-making company must.

The financial statements in Chapter 3 of the 2003–04 PBS detail an estimate of thecurrent year result, the planned financial performance for the next 12 months and‘forward estimates’ for the next 3 years. Revised estimates of budgeted performanceare published later in the year in the PAES, and the actual financial performance isreported in October in the Annual Report.

The Defence PBS essentially provides three sets of budgeted financial statements:

• The ‘departmental’ statements [PBS Table 3.1 to 3.5] for the Department ofDefence. These describe the resources that the department controls to deliveroutputs. In the ordinary sense, these are the revenue and costs associated withrunning Defence;

• The ‘administered’ statements, referred to as schedules, [PBS Table 3.6 to 3.8] forthe funds administered on behalf of Government primarily used for militarysuperannuation schemes; and

• Financial statements for the Defence Housing Authority [PBS pp.205–210]. TheDefence Housing Authority which forms part of the Defence Portfolio is notconsolidated into the Defence financial statements and are not analysed in thisbrief. DHA charges Defence for rent and housing-related services and pays adividend to government.

We explain the departmental statements below. The other two sets of statements areof less interest and we will only touch on them briefly. The departmental financialstatements include:

• Budgeted Statement of Financial Performance (also known as the OperatingStatement or Profit and Loss Statement – records revenues and expenses) [PBSTable 3.1];

• Budgeted Statement of Financial Position (also known as a Balance Sheet –records assets, liabilities and equity) [PBS Table 3.2];

• Budgeted Statement of Cash Flows [PBS Table 3.3]; and

• Capital Budget Statement (shows the budgeted spend on capital and the source offunding) [PBS Table 3.4].

In addition to the key statements and notes, a summary of movement of non-financialassets which shows the movements in property, plant and equipment and specialistmilitary equipment is also included. [PBS Table 3.5].

159

The departmental financial statements only report at the most aggregate level andrefer to the total financial performance of Defence as a whole. There is no informationon the individual outputs, services or the Defence groups in these statements.However, at PBS Chapter 2 prices to government are given for each of theGovernment Outcomes and their associated Outputs, including a profile of theassociated revenue and expenses for each Outcome and Output.

An important part of the financial statements are the accompanying notes [PBSpp.126–130]. These include explanatory notes on accounting policy and a list ofvariations between the 2003–04 budget and previous 2003–04 revised estimatespublished in the 2002–03 PAES in February 2003. The notes on variations only reportmarginal changes and give no insight into the ‘base’ of the Defence budget. However,a useful reconciliation of changes to Defence’s funding since the White Paperincrease in PBS 2001-02 is provided in PBS table 1.4.

The Defence Annual Report provides a much more extensive set of notes that breakdown many of the items in the financial statements into sub-categories. If you want tounderstand the budgeted financial statements it helps to have a recent copy of theannual report at hand so that you can refer to the notes to the financial statements.

Revenues and expenses in the Budgeted Statement of Financial Performance arecalculated using the accrual basis of accounting. Appropriations to fund expensestherefore include amounts for both cash and non-cash items.

The Budgeted Statement of Financial Performance – The OperatingStatement [PBS Table 3.1]

The Statement of Financial Performance reports on the accrual revenues and expensesinvolved in the delivery of the Defence Outputs during the financial year. It does notinclude what is spent on the investment in capital assets. Capital assets held arereported in the Statement of Financial Position PBS Table 3.2.

In simplest terms, the Statement of Financial Performance subtracts Defence’s totalexpenses from it total revenues to calculate the net operating result (profit or loss) forthe financial year. For 2003-04 Budget this is represented as:

NET OPERATING RESULT$164 million

= REVENUES$14 957 million

– EXPENSES$14 793 million

Budgeted Revenues, or income, for 2003-04 broadly comprises:

• Appropriations from Government ($14 398 million) includes the Price forOutputs Appropriation and funds the operational expenses of Defence. Thisappropriation, together with revenue from other sources (such as sale of goods andservices and other revenue), covers both cash related (eg employee expenses andsuppliers) and non cash related expenses (eg depreciation and inventoryconsumption). Explanations for variations to budget for appropriations areprovided at PBS pp.128-129.

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• Sales of Goods and Services ($239 million) includes revenue from goods andservices provided to organisations other than the agreed outputs to Government.A detailed breakdown is not provided however, the nature of these revenues isdemonstrated using 2001-02 actual revenue in Table 6.2.1.

Table 6.2.1 Revenue from Sales of Goods and Services 2001-02

• Assets Now Recognised ($278 million) This is the revenue associated withcorrections in accounting for assets found or recognised and not previouslyrecorded.

• Interest In conjunction with the cessation of the agency banking incentive schemefrom January 2003, Defence will no longer earn interest on cash balances. Priorto this Defence maintained significant cash at bank balances ($835 million at 30June 2002) and had budgeted to earn interest of $25 million for 2003-04 year priorto this change in arrangements. We discuss the impact of the Government’s

• Other Revenue ($42 million) includes foreign military sales refunds, settlementof damages and other miscellaneous items.

• Budgeted Expenses for 2003-04 broadly comprises the five components in Table6.2.2.

Table 6.2.2 Budgeted Expenses 2003-04

Sales of Goods and Services 2001-02

0

20

40

60

80

100

120

Fuel sales toforeign

governments

Rentalcontributions

Rations andquarterscharges

Operationalexercises,training and

facilities

Other

$ m

illion

Budgeted Expenses 2003-04

01000

2000300040005000

60007000

Employees Suppliers Depreciationand

amortisation

Write dow n ofassets

Borrow ingexpenses

$ m

illion

Budget Estimates and Framework Review at Section 7.

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The key components are:

• Employees represent all costs associated with the employment of military andcivilian personnel. A detailed profile of the components of this expense is notprovided however the nature of these costs is well demonstrated using the 2001-02actual costs in Table 2.2.3.

Table 2.2.3 Employee Expenses 2001-02

• Suppliers include all costs associated with the supply of goods and services toDefence for use in delivering the Outputs. The actual expenses for 2001-02appears in Table 6.2.4.

Table 6.2.4 Suppliers Expenses 2001-02

Breakdown of Employee Expenses 2001-02

0 500 1000 1500 2000 2500 3000

Salary and wages military

Salary and wages civilian

Superannuation

Other allowances

Workers compensation

Fringe benefits tax

Health services

$ (million)

Breakdown of Supplier Expenses

0 400 800 1200

Repair and overhaul

Inventory consumption

Goods and services

Facilit ies operations

Minor equipment

Consultants

Travel

Operating leases

$ (million)

162

• Depreciation and amortisation represents the annual cost of using up assets overtime – approximates the asset value divided by remaining life.

• Write Down of Assets is the reduction in the value of assets which are no longerused or exist such as specialist military equipment and inventories which areobsolete. This amount also includes net losses on asset sales.

The 2001–02 Annual Report provides more detailed information on actual expensesand revenues.

Net Operating Result

The net operating result shows the net financial impact on Defence’s resources of theoperating activities undertaken during the year. The budgeted result for 2003-04 is asurplus of $164 million as compared with a projected operating surplus of $4 792million for 2002-03. These results are not comparable due the inclusion of outputfunding for the capital use charge (CUC) in 2002-03 of $5 056 million. This is offsetby a corresponding amount returned to Government as a dividend which appears inthe Equity Interests component of the Statement of Financial Performance PBS Table3.1. The projected operating result for 2002-03 excluding the CUC is a loss of $264million.

The Equity Interests part of the Statement of Financial Performance summarises thenet change to Accumulated Surpluses at 30 June. This also appears on the Statementof Financial Position as a component of equity. The accumulated surpluses amount isthe sum of the past operating results that have occurred since the start of accrualreporting by Defence reduced by capital withdrawals of asset sales proceeds anddividends by way of the CUC.

The balance of accumulated surpluses is calculated in two steps:

� First, the net operating result is added to the ‘accumulated surplus’ from thebeginning of the financial year, called the Accumulated Surplus at 1 July, to givethe Total Available for Appropriation; and

� Then the accumulated surplus at the end of the financial year is calculated bysubtracting the payments to Government for the Capital Use Charge (nil: $5 056million for 2002-03) and Capital Withdrawals ($200 million: $473 million in2002–03).

The Budgeted Statement of Financial Performance PBS Table 3.1 is demonstrated onthe following page.

