Defence

Feature

Looking forward

It might not have captured all the headlines this year, but Defence and national security still featured prominently in the Federal Budget delivered by the Treasurer on the evening of 10 May.

Representatives from Budgets and Financial Planning Division. Photo by CPL Craig Eager.

Side story: Budget in brief

The 2005-06 Budget for Defence builds on the strategic and financial foundations laid down through the Defence White Paper 2000 and the annually-refreshed Defence Capability Plan (DCP).

Additional allocations approved by Government in the context of the Defence White Paper now total $28.1 billion over 13 years. In the first four years the Government had allocated $4 billion, with a further $2.3 billion provided in this year's budget.

While the majority of the additional White Paper funding is directed towards the program of capital investment in the Defence Capability Plan, there is also provision for through-life support costs and growth in personnel costs.

Defence Minister Robert Hill said Australians could be confident that our Defence organisation is now better placed than it has ever been to meet complex security challenges.

"We are now seeing the benefits of the long term funding commitments this Government has made to Defence and of the reforms we instigated particularly in the area of Defence capability procurement," he said.

The key features of the 2005-06 Budget for Defence include:

• the continuation of the White Paper Funding commitment;
• the continuation of a number of budget measures announced in previous Budgets;
• delivery on the Government's 2004 election commitments for its fourth term in office; and
• the provision of additional funding for a range of new budget measures.

Importantly though, the Budget's implications for Defence are not just about "more and more money". Defence has agreed to absorb a number of election and policy commitments costing $217.8 million over four years through re-ordering priorities within the Defence budget. This builds on existing savings measures that seek to reduce overheads and redirect funds for capability.

The Budget also anticipates the move to establish the Defence Materiel Organisation as a prescribed agency on 1 July 2005.

The major recommendation of the Defence Procurement Review, prescription will result in DMO being directly accountable to Government for procurement and sustainment of Defence equipment.

The CEO DMO, Dr Stephen Gumley, will be independently accountable to the Minister for Defence under the Financial Management and Accountability Act 1997.

The separation of DMO's finances from Defence - referred to as a "de-merger" of the accounts - is a significant undertaking and involves the creation of separate budget statements for the DMO.

Photo by CPL Craig Eager.

It involves the creation of a separate direct appropriation to the DMO of $44.2m to provide for policy advice and management services. It also means the transfer to the DMO, or the provision of:

• 4,448 civilian staff positions, including the associated employee liabilities;
• 1,684 military personnel positions. These ADF personnel remain under the CDF's command but work in the DMO, and DMO will pay some $153.6m to Defence each year to meet the salary costs for these staff; and
• $4.8 billion in net assets, primarily inventory.

The DMO will continue to provide services to Defence. Authorised by an overarching Memorandum of Arrangements, this service delivery will be managed and reported through a cascading set of Materiel Acquisition Agreements (covering major acquisition projects) and Materiel Sustainment Agreements (covering logistics support and equipment maintenance).

Total resourcing for Defence in 2005- 06 is $20.034 billion comprising total departmental funding of $17.495 billion and administered appropriations of $2.539 billion. This administered funding covers the cost of military superannuation and other housing subsidies.

When administered funds are included, this year's budget exceeds $20 billion for the first time and our balance sheet has all but broached $50 billion.

The Government has provided new funding of $701.6m over four years to enable Defence to implement the Government's 2004 election commitments outlined in its policy Defence - A Force for the New Century.

Additional funding has been provided for:

North West Shelf Surveillance - An additional $101.2m has been provided for the purchase of two additional Armidale Class Patrol Boats and associated through-life support, repair, maintenance and crew accommodation. These patrol boats will be based at Dampier or Port Hedland and will provide dedicated surveillance and monitoring capability for the North West Shelf. Defence will contribute a further $38.1m.

Operation RELEX II - The Government has provided $16.4m in 2005-06 for the Continuation of Operation RELEX II involving the coastal surveillance of Australia's northern approaches to help detect and deter unauthorised boat arrivals.

Enhanced Protective Security - An additional $74.8m has been provided for the extension of Operation SAFEBASE. This funding is for enhanced protective security measures for Defence personnel and facilities, including guarding, patrolling and protective searches.

