Amid the rapidly changing landscape of war, where threats to national security are less conventional and more asymmetric, there is a clear need to engage lateral thinking when it comes to acquiring military equipment.
Defence spend globally is around US$1.75 trillion annually. Ken Drover, global lead partner at KPMG’s defence centre of excellence says that while defence budgets are generally declining in the western world, there are some exceptions.
“Two groups of nations — Brazil, Russia, India and China (BRIC countries) and Mexico, Indonesia, Nigeria and Turkey (MINT countries) — are increasing their defence spending as their economies grow. Other than Brazil, the BRIC countries are spending more than 2% GDP on defence and MINT countries are expected to experience over 11% cumulative growth over the next five years,” Drover says.
In Australia, government has promised to lift defence spend to 2% of GDP by around 2022. However, Drover says budgets will remain tight and agencies dealing with Australia’s defence policy will need to adopt innovative procurement strategies to manage these pressures.
With experience in defence strategy, procurement and bridging communications between public and private sectors, Drover proposes innovative ways defence can acquire assets within this climate. Drover held a number of command appointments in the RAAF, and says the ability for Defence to adapt is pivotal.
“Defence can’t continue to do everything themselves, and most importantly, they don’t need to take all the risk,” he says. “I think there’s a range of risk sharing options that can be adapted to meet Australia’s strategic needs.”
Collaboration the answer
An approach to risk sharing which has had some traction is Public and Private Partnerships. Drover says opportunities exist for this to develop. These would be facilitated through innovative ownership structures, leases and life-support contracts that provide benefit for both parties.
“Bottom line is I think industry needs to be engaged more. It’s not just a public sector issue, it’s a public and private sector issue.
“I think defence has long been the domain of the public sector and in terms of frontline operations, rightly so.
“We need a stronger collaborative compact between the private sector and the public sector in terms of how best to support Defence.”
Deals akin to the UK’s Private Finance Initiatives (PFIs) are a model to consider, he says.
The UK Ministry of Defence has sealed about 50 PFI initiatives to share the risk of using supply assets, like the $23.6 billion AirTanker airborne refuelling planes and sea transport ferries — that in peaceful times could be underutilised.
Under the AirTanker PFI, modified Airbus A330s were modified to refuel UK jets in the air. When they were not needed the PFI allowed the planes to be used for other applications, which the operator profited from.
The deal hasn’t been as smooth as planned, with the UK’s National Audit Office (NAO) finding that challenges stemmed from limited market competition, evolving specifications, poor access to full cost data and poor project resourcing. Drover says lessons have been learnt and the system appears on track.
Despite the initial challenges, PFIs in general were given a tick by the NAO, which audited eight of the deals and concluded six were done well.
How can this work in Australia?
Drover advises that the Australian private sector can be engaged in more innovative ways to fulfil support services for Defence.
Australia already uses some collaboration schemes, such as the 25-year through-life support deal with BAE Systems, which supplied 33 Hawk 127 lead-in jet fighter training aircraft. It maintains them ready for pilots to sign them out and hand back.
“A lot of these programs in the early days suffered from a lack of understanding of each party’s business models,” Drover says, pointing out that the relationship has ironed out the kinks.
“I think that’s a mature relationship now between both parties and allows more and more industry involvement.”
The deal began in 1999 and undergoes contract renewals every five years. Initially the planes had issues with oxygen supply systems and corrosion on some fittings, but those issues were resolved. There was an ongoing structural concern with the tail sections on the Hawk 127, which in 2007 the Australian National Audit Office (ANAO) said had to be monitored.
The national auditor’s review of Australia’s $3.2 billion jet fighter fleet concluded “that these organisations (including BAE and RAAF) were effectively managing the Air Combat fleet’s in-service support within a complex mix of operational needs, funding priorities, maintenance capacities and aircraft capability upgrades”.
Other savvy tactics
To face the defence challenges of the next 30 years within a constrained budget environment, another approach could be joint ownership of assets, Drover says.
With global interconnectedness increasing, teaming with allied nations on defence procurement could also be a solution. Drover says the C17 fleet, owned by the North Atlantic Treaty Organization (NATO) Airlift Management Programme, delivers a common capability to several participating nations. This concept could be explored further, in conjunction with different ownership models, for Australian application.
Drover proposes that research and development of new technologies vital to tackling threats of electronic and cyber warfare and terrorism can be shared with “like minded countries”.
“Do we have to do it all ourselves, or how much can we leverage from our allies? How much do we need to leverage from our allies?”, he asks.
The multinational design and build of the Joint Strike Fighter provides an example of where Australia has already participated in a joint development program.
Equipment leasing arrangements could also be beneficial. Drover says the “power by the hour” system, commonly employed in the aviation industry, could be useful in areas such as defence training or exercise environment, to save costs.
“The next time a procurement, such as the Hawk 127, is envisaged, defence should consider not only outsourcing the through-life support, but for the aircraft to be owned and maintained by industry and leased back to the military on a pay per use arrangement, such as the Saab Gripen used by the Czech Republic and Hungarian Air forces.”
Another consideration is dual use of assets and being strategic about where equipment could be redeployed.
Solutions for the future
Drover says the key is to share global insights and lessons learnt to answer the most common question asked — “What are other countries doing to tackle this problem?”
Drover says overseas lessons, such as those from the UKs PFIs, can be applied to Australian agencies, who are likely to face similar challenges when it comes to resourcing, cost expectations and changing product specifications in the early days.
“Industry will need to play a greater role in sharing of risk and ownership of capability under these more innovative acquisition arrangements for new platforms,” he says.
“Any acquisition decisions need to be framed through the vision of lifecycle cost analysis, an assessment of cost and risk sharing opportunities, and whether new assets will be flexible enough to integrate with future technologies.”
For more information on approaches to defence procurement and possible solutions, the KPMG paper The World is Changing: Anticipate and Adapt, is available for review here.
Written by Dan Moss & Melinda Oliver