163

The Budgeted Statement of Financial Performance – The Operating Statement[PBS Table 3.1]

PBS Table 3.1: Budgeted Statement of Financial Performance

2002–03Projected

Result

2003–04PreviousEstimate

2003–04Budget

Estimate

Variation 2004–05ForwardEstimate

2005–06ForwardEstimate

2006–07ForwardEstimate

$’000 $’000 $’000 % $’000 $’000 $’000

REVENUES

18,230,325Appropriations fromGovernment 18,535,684 14,398,319 (22.3) 14,816,839 14,553,171 15,154,819

244,334Sales of goods andservices 231,802 239,014 3.1 238,026 243,261 248,508

20,000 Interest 25,000 – (100.0) – – –

415,000 Assets now recognised – 278,000 – – – –65,982 Other 41,646 41,931 (0.7) 42,183 42,555 42,936

18,975,641 Total Revenues 18,834,132 14,957,264 (20.6) 15,097,048 14,838,987 15,446,263

EXPENSES6,100,622 Employees 6,160,790 6,575,305 6.7 6,737,877 6,929,293 7,203,3294,752,018 Suppliers 4,584,573 4,979,608 8.6 5,240,877 5,033,499 5,272,948

1,370 Grants 2,013 1,874 (6.9) 1,911 1,949 1,988

2,677,814Depreciation andamortisation 2,826,637 2,826,637 – 2,984,937 2,742,171 2,835,282

620,000 Write-down of assets 100,000 378,000 278.0 100,000 100,000 100,000– Other – – – – – –

14,151,824 Total Expenses 13,674,013 14,761,424 8.0 15,065,602 14,806,912 15,413,547

31,643Borrowing costexpense 30,678 31,920 4.0 31,446 32,075 32,716

4,792,174 Net Operating Result 5,129,441 163,920 (96.8) – – –

EQUITY INTERESTS

38,072,157Accumulated surplusesat 1 July 37,412,657 37,334,737 (0.2) 37,298,757 37,122,925 37,122,925

42,864,331Total Available ForAppropriation 42,542,098 37,498,657 (11.9) 37,298,757 37,122,925 37,122,925

(5,056,094) Capital use charge (5,129,441) – (100.0) – – –(473,500) Capital withdrawal (88,900) (199,900) 124.9 (175,832) – –

37,334,737Accumulated SurplusesAt 30 June 37,323,757 37,298,757 (0.1) 37,122,925 37,122,925 37,122,925

RevenuesIncome earned through the deliveryof Defence’s Outputs and from othersources

Net Operating ResultThe net profit or losscalculated by subtractingExpenses from Revenue

Total available for appropriationThe equity from the start of the yearadjusted for the operating resultmade during the year

Capital WithdrawalCash returned to theGovernment from the saleof assets, mainly property

ExpensesResources consumed in the process of deliverythe Defence Outputs to Government. This islargely employee expenses, suppliers (includinginventory use) and depreciation

Capital use chargeThe charge levied by Governmentat 11% per annum for the use of$45 billion of net assets. This hasbeen discontinued from 2003-04.

Accumulated Surplus 30 JuneAccumulated results at the endof the year shown as part ofequity on Statement of FinancialPosition

Surpluses at 1JulyDefence’s totalaccumulated surplusat start of year

Theprice ofoutputs

See Statement of Financial Position

164

The Budgeted Statement of Financial Position – The Balance Sheet[PBS Table 3.2]

The Statement of Financial Position projects a snapshot of Defence’s assets, liabilitiesand equity (net assets) at the end of the financial year. This is calculated bysubtracting the total liabilities from the total assets to arrive at net assets. For 2003-04this is represented as:

NET ASSETS$46.8 billion

= ASSETS$51.3 billion

– LIABILITIES$4.5 billion

Budgeted assets for 2003-04 comprise:

• Financial Assets of $1.574 million is essentially made up of cash and receivables.An interesting comparison of 2003-04 budget with 2001-02 actuals is providedbelow.

• Cash. Until January 2003 Defence received its output appropriation in twenty-six equal drawdowns over the financial year (although this could be varied tomeet operating costs and some capital expenditures). Defence retained somecash in its bank account to meet future assets and liabilities ($835 million at 30June 2002). From January 2003 Defence returned all but $100 million to theOfficial Public Account and will now only draw down appropriations on ajust-in-time basis. This Government policy change is discussed in detail atSection 6.3.

• Receivables in 2003-04 ($1 473 million) predominantly represents undrawnappropriation in line with the introduction of the just-in-time cash drawdownarrangements. Refer to Section 7 for a discussion on this.

Receivables for 2001-02 included an amount for CUC receivable of $138million. Treatment of this item in the 2002-03 actuals will be interesting givenits discontinuation from 1 July 2003.

• Non-Financial Assets of $49 732 million as shown in Table 6.2.5.

Figure 6.2.5 Non Financial Assets 2003-04

Non Financial Assets 2003-04

0

5000

10000

15000

20000

25000

30000

35000

SpecialistMilitary

Equipment

Land andbuildings

Otherequipment &

infrastructure

Inventories Other &Intangibles

$ m

illion

165

Non financial assets include:

• Land and Buildings $8 211 million, and Infrastructure Plant andEquipment $37 234 million which primarily includes Specialist MilitaryEquipment of $32 635 million (including equipment in-service as well asunder construction).

• Intangibles ($84 million) including software and patents, copyrights andlicences.

Expenses incurred as a result of the use of these assets includes depreciation($2 827 million) and write down of assets ($378 million) shown on theStatement of Financial Performance. As assets are sold the difference betweenthe written down value of assets and the sale proceeds (Statement of CashFlows) are reported as profits or losses on sale. Defence has not budgeted forany profit or loss on sale. An analysis of the trends of these assets andexpenses is undertaken at Section 7.

• Inventories are budgeted at a net value of $3 638 million after a reduction forobsolescence (this breakdown not shown in the PBS). As inventories are usedthey are recorded as an expense in the Statement of Financial Perfromance inthe suppliers category. Again this consumption of inventory is not shownseparately although it does appear in the analysis of outputs at PBS Table 2a.

• Other ($564 million) includes prepaid expenses and capital items.

• Budgeted liabilities represent amounts owing to other parties and comprises threecomponents, employee provisions, suppliers’ liabilities and leases. These aregraphed in Figure 6.2.6.

Figure 6.2.6 Budgeted Liabilities 2002-03

Liabilities 2003-04

0

500

1000

1500

2000

2500

3000

3500

Employee provisions Suppliers Leases

$ m

illiio

n

166

• Employee Provisions is $3140 million for 2003-04 and is the major liabilityfor Defence. Actual employee provisions reported for 2001–02 appears inFigure 6.6.7.

Figure 6.2.6 Employee Liabilities 2001-02

• Suppliers ($1033 million). Actual creditors reported in 2001–02 includednon-capital trade creditors (~$653 million) and capital trade creditors(~$377 million). No change in total suppliers is projected in the PBS from 30June 2002 to 30 June 2007.

− Leases ($336 million) being mainly a finance lease arrangement with theDefence Housing Authority for the supply of housing to ADF personnel.

• The Net Assets also represent the Total Equity. The total equity represents theGovernment’s overall owner interest in Defence. In the Equity part of theStatement of Financial Position the total equity is broken down into threesomewhat artificial categories:

• Capital ($3315 million) is the accumulated result of equity injections since1999 less capital withdrawals up to 30 June 2002. From 2002-03 this istreated as an adjustment to accumulated surpluses. Capital withdrawn relatesto the Government’s share of the proceeds from property sales.

• Revaluation Reserves ($6166 million) which result from the revaluation ofassets. For accounting purposes, where the value of assets has been revisedand increased, Defence is required to account for these increases throughincreasing the asset as well as a special ‘revaluation reserve’; and

• Accumulated Surpluses is the accumulated results from previous years plusthe initial value of net assets (or equity) when accrual reporting wasintroduced.

Finally on the Statement of Financial Position PBS Table 3.2 the assets and liabilitiesare broken down into current and non-current. Current assets and liabilities are thosethat those which are expected to be realised within the next twelve months, whereasnon-current ones are expected to be realised beyond that time.

The Budgeted Statement of Financial Position is demonstrated on the following page.

Employee Liabilities 2001-02

0200400600800

1000120014001600

Military compensation Long service leave Annual leave

$ m

illion

167

The Budgeted Statement of Financial Position – The Balance Sheet[PBS Table 3.2]

PBS Table 3.2: Budgeted Statement of Financial Position2002–03

ProjectedResult

2003–04PreviousEstimate

2003–04Budget

Estimate

Variation 2004–05ForwardEstimate

2005–06ForwardEstimate

2006–07ForwardEstimate

$’000 $’000 $’000 % $’000 $’000 $’000

ASSETSFinancial Assets

100,000 Cash 1,010,955 100,000 (90.1) 100,000 100,000 100,0001,219,467 Receivables 513,392 1,473,826 187.1 1,582,393 1,592,793 1,454,493

1,319,467 Total Financial Assets 1,524,347 1,573,826 3.2 1,682,393 1,629,793 1,554,493Non-Financial Assets

8,349,846 Land and buildings 8,182,057 8,210,737 0.4 8,042,606 8,042,588 7,968,319

36,275,309Infrastructure, plantand equipment 37,993,356 37,234,123 (2.0) 38,052,121 39,489,632 41,244,129

119,731 Intangibles 84,804 84,804 – 48,872 56,389 59,3873,682,509 Inventories 3,458,391 3,638,087 5.2 3,559,758 3,491,345 3,544,714

564,424 Other 564,424 564,424 – 564,424 564,424 564,424

48,991,819Total Non-FinancialAssets 50,283,032 49,732,175 (1.1) 50,267,781 51,644,378 53,380,973

50,311,286 Total Assets 51,807,379 51,306,001 (1.0) 51,950,174 53,274,171 54,935,466

LIABILITIESDebt

348,676 Leases 336,115 336,115 – 322,508 308,028 292,608348,676 Total Debt 336,115 336,115 – 322,508 308,028 292,608

Provisions and Payables3,068,933 Employees 3,187,259 3,140,418 (1.5) 3,228,683 3,272,006 3,295,5071,033,744 Suppliers 1,033,744 1,033,744 – 1,033,744 1,033,744 1,033,744

