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No pot of gold: Understanding Defence’s Integrated Investment Program

April 12, 2024 | Jennifer Parker

Image: Hunter-class frigate: BAE Systems.

Almost a year ago, the Defence Strategic Review (DSR) set homework for the Department of Defence, including reprioritising the country’s rolling plan for military capability spending, the Integrated Investment Program (IIP). That update is now nearly due.  

But we should not assume that the government can address defence funding problems by shifting funds between projects in a spending plan that is already overburdened. 

There’s a widespread view in the public that Defence wastes money, a view reinforced in recent years by critical Australian National Audit Office reports detailing cost increases for many Australian Defence Force projects. The Hunter frigate program is a well-known example, with the Government citing the $20 billion cost increase as one reason for cutting the project from nine to six frigates. 

This leads to false assumptions that better fiscal responsibility and prioritisation will free up pots of gold within the IIP. It doesn’t help that the IIP is poorly understood and that Defence engages little in public discourse, whether to justify skyrocketing costs, debunk myths around capability acquisition or highlight its on-budget delivery of most projects. 

Created in response to a recommendation of the 2015 First Principles Review, the IIP outlines Defence’s funding lines for capability acquisition and sustainment for the coming 20 years. 

Only two public versions have been released, one in 2016 and one in the 2020 Force Structure Plan (FSP), leaving a public impression that the IIP remains fixed for long intervals. In fact, it is a classified living document, updated twice a year. The updates include reprioritisation. 

The DSR highlighted the deterioration of Australia’s strategic circumstances, including the ‘the prospect of major conflict in the region that directly threatens our national interest’. Accordingly, it called for a highly integrated, enhanced-lethality ADF. 

To achieve this, parts of the ADF need to be reshaped, new capabilities must be acquired and some that already in planning need to be accelerated. The DSR gave some indication of those changes, but the vast majority have been left as homework for the department. The first instalment of the biennial National Defence Strategy (NDS), to be issued with the IIP update, will hopefully reveal more details. 

While many of the DSR’s recommendations were welcome, the handbrake on its success was the government’s position that the review’s changes of approximately $19 billion must be cost-neutral within the forward estimates—from 2023-24 to 2026-27.  

Although the recently announced replacement and expansion of the Royal Australian Navy’s surface combatant fleet is expected to come with a $1.7 billion uplift in the forward estimates, this doesn’t address the broader requirements of the DSR or NDS. Fiscal relief for the defence budget is not due until 2027-28, with an uplift of $30 billion to be provided from then until 2032-33. 

A cost-neutral DSR implied some combination of two things: some of the announcements were at least partly factored into the IIP already, and some projects in it would need to be cancelled or amended. Indeed, some cancellations and amendments were made public when the DSR was released, but many were not. 

The DSR made plain that the IIP was under significant pressure. Unfunded announcements had been pushed into it since the 2020 FSP without going through the prioritisation process. 

The 2016 white paper recommended that the IIP carry 20 percent overprogramming, meaning that for each year the programmed spending would be a fifth higher than available funding. That was based on the historical observation that there will always be some projects that slip. It’s a sound budgeting mechanism, but the DSR revealed that the IIP was actually carrying 24 percent overprogramming. And changes called for in the DSR have probably added to that. 

To address the funding pressure, the DSR recommended that ‘lower-priority projects’ should be stopped or suspended and that ‘funding should be released by the rebuild and reprioritisation of the IIP’. 

While reprioritisation within the IIP makes sense in our changing strategic circumstances, the problem is that it has been the go-to bucket of money for some time. The Defence funding envelope was set in the 2016 white paper, so almost every capability change since then has resulted in reshuffling of existing IIP funds. In the last couple of years, such initiatives as the Australian Signals Directorate’s uplift of $11.5 billion for the Redspice program and the $38 billion investment in Defence workforce growth have wreaked havoc on the IIP, resulting in the cancellation, reshaping or shaving of projects. 

The likely result is that, despite the DSR’s recommendation to generate additional capability funding through removing the IIP’s low-hanging fruit, it is unlikely that there is any low-hanging fruit left. Considering the IIP pressure described in the DSR and the need to fund such efforts as Redspice and Defence workforce growth, the overall acquisition and sustainment program is clearly at significant risk. 

Defence Minister Richard Marles has already signalled that the IIP to be released in coming weeks will show significant cuts to projects. 

While talk of reprioritisation and greater fiscal responsibility is easy to sell to a public that’s unfamiliar with the IIP, repeated pillaging of what has likely become a bare bones capability program is risky in a time where our strategic reviews say we should be strengthening preparedness. 

We must not imagine that there is a pot of gold at the end of the IIP rainbow. Defending the country simply demands a real uplift of funds, and Defence needs to explain publicly why this matters, otherwise we will be piling more risk onto the capability program at one of our greatest times of need in nearly 70 years.

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