Iraq - Operation CATALYST - The Government has also provided $205.3m to continue Operation CATALYST until 30 June 2006, and an additional $240m over four years (including $24.8m in 2004-05) to fund two six month ADF deployments, commencing in May 2005, to assist with stabilisation and reconstruction activities in the Al Muthanna Province of Southern Iraq.

Australia-United States Free Trade Agreement - The Government has provided $10.3m in 2005-06 and $31.6m over the forward estimates to fund the costs to Defence of implementing the Australia- United States Free Trade Agreement. This additional funding will enable Defence to revise its procurement processes to ensure that it complies with the revised rules and procedures in the conduct of procurement arising from the new agreement. It will also cover costs associated with the greater use of open tendering to ensure nondiscrimination in access and treatment for suppliers to Government procurement markets between Australia and the United States.

Tsunami financial assistance - The Government has provided $11.1m in 2005-06 for the Tsunami response effort and financial assistance over and above the $50.9m provided in 2004-05.

Counter-proliferation intelligence enhancement - The Government has also provided $3.8m in 2005-06 and $12.1m over the forward estimates for the costs associated with the enhancement of intelligence on the proliferation of Weapons of Mass Destruction.

Asia Pacific Economic Cooperation 2007 - A further $19.7m has been provided over the forward estimates to cover Defence's contribution to the security support of Australia's hosting of APEC 2007. Supplementation is subject to a no win/no loss arrangement, as with all operations funding. Importantly, the Government has agreed to bring $300m of Defence Capability Plan funding from the forward estimates into 2005-06.

The Budget decisions have paved the way for the current funding position outlined in the 2005-15 Defence Management and Finance Plan (DMFP) to be confirmed. This forms the basis of the Service and Group allocations to the Service Chiefs and Group Heads on 1 June 2005.

In 2005-06 Defence will spend about 40% of its budget on Personnel, about the same as the projected result in 2004-05. Personnel costs continue to rise at about 5 to 6% each year and this continues to place pressure on the budget. A high priority in 2005-06 will be the continued development of the Defence Workforce and the Defence People Plans to address these workforce challenges.

Important initiatives on remuneration, occupational health and safety, and targeted education and training will be progressed. The Budget also provides for a number of ongoing programs directed at improving the conditions of ADF members. These include projects to enhance accommodation and associated facilities, attraction and retention initiatives, new childcare places and ADF spouse support.

Since the Defence White Paper was announced in 2000, the Government has approved about 139 major projects or phases of projects with an all-up cost of around $22 billion. Further projects will be considered by the Government in 2005- 06, with $355m provided for expenditure against new starts.

A snapshot of some of the major Defence Capability Plant projects to be considered by Government in 2005-06 includes upgrades for the F/A-18 Hornets, Phase 4 of Project JP2048 for Amphibious Deployment and Sustainment, and Phase 1 of Project JP2098 for the Joint Coalition Training Capability.

With regard to Defence estate issues, in the Budget the Government also agreed to:

• the continuation of the current business model for property disposals, whereby Defence manages the property disposal program under Government direction;
• Defence retaining its disposal costs from the disposal proceeds, with an end of year reconciliation with the Department of Finance and Administration; and
• continue the current arrangement where net revenue in excess of the revenue target is retained by Defence.

The 2005-06 Defence Property Disposal program is expected to involve sale of property to the value of some $88.6m.

Improvements to Defence's financial management, business systems and processes continue to be undertaken, although more work is still required. Funding is available in the Budget to continue this important work to resolve the current load of 95 Australian National Audit Office audit qualifications.

It is expected that some of these audit findings will be resolved in 2004-05, but enduring improvements will take some years.

Important initiatives underway to address these findings include:

• establishment of program offices in the CFO Group and the DMO to drive audit remediation strategies;
• rigorous monitoring of remediation strategies by the Financial Statements Project Board;
• a range of business skilling initiatives; and
• development of a financial controls framework that will standardise financial transaction and management processes across the portfolio. This in turn will improve the integrity of Defence financial data, budgeting and financial statements.

Source: CFO Group

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