15,052 Other 15,052 15,052 – 15,052 15,052 15,052

4,117,729Total Provisions andPayables 4,236,055 4,189,214 (1.1) 4,277,479 4,320,802 4,344,303

4,466,405 Total Liabilities 4,572,170 4,525,329 (1.0) 4,599,987 4,628,830 4,636,91145,844,881 Net Assets 47,235,209 46,780,672 (1.0) 47,350,187 48,645,341 50,298,555

EQUITY2,295,248 Capital 3,745,309 3,315,772 (11.5) 4,094,352 5,389,506 7,042,7206,214,896 Reserves 6,166,143 6,166,143 – 6,132,910 6,132,910 6,132,910

37,334,737 Accumulated surpluses 37,323,757 37,298,757 (2.1) 37,122,925 37,122,925 37,122,925

45,844,881 Total Equity 47,235,209 46,780,672 (1.0) 47,350,187 48,645,341 50,298,555

Represented by2,176,168 Current assets 2,713,978 2,181,945 (19.6) 2,342,813 2,401,205 2,464,066

48,135,118 Non–current assets 49,093,401 49,124,056 0.1 49,607,361 50,872,966 52,471,4002,122,245 Current liabilities 2,164,262 2,148,011 (0.8) 2,179,679 2,195,582 2,204,6752,344,160 Non-current liabilities 2,407,908 2,377,318 (1.3) 2,420,308 2,433,248 2,432,236

Assets (what Defence owns)(resources that will bring future benefit) Thefinancial and non-financial assets budgeted tothe end of the financial year

Liabilities (what Defence owes)(resources that have been used but not paid for)Payments that Defence is required to make atsome time in the future

Net Assets = Total EquityThis is simply the differencebetween the assets and theliabilities and represents thevalue of the owner’sinterests

Here the equity (net assets)are broken up in terms of thesource or nature of equity

168

The Budgeted Statement of Cash Flows [PBS Table 3.3]

The budgeted statement of cash flows reports the actual receipt and expenditure ofcash in Defence. It is however, just as complex as any of the other statements.

The cash flows are broken into three categories and the net impact of cash movementsfor each category is then brought together to literally show the net impact onDefence’s bank account at the end of the financial year. In broad terms the 2003-04budget shows the movements in cash as follows:

Change to cash$nil

= Net cash from/tooperating activities

$2 952 million

+ Net cash from/toinvesting activities –-

-$3 760 million

+ Net cash from/tofinancing activities

$808 million

Net Cash from/to Operating Activities is the net cash remaining after the delivery ofthe Defence outputs. As is shown, from the total cash received from operatingactivities of $15 579 million about $6504 million is spent on employees and$5788 million is spent on suppliers. The composition of these amounts are similar tothe corresponding expenses in the Statement of Financial Performance – although thenumbers will differ slightly due to goods and services tax (GST) and timingdifferences between expenses are incurred and when the cash is paid. The total unusedcash from operating activities is around $2952 million.

It is interesting to note the appearance of transfers of cash to and from the OfficialPublic Account which is a direct result of the just-in-time cash drawdownarrangements introduced in January 2003. They are in effect cash flows arising fromnot drawing down all of the appropriation available to Defence. This is discussed inmore detail in Section 7.

Net Cash from/to Investing Activities is the difference between the gross receiptsfrom the sale of assets (including equipment, property and buildings $306 million),and the purchase of specialist military equipment ($3552 million) and other property,plant and equipment ($514 million). The specialist military equipment includes themajor and minor capital equipment programs, while other property, plant andequipment includes much of the capital facilities program. Investing activitiesconsume $3760 million more cash than they generate from capital receipt activities.The difference is funded from the excess operating activities cash and equityappropriation.

It is possible to see how much of the excess operating cash is used to purchase capitalitems by looking at PBS Table 3.4 Capital Budget Statement. Of the $2 952 millionnet operating cash, $2 939 million is budgeted to be used as funding for capital,referred to as ‘operating receipts’ within Total Capital Funding. This amountrepresents funding in the output appropriation for depreciation and other non cashamounts that is being applied to buy assets.

169

Net Cash from/to Financing Activities is mainly concerned with accounting for thevarious cash transactions between Defence and the Government related to capitalinvestment.

Net cash from/tofinancing activities

$808 million=

Equity injection$1 021 million –

Capitalwithdrawal

$200 million–

Repaymentof debt

$13 million

Finally, the three net cash changes over the financial year are brought together toproject the cash held by Defence on 30 June 2004 on the basis of the starting balanceat 1 July 2003.

Cash held 30 June 2004$100 million

= Cash held 1 July 2003$100 million

+ Change to cash$nil

Again, the significant variation in the projected cash held between the previousestimate of $1 010 million for 2003-04 and 2003-04 Budget Estimate of $100 millionresulting from the introduction of the just-in-time cash drawdown arrangementsintroduced in January 2003 is discussed in detail in Section 7.

The Budgeted Statement of Cash Flows is demonstrated on the following page.

170

The Budgeted Statement of Cash Flows [PBS Table 3.4]

PBS Table 3.3: Budgeted Statement of Cash Flows

2002–03Projected

Result

2003–04PreviousEstimate

2003–04Budget

Estimate

Variation 2004–05ForwardEstimate

2005–06ForwardEstimate

2006–07ForwardEstimate

$’000 $’000 $’000 % $’000 $’000 $’000

OPERATING ACTIVITIES

18,230,325Appropriations fromGovernment 18,535,684 14,398,319 (22.3) 14,816,839 14,553,171 15,154,819

265,347Sales of goods andservices 251,737 259,570 3.1 258,496 259,073 264,662

20,000 Interest 25,000 – (100.0) – – –785,624 Net GST refund 826,386 834,387 1.0 835,181 820,492 882,48063,982 Other 39,646 39,931 0.7) 40,183 42,555 42,936

–Cash transfer fromOfficial Public Account – 46,900 – 34,800 52,600 75,300

19,365,278 Total cash received 19,678,453 15,579,107 (20.8) 15,985,499 15,727,891 16,420,197

5,986,292 Employees 6,042,464 6,503,820 7.6 6,649,612 6,885,970 7,179,8285,618,376 Suppliers 5,333,016 5,788,129 8.5 6,016,199 5,801,390 6,224,951

1,370 Grants 2,013 1,874 (6.9) 1,911 1,949 1,98831,643 Other 30,678 31,920 4.0 31,446 32,075 32,716

706,075Cash transfer fromOfficial Public Account – 301,259 – 143,367 – –

12,343,756 Total cash used 11,408,171 12,627,002 10.7 12,842,535 12,721,384 13,439,483

7,021,522Net cash from/(to)Operating Activities 8,270,282 2,952,105 (64.3) 3,142,964 3,006,507 2,980,714

INVESTING ACTIVITIES

582,982

Proceeds from sales ofproperty, plant andequipment 195,384 306,384 56.8 242,312 40,000 40,000

582,982 Total cash received 195,384 306,384 56.8 242,312 40,000 40,000

3,241,107Purchase of specialistmilitary equipment 3,911,495 3,552,270 (9.2) 3,345,264 3,709,927 4,150,214

552,561Purchase of property,plant and equipment 510,790 514,282 0.7 629,153 617,254 508,294

3,793,668 Total cash used 4,422,285 4,066,552 (8.0) 3,974,417 4,327,181 4,658,508

(3,210,686)Net cash from/(to)investing activities (4,226,901) (3,760,168) (11.0) (3,732,105) (4,287,181) (4,618,508)

FINANCING ACTIVITIES995,201 Equity appropriation 1,230,061 1,020,524 (17.0) 778,580 1,295,154 1,653,214995,201 Total cash received 1,230,061 1,020,524 (17.0) 778,580 1,295,154 1,653,214

11,595 Repayments of debt 12,561 12,561 – 13,607 14,480 15,4205,056,094 Capital use charge 5,129,441 – (100.0) – – –

473,500 Capital withdrawal 88,900 199,900 124.9 175,832 – –5,541,189 Total cash used 5,230,902 212,461 (95.9) 189,439 14,480 15,420

(4,545,988)Net cash from/(to)financing activities (4,000,841) 808,063 (120.2) 589,141 1,280,674 1,637,794

(735,152)Net Increase/(Decrease)in Cash Held 42,540 – (100.0) – – –

835,152 Cash at 1 July 968,415 100,000 (89.7) 100,000 100,000 100,000100,000 Cash At 30 June 1,010,955 100,000 (90.1) 100,000 100,000 100,000

The cash received for operating activities is thecollection of the revenues on the Statement ofFinancial Performance. The difference is due totiming of transactions.

The cash used for operating activities is less than theexpenses recorded for operating activities on theStatement of Financial Performance because of non-cash expenses (eg depreciation)

Cash balance held inDefence’s bank accountCash received,

mainly for thesale of property,plant andequipment

The purchase of assetsincluding capital assets andbuildings

Here is where the net change in cashin the bank between the start and theend of the financial year is calculated

Here is where generally paymentsto and from Government are shown

171

The Capital Budget [PBS Table 3.4]

The Capital Budget Statement [PBS Table 3.4] is largely a restatement of theBudgeted Statement of Cash Flows relating to capital investment. It spells out wherethe funding for the capital budget comes from.

The Capital Expenditure is presented just as it is in the Budgeted Statement of CashFlows. The Capital Receipts are also sourced from the Budgeted Statement of CashFlows and the calculation of the Net Capital Receipts simply subtracts the CapitalWithdrawal from this cash received for investing activities. The interesting part of thestatement is the calculation of the Total Capital Funding.

The Total Capital Funding shows the three separate sources of cash funding forcapital investment. This includes the equity injection, or equity appropriation, fromthe Government ($1020 million), and the net capital receipts of $106 million, beingthe proceeds from the sale of assets after the capital withdrawal by Government.Finally, the Operating receipts provide the balance of the capital funding of $2939million from what is in effect cash from operating activities.

Capital funding$4 066 million

= Equity injection$1 020 million

+ Operating receipts$2 939 million

+ Net capital receipts$106 million

Further details on the Capital Budget can be found in PBS Table 3.5.

PBS Table 3.4: Capital Budget

2002–03Projected

Result

2003–04PreviousEstimate

2003–04Budget

Estimate

Variation 2004–05ForwardEstimate

2005–06ForwardEstimate

2006–07ForwardEstimate

$’000 $’000 $’000 % $’000 $’000 $’000

CAPITAL EXPENDITURE

3,241,107Purchase of specialistmilitary equipment 3,911,495 3,552,270 (9.2) 3,345,264 3,709,927 4,150,214

552,561Purchase of property,plant and equipment 510,790 514,282 0.7 629,153 617,254 508,294

3,793,668 Total Capital Payments 4,422,285 4,066,552 (8.0) 3,974,417 4,327,181 4,658,508

Funded from:995,201 Equity injection 1,230,061 1,020,524 (17.0) 778,580 1,295,154 1,653,214

2,688,985 Operating receipts 3,085,740 2,939,544 (4.7) 3,129,357 2,992,027 2,965,294109,482 Net Capital receipts 106,484 106,484 – 66,480 40,000 40,000

3,793,668 Total Capital Funding 4,422,285 4,066,552 (8.0) 3,974,417 4,327,181 4,658,508

CAPITAL RECEIPTS

22,896

Proceeds from sale ofspecialist militaryequipment – 23,532 – – – –

560,086

Proceeds from sales ofproperty, plant andequipment 195,384 282,852 44.8 242,312 40,000 40,000

– Other capital receipts – – – – – –(473,500) Less: Capital withdrawal (88,900) (199,900) 124.9 (175,832) – –

109,482 Net Capital Receipts 106,484 106,484 – 66,480 40,000 40,000

This is where the net capital receipts arecalculated by subtracting the capital withdrawalfrom the receipts from the sales of property plantand equipment

Capital expenditure as given inthe Statement of Cash Flows

This is the interesting bit where the varioussources of funding for capital investmentare brought together. Note the funding of$2.9 billion in operating receipts

172

173

SECTION 7 - FINANCIAL PERFORMANCE & TRENDS

IntroductionThis Section looks back over the Defence budgets and actual results since theintroduction of the output accrual based budgeting framework in 1999-00, examinesDefence’s financial performance over that period and draws out implications for the2003–04 budget. It also considers changes to the presentation and content in thisyear’s PBS.

There are a number of factors that hamper our ability to fully explore the financialperformance and efficiency of Defence operations. The PBS and, to a lesser extent,the actual results as reported in the Annual Report for each period do not disclose allthe detail needed for such an analysis. Activity information is lacking from the resultsthereby preventing comparisons between financial and operational performance to bemade. Attempts have been made to exclude the impact of any accounting distortionsand GST impacts.

Despite these limitations, worthy of mention is the considerable improvement in thereporting and level of information available in the 2003-04 PBS as compared toprevious years. We have attempted to review the financial statements in light of theinformation provided in the PBS about Defence’s planned activities as well as revisitsome of the issues raised in this brief last year. Some interesting and important issueshave been raised, of particular interest, is the Government’s Budget Estimates andFramework Review and its implications for the 2003-04 Defence budget.

What has changed in presentation and content?The output accrual based budgeting framework has operated since 1999/2000 and hasbeen the subject of review by Government during the year. The Budget Estimates andFramework Review made 20 recommendations in November 2002 to improve theoperation of the budget and financial management of agencies, which will beimplemented over the 2002 to 2005 period. Changes impacting the 2003 –2004Portfolio Budget Statements include:

• Removal of the Capital Use Charge from appropriation funding and repaymentarrangements;

• Just in time cash draw-down system adopted by Defence in January 2003which introduces an appropriation receivable which Defence can draw downto meet future funding needs; and

• Agency banking incentive scheme discontinued.

Capital Use Charge DiscontinuedThe Capital Use Charge (CUC) will be discontinued from 1 July 2003. Fundsappropriated to Defence will no longer include an amount to recognise the theoreticalfinancing cost of the net assets used by Defence, nor require it to be repaid toGovernment. The impact is that the Budgeted Appropriation to Defence was reducedby $5 129 million in 2003-04 compared to the previous estimate.

174

The reduction is shown on the Budgeted Statement of Financial Performance PBSTable 3.1 (page 118) in Appropriations from Government and in the CUC at thebottom of that page.

The Budgeted Statement of Cash Flows PBS Table 3.3 (page 120) also shows thereduction in Appropriations from Government for the CUC in operating activities andhas reduced to zero the CUC paid under Financing Activities.

Just in Time Cash Draw-Down System IntroducedThe just in time cash draw-down system was adopted by Defence earlier than therecommended 1 July 2003 commencement date. The system requires Defence toreturn cash reserves to the Official Public Account (OPA) and only to access thosemonies when agreed by Government. In February 2003 Defence all but $100 millionof their cash holdings to the OPA. Total planned transfers to and from the OPA fromFebruary to June 2003 as shown on PBS Table 1.9.

The net movement during the year is shown on PBS Table 3.3Budgeted Statement ofCash Flows in operating activities. Movements in the balance transferred to the OPAare discussed in detail later in this section.

Agency Banking Incentive Scheme DiscontinuedAssociated with the move to just-in-time cash draw downs, is the discontinuance ofthe Agency Banking Incentive Scheme where Defence was previously able to investmoney held in short to medium term cash deposits and earn interest. As the majorityof cash at bank funds held have been returned to the OPA, Defence will not earninterest. The previous estimate included projected interest of $25 million in revenueswhich has now been removed. Defence have however been compensated for the lossof interest by an increased appropriation of $28.5 million as noted in Note 2 to thebudgeted financial statements on page 128.

Summary of Estimated Special Account BalancesOne other change is the inclusion of PBS Table 3.9: Summary of Estimated SpecialAccount Balances, which shows the balances and cash movements of special accountswhere money is held in trust by Defence for specific purposes and cannot be used forany other purpose. The inclusion of the table provides increased transparency forthese special public money items and is an abridged version of the notes required tobe included in the financial statements for many years.

Net Operating Surplus

Given the requirement for agencies to budget to achieve a zero result it is interestingto see the trend in operating results over the past few years. To be able to see thetrend, the net operating results in Table 7.1 below have been adjusted to take out theimpact of unbudgeted non cash asset adjustments and the capital use charge whichdistort the real operating result.

It was noted that Defence also incurred expenditure in 2002-03 for military operationsand logistics that required spending of existing cash reserves as the expenditure wasnot provided for in the output appropriation. These items were included in the budgetmeasures announced in May 2003 as follows:

175

• Operations Bastille and Falconer (IRAQ) – expenditure of $297.2 million in2002-03 funded from cash reserves for which Defence is to be reimbursed$248.6 million in 2003-04;

• Operation Bel Isi ll (Bouganville) – expenditure of $10.1 million in 2002-03funded from cash reserves for which Defence is to be reimbursed in full in2003-04; and

• Additional logistics funding – expenditure of $101.4 million in 2002-03funded from cash reserves for which Defence will not be reimbursed.Additional funding from the Government has been provided for logistics in thebudget and forward estimates years 2003-04 to 2006-07.

These measures totalling $408.7million (Refer PBS Table 1.8 Summary of Measures)were not covered by the output appropriation for 2002-03 and so distort theunderlying operating result. These measures have been isolated in 2002-03 in Table7.1 below to highlight the impact of this ‘additional expenditure’ on the operatingresult.

Table 7.1 Operating Surplus after Asset Adjustments, Capital Use Charge andExpenditure on Operations and Logistics (all figures are in ‘000s)

Item Actual1999–2000

$000

Actual2000–01

$000

Actual2001–2002

$000

Projected2002–03

$000

Budget2003–04

$000Surplus before CUC 5 316 468 6 398 619 4 410 020 4 792 174 163 920Less: CUC (1) 4 599 955 4 982 388 4 663 854 5 056 094 -Surplus after CUC 716 513 1 416 231 - 253 834 –263 920 163 920Unbudgeted asset relatedadjustments (non–cash)

– 227 903 – 516 282 711 054 105 000 -

Surplus after net asset adjustments 944 416 899 949 457 220 -158 920 163 920Additional measures expenditure - - - 408 700(2)

Reimbursement for operations - - - -258 700Surplus after reimbursement foroperations

944 416 899 949 457 220 249 780 -94 780

1. The CUC was discontinued from 2002-03.

2. Assumes amount represents expenses, although it is actually some unknown mix of capital and expenses.

The actual results in all years were affected by large asset adjustments. Table 7.2outlines the major asset adjustments that are of a non-cash nature. These directlyeffect the net value of assets held on the balance sheet. This includes both correctionseg reversals of previous asset write-downs and more normal asset related transactionsuch as write-downs eg increases to the provision for obsolescence. While the size ofthe asset adjustments appears to be declining, possibly reflecting the implementationof accrual accounting and associated ongoing improvements to assets systems andpolicies, it will interesting to see if the asset adjustments can be restricted to thebudgeted net $100 million per annum for 2003-04.

176

Table 7.2 Asset Adjustments (all figures are in 000s)

Item Actual1999–2000

$000

Actual2000–01

$000

Actual2001–2002

$000

Projected2002–2003

$000

Budget2003–2004

$000RevenuesAssets now recognised 250 270 1 103 4591 694 050 415 000 278 000Assets recognised dueto change in accountingpolicy

- 511 6932 - – –

ExpensesWrite-downs –478 173 –1 098 870 1 573 635 620 000 378 000Net asset adjustments –227 903 516 282 879 585 205 000 100 000PBS budgetedadjustments

0 0 168 531 100 000 100 000

Unbudgeted assetadjustments

-227 903 516 282 711 054 105 000 0

1. In 1999–2000 an amount of $1 274 258 for assets adjustments in this category were recorded as an adjustmentto opening accumulated results (under the transitional provisions of AAS29). In 2000–01 these adjustmentswere reported as revenues.

2. This amount reflects the adjustments for the increase in threshold for which expenditure is recognised as anasset.

The operating surplus after deducting asset adjustments may not necessarily result inthe same amount of unspent cash remaining from the output appropriation for anumber of reasons.

Up until 30 June 2001 Defence appears to have used cash available from the surplus(being the amount of cash related expenses which have not been incurred or excessother revenues) to fund various investments in assets such as inventories and property,plant and equipment. In 2001-02 the dramatic increase in cash was largely a result ofunder achievement of expenses and capital expenditure. From the 2001-02 year cashreserves have continued to accumulate in contrast to declining operating surpluses.This accumulation in cash reserves is consistent with trends identified in theunderspend on capital assets. The accumulation of cash is discussed in detail later inthis Section.

Reporting by OutcomesDefence has moved from one outcome for 2002-03 to 6 outcomes for 2003-04 with anassociated 29 outputs. (A seventh Outcome/Output has also been established foradministered appropriations.) This move has significantly increased transparency ofDefence operations and provides much more useful information to the reader. It alsocomes with increased reporting requirements and additional restrictions on the use ofthe funds. Defence may now not have the flexibility to easily move funds between the6 outcomes that it could when they were outputs.

177

The Price to Government of Defences Outcomes PBS Table 2a (see page 37)identifies the budgeted operating expenses for the delivery of outputs as $14 957million for 2003-04 where the PBS Table 3.1 Budgeted Statement of FinancialPerformance (page 118) includes operating costs plus borrowing expenses($14 793 million). The difference of $164 million is the Net Operating Surplus. Table2a appears to overstate the operating expenses in the price of outcomes toGovernment. The difference does not exist in years where there is a nil resultprojected.

How much cash is used and how much cash is held in reserve?The move to accrual budgeting allowed agencies to manage their own cash at bankbalances and had resulted in the large build of cash up in Defence. Under the new justin time cash draw-down system Defence will hold minimal cash and only draw fundsdown as needed to pay bills. As noted earlier, Defence transferred all but $100 millionof its cash holdings to the Official Public Account in February 2003. These funds areavailable at any time for Defence to draw upon to meet commitments. The PBS stateson Page 29 that these amounts are held ‘to meet existing liabilities as they fall due infuture years’ and that the ‘Government has agreed can be drawn down to meetexisting employee and other liabilities as payment becomes due’.

During the period since the introduction of accrual budgeting on 1 July 1999 to theend of the projected Forward Estimates period in 2006-07 cash balances andappropriations receivable have built up and are projected as shown in Table 7.1.

Figure 7.1: Build up of Cash to Date and Projected

The major build-up in the combined cash and appropriation receivable reservesoccurred in the 2001-02 financial year. From an accounting perspective changes to thecash and appropriations receivable balance are the result of all aspects of operationsand reflect the consequence of all financial and associated cash transactions occurringduring the period.

Build up of cash to date and projected

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

Actual30-Jun-99

Actual30-Jun-00

Actual30-Jun-01

Actual30-Jun-02

Projected30-Jun-03

Budget30-Jun-04

Estimate30-Jun-05

Estimate30-Jun-06

Estimate30-Jun-07

$ m

illio

n

Appropriation Receivable

Cash Balance

178

Whilst it is difficult to specifically identify one individual factor that has lead to thebuild up of these reserves, from our analysis it is clear that the build-up is acombination of operating surpluses and underspending on capital items.

Will Defence need the cash reserves in the future?Looking forward the balance of the combined cash and appropriations receivablebalance grows significantly in 2003-04 as reserves are topped up for cash reservesused in 2002-03 for operations Bastille and Falconer. After 2003-04 the movementsin the reserves are less significant with the balance sitting between $1 040 million and$1 170 million. Which ever way it is viewed, it is still a significant amount availableto Defence. Of course, $200 million of the reserve is set aside for future capitalinvestment and will be considered for release in 2003-04. If this occurs the cashreserve will faqll by 20%.

Will Defence need it to meet employee liabilities?Not in the immediate future. During the budget and forward estimate years the cashrequired to meet employee requirements is less than the amount that will be providedvia appropriation for employee expenses. Total appropriation for employee costsequals estimated employee expenses on the Statement of Financial Performance andtotals $27 446 million over the budget and forward estimates period where the cashrequired from the Statement of Cash Flows is $27 219 million – some $227 millionless.

Future pressures on Defence’s Cash and Appropriation’s Receivable ReservesA number of factors may result in increased cash and reserve holdings in the budgetand forward years. Defence plans a bigger capital spend than it has ever achievedbefore. Given recent trends this will be a challenging goal. Any underspends in theprogram will result in increased cash and reserve holdings.

Employee liabilities are projected to increase by an average of 1.8% per annum overthe budget and forward estimate years. This is well below the average growth of thelast 4 years of 6.8%. Figure 7.3 shows the relative percentage growth each year.

Figure 7.2 Growth Rate of Employee Provisions

Growth Rate of Employee Provisions

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

% increase in employeeprovisions over previousyear's balance

179

A pay rise of 2% would automatically increase the employee provisions by 2% and sowithout reducing the average days owing to employees in each and every year it isunlikely that the provision would not grow more rapidly. A faster growing provisioncould impact in two ways. Firstly it could cause employee costs to rise greater thanthe budget and forward estimate amounts with no impact on cash. Secondly ifemployee costs are controlled less cash would be required in the short term to pay toemployees thus increasing cash and reserve holdings.

If Receivables amounts owing to Defence are paid back, the cash and reserve holdingswill increase. The profile of actual receivables for 2000 to 2002 was:

Table 7.3: Receivables for Goods and Services 30 June 2000 - 2002

30 June 2000$m

30 June 2001$m

30 June 2002$m

Sale of assets and properties 208 221 74GST - net refund due - 82 103CUC receivable - 21 138Advances and loans 67 79 72Other 29 25 63Goods and services 61 118 103Less provision for doubtful debts (2) (2) (33)Total Receivables 363 544 520

Two other points that may cause cash and reserve balances to increase are worthy ofnote:

Firstly, the CUC receivable of $138 million is included in the balance at 30 June 2002but examination of the projected financial statements for 2003 and for the budget andforward estimates years do not appear to reflect this amount being paid to Defence. Ifthe money owing is paid to Defence cash and reserve holdings will be higher.

Secondly amounts receivable from Sales of Goods and Services represent a significantproportion of the year’s sales of those goods and services. Sales of goods and servicesinclude housing rentals, revenues from foreign Governments, rations and quarters,rental of Defence property and other sales of goods and services. Table 7.4 sets outthe amounts owed in respect of sales of goods and services for each year andcalculates the average length of time that those amount remain up paid to Defence.

Table 7.4: Receivables for Goods and Services – Collection Days

30 June 2000$m

30 June 2001$m

30 June 2002$m

Receivables for goods and services 61 118 103Annual sales of goods and services 229 243 228Average calendar days owing 98 days 177 days 164 daysSome receivables balances may include GST as part of the amount owing as some sales would besubject to GST. As details are not available all balances are treated as if they had zero GST included.

180

While the terms of settlement are not known for each type of sale, or the timingthroughout the year, the average days outstanding has increased significantly duringthe above period. The financial statements do not project any major changes toreceivables balances or sales of goods and services going forward. If Defenceimproves its debt management performance some of the money owed will beconverted into cash.

Planned use of Cash and Monies held in the OPAPBS Table 1.9: Use of Cash (Appropriation Receivable) on page 29 shows themovements of money to and from the OPA over the current year and the forwardestimates period and the resultant amounts available to be drawn down at any time byDefence. The table shows the composition of the balance in each year, but it does notattempt to show the make up of the initial amount paid into the OPA. Table 1.9would perhaps be more useful if it focused on movements in each year and theopening and closing balances as Shown in our Table 7.5.

Table 7.5 Suggested Presentation of PBS Table 1.9: Use of Cash (AppropriationReceivable)

2003-04Budget

$m

2004-05ForwardEstimate

$m

2005-06ForwardEstimate

$m

2006-07ForwardEstimate

$mBalance at the beginning of the financialyear – 1 July

960.434 1 069.001 1 016.401

Cash drawn to reduce employeeentitlements

(46.900) (34.800) (52.600) (75.300)

Cash repaid to OPA from 2003-04appropriation for operations Bastille andBel Ise II – drawn in 2003-02

258.660

Cash paid to OPA to meet futureliabilities

42.540 143.367

Cash paid to OPA for Locally EngagedStaff entitlements for staff transferredfrom DFAT

0.059

Balance at the end of the financial year –30 June

960.434 1 069.001 1 016.401 941.101

Its noteworthy that the amount set aside in Table 7.5 for 2004-05 of $143 million farexceeds the build up of Total Liabilities in the Budgeted Statement of FinancialPosition in that year which amount to $75 million ($4 600 million less $4 525million).Even after using $35 million to reduce employee liabilities as shown in Table 7.5above the amount put aside is some $33 million greater than is required to satisfyadditional liabilities arising in that year.

The balance owing to Defence is treated as an Appropriation Receivable and includedin PBS Table 3.1 Budgeted Statement of Financial Position as a Financial Asset calledReceivables. This balance could be shown separately to improve transparency offunds available to be used.

In these early days of implementing the reforms a note reconciling the movements andclosing balance of the Appropriation Receivable PBS Table 3.2: Budgeted Statementof Financial Position (such as Table 7.5 above) would be very useful.

181

Lease Debts and Borrowing CostsIt is interesting to note that during the budget and forward estimates periods leaseliabilities (included as debt in the PBS Table 3.2: Budgeted Statement of FinancialPosition) is reducing from $349 million in 2003 to $293million in 2007, yetborrowing costs increase from $31.6 million in 2003 to $32.7 million in 2007.

InventoriesInventories represent items such as ammunitions and rotatable spare parts and are asignificant item for Defence. Therefore, it would be useful to understand somethingabout the efficiency with which inventories are managed. Key to good inventorymanagement is turnover, the level of inventory held and the rate of obsolescence.

Unfortunately, there is insufficient information available in the PBS to determineDefence’s performance in this area although the inclusion of inventory consumptiondetails in Chapter 2 Price to Government of Defence’s Outcomes in the 2003-04 PBSis a welcome addition to the 2002-03 PBS and has made the simple comparison inFigure 7.3 possible.

Figure 7.3 Inventory Consumption Compared to Inventory Held

Points of interest to note are:

• The apparent build up of inventory stores in 2000-01;

• The ratio between inventory consumption to inventory held has trendedslightly upwards from approximately 21% to 29% over the period 2002 to2007. It would be useful to compare with the level and pattern of activitywithin Defence over this period if the information was available;

• The increasingly significant level of non current inventory held, approximately90% in 2001-02 (1999-00: 81%); and

• The provision for obsolescence has remained consistent across the last twoyears actuals being approximately 12-13% of inventory held (19% in 1999-00).

Inventory Consuption Compared with Inventory Held

0500

10001500

20002500

30003500

40004500

5000

30-Jun-00Actual

30-Jun-01Actual

30-Jun-02Actual

30-Jun-03Projected

30-Jun-04Budget

30-Jun-05Estimate

30-Jun-06Estimate

30-Jun-07Estimate

$ m

illion Inventory

Inventory Consumption

182

It must be said that Defence is a unique enterprise and that best commercial practicein inventory management may not apply in the world of long lead-times for specialistmilitary equipment and the critical need to have inventory available should a conflictarise.

Also, the ongoing refinement of logistics information systems means that the trend isskewed by increased visibility of inventory holding and consumption relative toprevious years.

The 2003-04 BudgetThe major changes between the 2003–04 Budget Estimate and the 2002–03 ProjectedResult have been summarised in Table 7.6.

Table 7.6 Comparison of the 2002-03 Projected Result and 2003-04 Budget Estimates

2002-03Projected Result

$’000s

2003–04Budget Estimate

$’000s

Variance

$’000s

Variance

%Output Appropriation (net of CUC) (1) 13 174 231 14 398 319 1 224 088 9.3Employee expenses 6 100 622 6 575 305 474 683 7.8Suppliers expense 4 752 018 4 979 606 227 588 4.7Depreciation 2 677 814 2 826 637 148 823 5.5Cash at Bank 100 000 100 000 - -Receivables 1 219 467 1 473 826 254 359 20.9Net Assets 45 844 881 46 780 672 935 791 2.0Capital expenditure 3 793 668 4 066 552 272 884 7.2Equity Injection 995 201 1 020 524 25 323 2.5

(1) CUC discontinued 2003-04.

The variances associated with the operating result appear reasonable based on the2002-03 projected result and are consistent with information provided in the PBS inrelation to the new measures proposed for 2003-04, including the reimbursement of2002-03 expenditures. Of interest will be Defence’s ability to achieve the low assetadjustments allowed ($100 million) given the actual results of the last three years.See Table 7.2.

A discussion on cash and appropriation receivable appears earlier in this section andexplains in detail the changes in accounting treatment and operations that drive thevariance identified in Table 7.5.

The capital expenditure target has been revised down by 8% from the previousestimate for 2003-04 in light of recent under performance in this area. It will beinteresting to see if Defence can achieve this spending given actual capitalexpenditure in the last few years. A detailed analysis of Defence’s capital budget ispresented in Section 2.3.

183

TRENDS - TABLE 7.6

1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07Actual Actual Actual Projected Budget Forward Forward Forward

Result Estimate Estimate Estimate Estimate000's 000's 000's 000's 000's 000's 000's 000's

Appropriations

Appropriation for outputs 15,812,527 17,113,920 17,843,477 18,230,325 14,398,319 14,816,839 14,553,171 15,154,819% Increase/-decrease 8.23% 4.26% 2.17% -21.02% 2.91% -1.78% 4.13%Equity Injection 687,170 93,522 754,175 995,201 1,020,524 778,580 1,295,154 1,653,214% Increase/-decrease -86.39% 706.41% 31.96% 2.54% -23.71% 66.35% 27.65%Total Revenue From Govt 16,499,697 17,207,442 18,597,652 19,225,526 15,418,843 15,595,419 15,848,325 16,808,033% Increase/-decrease 4.29% 8.08% 3.38% -19.80% 1.15% 1.62% 6.06%Capital Use Charge 4,599,955 4,982,388 4,663,854 5,056,094 0 0 0 0Appropriation net of CUC 11,899,742 12,225,054 13,933,798 14,169,432 15,418,843 15,595,419 15,848,325 16,808,033% Increase/-decrease 2.73% 13.98% 1.69% 8.82% 1.15% 1.62% 6.06%Appropriation net of CUC & capital withdrawal 15,419,587 15,848,325 16,808,033% Increase/-decrease 2.35% 13.56% -0.97% 11.12% 1.32% 2.78% 6.06%

Expenses

Employees 4,964,902 5,385,401 5,744,930 6,100,622 6,575,305 6,737,877 6,929,293 7,203,329% Increase/-decrease 8.47% 6.68% 6.19% 7.78% 2.47% 2.84% 3.95%Suppliers 3,847,042 3,937,529 4,682,910 4,752,018 4,979,608 5,240,877 5,033,499 5,272,948% Increase/-decrease 2.35% 18.93% 1.48% 4.79% 5.25% -3.96% 4.76%Depreciation 1,800,300 2,234,956 2,526,197 2,677,814 2,826,637 2,984,937 2,742,171 2,835,282% Increase/-decrease 24.14% 13.03% 6.00% 5.56% 5.60% -8.13% 3.40%

Assets & Liabilities

Cash 137,913 58,303 835,153 100,000 100,000 100,000 100,000 100,000% Increase/-decrease -57.72% 1332.44% -88.03% 0.00% 0.00% 0.00% 0.00%Receivables 363,446 544,596 520,293 1,219,467 1,473,826 1,582,393 1,529,793 1,454,493% Increase/-decrease 49.84% -4.67% 57.33% 20.86% 7.37% -3.32% -4.92%Property, plant & equipment 40,707,951 43,808,697 44,412,460 44,744,886 45,529,664 46,143,599 47,588,609 49,271,835% Increase/-decrease 7.62% 1.38% 0.75% 1.75% 1.35% 3.13% 3.54%Inventories 2,933,463 3,238,786 3,620,788 3,682,509 3,638,087 3,559,758 3,491,345 3,544,714% Increase/-decrease 10.41% 11.79% 1.70% -1.21% -2.15% -1.92% 1.53%

Liabilities

Debt 556 391,898 360,272 348,676 336,115 322,508 308,028 292,608% Increase/-decrease 70385.25% -8.07% -3.22% -3.60% -4.05% -4.49% -5.01%Employee Liabilities 2,459,591 2,732,908 2,954,603 3,068,933 3,140,418 3,228,683 3,272,006 3,295,507% Increase/-decrease 11.11% 8.11% 3.87% 2.33% 2.81% 1.34% 0.72%Net Assets 41,699,414 44,270,054 45,589,447 45,844,881 46,780,672 47,350,187 48,645,341 50,298,555% Increase/-decrease 6.16% 2.98% 0.56% 2.04% 1.22% 2.74% 3.40%

Capital purchases

Capital purchases 3,913,912 3,413,171 2,992,544 3,793,668 4,066,552 3,974,417 4,327,181 4,658,508% Increase/decrease -12.79% -12.32% 26.77% 7.19% -2.27% 8.88% 7.66%

AN

AL

YSI

S O

F FI

NA

NC

IAL

PE

RFO

RM

AN

CE

Tab

le 7

.719

99-0

020

00-0

120

01-0

220

02-0

320

02-0

320

02-0

320

03-0

420

03-0

420

03-0

4O

pera

ting

Res

ult V

aria

nce

Act

ual

Act

ual

Act

ual

Bud

get

Rev

ised

Proj

ecte

d R

esul

tR

evis

edB

udge

t V

aria

nce

000'

s00

0's

000'

s00

0's

000'

s00

0's

000'

s00

0's

000'

sa

bb-

aSu

rplu

s bef

ore

CU

C5,

316,

468

6,39

8,61

94,

410,

020

5,05

6,09

45,

056,

094

4,79

2,17

45,

129,

441

163,

920

-4,9

65,5

21C

UC

4,59

9,95

54,

982,

388

4,66

3,85

45,

056,

094

5,05

6,09

45,

056,

094

5,12

9,44

10

-5,1

29,4

41O

pera

ting

Surp

lus

716,

513

1,41

6,23

1-2

53,8

340

0-2

63,9

200

163,

920

163,

920

Add

bac

k: N

et a

sset

rela

ted

non-

cash

adj

ustm

ents

879,

585

100,

000

205,

000

205,

000

100,

000

100,

000

0O

pera

ting

Surp

lus a

fter

net

ass

et a

djus

tmen

ts62

5,75

110

0,00

020

5,00

0-5

8,92

010

0,00

026

3,92

016

3,92

0

Tab

le 7

.819

99-0

020

00-0

120

01-0

220

02-0

320

02-0

320

02-0

320

03-0

420

03-0

420

03-0

4St

atem

ent o

f Fin

anci

al P

erfo

rman

ceA

ctua

lB

udge

tR

evis

edPr

ojec

ted

Res

ult

Rev

ised

Bud

get

Var

ianc

e00

0's

000'

s00

0's

000'

s00

0's

000'

s00

0's

000'

s00

0's

ab

b-a

Rev

enue

Out

put A

ppro

p15

,025

,706

17,1

13,9

2017

,843

,477

18,2

35,3

5118

,337

,625

18,2

30,3

2518

,535

,684

14,3

98,3

19-4

,137

,365

ET A

ppro

p60

7,46

70

00

00

00

0Pr

evio

us p

erio

d ap

prop

riatio

n17

9,35

40

00

00

00

0To

tal G

ross

App

rop

15,8

12,5

2717

,113

,920

17,8

43,4

7718

,235

,351

18,3

37,6

2518

,230

,325

18,5

35,6

8414

,398

,319

-4,1

37,3

65Le

ss C

UC

Exp

ense

4,59

9,95

54,

982,

388

4,66

3,85

45,

056,

094

5,05

6,09

45,

056,

094

5,12

9,44

10

-5,1

29,4

41A

ppro

p ne

t of C

UC

11,2

12,5

7212

,131

,532

13,1

79,6

2313

,179

,257

13,2

81,5

3113

,174

,231

13,4

06,2

4314

,398

,319

992,

076

Net

gai

n on

sale

3,67

50

17,9

300

00

00

0W

rite

Bac

k of

Ass

ets

250,

270

1,10

3,45

969

4,05

00

415,

000

415,

000

027

8,00

027

8,00

0A

sset

s rec

ogni

sed

for f

irst t

ime

511,

693

00

00

00

0O

ther

Rev

enue

373,

133

408,

710

435,

174

287,

105

305,

774

330,

316

298,

448

280,

945

-17,

503

Tot

al R

even

ue11

,839

,650

14,1

55,3

9414

,326

,777

13,4

66,3

6214

,002

,305

13,9

19,5

4713

,704

,691

14,9

57,2

641,

252,

573

Exp

ense

sEm

ploy

ees

4,96

4,90

25,

385,

401

5,74

4,93

05,

874,

644

5,92

2,58

26,

100,

622

6,16

0,79

06,

575,

305

414,

515

Supp

liers

(net

of i

nven

tory

con

sum

ptio

n)3,

875,

787

4,67

5,89

14,

748,

896

3,87

0,72

74,

584,

573

4,03

0,57

7-5

53,9

96In

vent

ory

cons

umpt

ion

618,

195

574,

282

807,

123

00

881,

291

094

9,03

194

9,03

1O

ther

32,7

1982

,406

52,9

3933

,013

33,0

1333

,013

32,6

9133

,794

1,10

3D

epre

ciat

ion

1,80

0,30

02,

234,

956

2,52

6,19

72,

782,

814

2,67

7,81

42,

677,

814

2,82

6,63

72,

826,

637

0

185

Loss

on

sale

00

00

00

00

0W

rite

Dow

n47

8,17

31,

098,

870

1,57

3,63

510

0,00

062

0,00

062

0,00

010

0,00

037

8,00

027

8,00

0T

otal

exp

ense

s11

,123

,136

12,7

39,1

6214

,580

,611

13,4

66,3

6214

,002

,305

14,1

83,4

6713

,704

,691

14,7

93,3

441,

088,

653

Res

ult (

less

CU

C)

716,

514

1,41

6,23

2-2

53,8

340

0-2

63,9

200

163,

920

163,

920

Tab

le 7

.919

99-0

020

00-0

120

01-0

220

02-0

320

02-0

320

02-0

320

03-0

420

03-0

420

03-0

4St

atem

ent o

f Fin

anci

al P

ositi

onA

ctua

lA

ctua

lA

ctua

lB

udge

tR

evis

edPr

ojec

ted

Res

ult

Rev

ised

Bud

get

Var

ianc

e00

0's

000'

s00

0's

000'

s00

0's

000'

s00

0's

000'

s00

0's

Ass

ets

Cas

h13

7,91

358

,303

835,

153

609,

807

968,

415

100,

000

1,01

0,95

510

0,00

0-9

10,9

55R

ecei

vabl

es36

3,44

654

4,59

652

0,29

343

3,80

851

3,39

21,

219,

467

513,

392

1,47

3,82

696

0,43

4Pr

oper

ty, p

lant

& e

quip

men

t & in

tang

ible

s44

,412

,460

44,5

69,7

4745

,008

,706

44,7

44,8

8646

,260

,217

45,5

29,6

64-7

30,5

53In

vent

orie

s2,

933,

463

3,23

8,78

63,

620,

788

3,12

7,70

63,

554,

269

3,68

2,50

93,

458,

391

3,63

8,08

717

9,69

6O

ther

non

-fin

anci

al a

sset

s67

9,03

557

4,96

356

4,42

448

2,96

356

4,42

456

4,42

456

4,42

456

4,42

40

Tot

al A

sset

s44

,821

,808

48,2

25,3

4549

,953

,118

49,2

24,0

3150

,609

,206

50,3

11,2

8651

,807

,379

51,3

06,0

01-5

01,3

78

Lia

bilit

ies

Deb

t55

639

1,89

836

0,27

236

9,59

934

8,67

634

8,67

633

6,11

533

6,11

50

Empl

oyee

s2,

459,

591

2,73

2,90

82,

954,

603

2,95

6,05

83,

068,

933

3,06

8,93

33,

187,

259

3,14

0,41

8-4

6,84

1O

ther

liab

ilitie

s66

2,24

783

0,48

51,

048,

796

488,

485

1,04

8,79

61,

048,

796

1,04

8,79

61,

048,

796

0T

otal

liab

ilitie

s3,

122,

394

3,95

5,29

14,

363,

671

3,81

4,14

24,

466,

405

4,46

6,40

54,

572,

170

4,52

5,32

9-4

6,84

1N

et a

sset

s41

,699

,414

44,2

70,0

5445

,589

,447

45,4

09,8

8946

,142

,801

45,8

44,8

8147

,235

,209

46,7

80,6

72-4

54,5

37

Equ

ityA

ccum

ulat

ed su

rplu

ses

3689

5453

38,3

04,5

8638

,072

,156

37,5

73,3

8637

,412

,657

37,3

34,7

3737

,323

,757

37,2

98,7

57-2

5,00

0C

apita

l (ac

cum

ulat

ed e

quity

ij

ti)

6871

7078

0,69

21,

403,

444

2,50

1,66

61,

855,

748

1,82

1,74

83,

656,

409

3,11

5,87

2-5

40,5

37C

apita

l with

draw

al0

-45,

616

-103

,397

065

9,50

047

3,50

088

,900

199,

900

111,

000

Res

erve

s4,

116,

791

5,23

0,39

16,

217,

244

5,33

4,83

76,

214,

896

6,21

4,89

66,

166,

143

6,16

6,14

30

Tot

al e

quity

41,6

99,4

1444

,270

,053

45,5

89,4

4745

,409

,889

46,1

42,8

0145

,844

,881

47,2

35,2

0946

,780

,672

-454

,537

Tab

le 7

.10

1999

-00

2000

-01

2001

-02

2002

-03

2002

-03

2002

-03

2003

-04

2003

-04

2003

-04

Stat

emen

t of C

ash

Flow

sA

ctua

lA

ctua

lA

ctua

lB

udge

tR

evis

edPr

ojec

ted

Rlt

Rev

ised

Bud

get

Var

ianc

e00

0's

000'

s00

0's

000'

s00

0's

000'

s00

0's

000'

s00

0's

Ope

ratin

g ac

tiviti

esC

ash

in15

,973

,816

18,0

51,5

6518

,843

,225

19,3

34,0

6219

,473

,545

19,3

65,2

7819

,678

,453

15,5

79,1

07-4

,099

,346

Less

:Cas

h us

ed8,

262,

530

9,84

1,73

611

,149

,916

11,2

14,8

6511

,353

,789

12,3

43,7

5611

,408

,171

12,6

27,0

021,

218,

831

Net

ope

ratin

g ca

shflo

ws

7,71

1,28

68,

209,

829

7,69

3,30

98,

119,

197

8,11

9,75

67,

021,

522

8,27

0,28

22,

952,

105

-5,3

18,1

77In

vest

ing

(cap

ital)

Cas

h in

132,

906

87,1

4221

7,97

769

9,76

672

2,66

258

2,98

219

5,38

430

6,38

411

1,00

0Le

ss:C

ash

used

(ass

et p

urch

ases

)3,

913,

912

3,41

3,17

12,

992,

544

4,07

2,38

24,

197,

168

3,79

3,66

84,

422,

285

4,06

6,55

2-3

55,7

33N

et in

vest

ing

cash

flow

s-3

,781

,006

-3,3

26,0

29-2

,774

,567

-3,3

72,6

16-3

,474

,506

-3,2

10,6

86-4

,226

,901

-3,7

60,1

6846

6,73

3Fi

nanc

ing

Cas

h in

(equ

ity in

ject

ion)

687,

170

93,5

2275

4,17

51,

090,

415

1,21

5,20

199

5,20

11,

230,

061

1,02

0,52

4-2

09,5

37Le

ss: C

ash

used

4,56

0,60

35,

065,

454

4,88

8,18

25,

727,

189

5,72

7,18

95,

541,

189

5,23

0,90

221

2,46

1-5

,018

,441

Net

fina

ncin

g ca

shflo

ws

-3,8

73,4

33-4

,971

,932

-4,1

34,0

07-4

,636

,774

-4,5

11,9

88-4

,545

,988

-4,0

00,8

4180

8,06

34,

808,

904

Net

tota

l inc

reas

e/de

crea

se56

,847

-88,

132

784,

735

109,

807

133,

262

-735

,152

42,5

400

-42,

540

Ope

ning

bal

ance

81,0

6514

6,43

650

,417

500,

000

835,

152

835,

152

968,

415

100,

000

-868

,415

Clo

sing

bal

ance

137,

912

58,3

0483

5,15

260

9,80

796

8,41

410

0,00

01,

010,

955

100,

000

-910

,955

Tab

le 7

.11

1999

-00

2000

-01

2001

-02

2002

-03

2002

-03

2002

-03

2003

-04

2003

-04

2003

-04

Cap

ital B

udge

t Sta

tem

ent

Act

ual

Act

ual

Act

ual

Bud

get

Rev

ised

Proj

ecte

dR

ltR

evis

edB

udge

t V

aria

nce

000'

s00

0's

000'

s00

0's

000'

s00

0's

000'

s00

0's

000'

sC

apita

l exp

endi

ture

3,91

3,91

23,

413,

171

2,99

2,54

44,

072,

382

4,19

7,16

83,

793,

668

4,42

2,28

54,

066,

552

-355

,733

Fund

ed fr

omEq

uity

Inje

ctio

n68

7,17

093

,522

754,

175

1,09

0,41

51,

215,

201

995,

201

1,23

0,06

11,

020,

524

-209

,537

Self

Fund

ing

3,03

2,94

63,

232,

507

2,11

8,27

62,

941,

701

2,91

8,80

52,

688,

985

3,08

5,74

02,

939,

544

-146

,196

Net

Cap

ital R

ecei

pts

193,

796

87,1

4212

0,09

340

,266

63,1

6210

9,48

210

6,48

410

6,48

40

Tota

l3,

913,

912

3,41

3,17

12,

992,

544

4,07

2,38

24,

197,

168

3,79

3,66

84,

422,

285

4,06

6,55

2-3

55,7

33C

apita

l rec

eipt

s bud

get

Ass

et S

ales

132,

906

87,1

4221

7,97

769

9,76

672

2,66

258

2,98

219

5,38

430

6,38

411

1,00

0O

ther

rece

ipts

60,8

900

00

00

00

0W

ithdr

awal

00

-97,

884

-659

,500

-659

,500

-473

,500

-88,

900

-199

,900

-111

,000

Net

Cap

ital r

ecei

pts

193,

796

87,1

4212

0,09

340

,266

63,1

6210

9,48

210

6,48

410

6,48

40

187

Tab

le 7

.12

1999

-00

2000

-01

2001

-02

2002

-03

2002

-03

2002

-03

2003

-04

2003

-04

2003

-04

Adm

inis

tere

d Sc

hedu

les

Act

ual

Act

ual

Act

ual

Bud

get

Rev

ised

Proj

ecte

dR

ltR

evis

edB

udge

t V

aria

nce

000'

s00

0's

000'

s00

0's

000'

s00

0's

000'

s00

0's

000'

sA

dmin

iste

red

asse

ts1,

869,

559

1,72

1,10

01,

520,

243

1,62

8,08

51,

520,

243

1,41

8,41

31,

520,

243

1,39

3,41

3-1

26,8

30A

dmin

iste

red

liabi

litie

s24

,630

,846

26,0

23,8

5926

,900

,000

28,0

18,2

6027

,800

,000

27,8

00,0

0028

,600

,000

28,6

00,0

000

Adm

inis

tere

d ap

prop

riatio

ns1,

235,

154

1,28

2,93

72,

289,

635

2,20

5,88

12,

236,

481

2,23

6,48

12,

236,

481

2,23

6,48

10

Adm

inis

tere

d ex

pens

es2,

641,

374

2,68

5,92

42,

289,

635

2,20

5,88

12,

236,

481

2,23

6,48

12,

236,

481

2,23

6,48

10

Adm

inis

tere

d be

nefit

pay

men

ts1,

260,

692

1,27

8,81

11,

318,

668

1,30

0,00

01,

330,

600

1,33

0,60

01,

430,

600

1,43

0,60

00

ABOUT THE AUSTRALIAN STRATEGIC POLICY INSTITUTE

ASPI is an independent, non-partisan research institute on strategic policy. It has beenset up by the Government to provide fresh ideas on Australia’s defence and strategicpolicy choices. It will help Australians understand the critical strategic choices whichour country will face over the coming years, and will help Government make better-informed decisions. ASPI is charged with the task of informing the public on strategicand defence issues, generating fresh ideas for government, and fostering strategicexpertise in Australia.

ASPI is therefore a policy-focused organisation, and its products are above all elsecontributions to the policy debate, both inside and outside Government. For moreinformation, see ASPI’s website at www.aspi.org.au.

ASPI’s Research Program

ASPI Policy ProposalsEach year ASPI will publish a number of policy proposals on key issues facingAustralian strategic and defence decision-makers. These proposals will draw on workby external contributors.

ASPI Policy AnnualsASPI will publish a series of annual publications on key topics.

Current StudiesASPI plans to publish a series of shorter studies, of up to 5,000 words each, on topicalsubjects that arise in public debate.

Commissioned WorkASPI will undertake commissioned research for clients including Commonwealthministers and departments, State Governments, foreign governments and industry.

ASPI’S PROGRAMS

Strategy and International Program

This program covers ASPI’s work on Australia’s international security environment,the development of our higher strategic policy, our approach to new securitychallenges, and the management of our international defence relationships. It is alsoresponsible for relationships with overseas institutions and the international visitorsprogram.

188

189

Operations and Capability Program

This program covers ASPI’s work on the operational needs of the Australian DefenceForce, the development of our defence capabilities, and the impact of new technologyon our armed forces. It also covers the major capability investment issues, and onhigher-level workforce issues such as Reserves.

The Budget and Management Program

This program covers the full range of questions concerning the delivery of capability,from financial issues and personnel management to acquisition and contracting out –issues that are central to the Government’s policy responsibilities, but receive verylittle outside attention. This program will also be responsible for the overall promotionof our program of commissioned work.

ASPI’s events program

ASPI’s event program is planned to include major lectures, conferences of senioropinion leaders in the wider community, summer schools, informal seminars for thepolicy community, and seminars and other events in centres around Australia. Wealso host prominent international experts on defence and strategic issues to Australiafor visits.

ASPI will also undertake dialogues on strategic issues with a number of key regionalcountries.

190

GLOSSARY

ADF Australian Defence ForceAES Additional Estimates StatementsAEW&C Airborne Early Warning & ControlANAO Australian National Audit OfficeAPS Australian Public ServiceCDF Chief of the Defence ForceCSP Commercial Support programCUC Capital Use ChargeDCP Defence Capability PlanDFRB Defence Force Retirement and Death BenefitsDHA Defence Housing AuthorityDMO Defence Materiel OrganisationDRP Defence Reform ProgramDSTO Defence Science and Technology OrganisationEWSP Electronic Warfare Self ProtectionFADT Foreign Affairs Defence and TradeFBT Fringe Benefits TaxFMA Financial Management and Accountability Act 1997GDP Gross Domestic ProductGST Goods and services taxMSBS Military Superannuation and Benefits SchemePAES Portfolio Additional Estimates StatementsPBS Portfolio Budget StatementSES Senior Executive Service