Chapter 8

Budgets, Plans and Programmes

It was already stressed that defence policy is largely a series of accommodations to the inevitable, and involves respecting immovable forces where they exist. The greatest of these immovable forces is the availability of money, and an important secondary problem is the inevitable opposition which will arise to spending the money that is made available.

All defence planning is ultimately irrational. This is because it is based on fear: fear of the known, of the unknown, and of one’s own weakness. For this reason, there has never been a budget or a force structure big enough for its proponents, and there never will be. Indeed, as with addictive drugs, more money, manpower and equipment feed the appetite rather than sating it. It is not implied by this that all defence planning is conducted irrationally, still less that it should be: indeed, most of the rest of this chapter is devoted to ways in which it can be made more rational. But, it is clear that the process must always eventually be a subjective one. No scientific method of determining force structure has ever been invented, and it would be unwise to expect one. For this reason, what follows is essentially a political and procedural analysis of how budgets and programmes are decided, and how the process can be best carried out, rather than the economic or management-based analysis which is most often seen.

Budgets

Most things start with the availability of money. Indeed, defence planning is often little more than finding the least bad way to use the insufficient money available. There is no logical way of deciding how large the defence budget should be. There is a long-term and widely distributed tendency for defence budgets to take up an average 2-3% of a country’s gross domestic product (GDP) over a period of years. Why this is so is not entirely clear, but it does seem that few economies can sustain a level of effort much higher than this for many years before they suffer in some way. The position is complicated, however, by the lack of a standard definition of defence expenditure, other than the NATO one, the fact that the relationship is a dynamic one, between two changing figures, and the existence in some countries of special funds for defence purchases outside the normal defence budget.

Normally, however, the percentage of GDP is not a factor in determining the size of the defence budget, except as a rhetorical device. Defence budgets, in fact, are usually decided by a political trial of strength, based on the amount spent, or budgeted for in the preceding year, and any special factors which may have intervened. As a result of the defence budget being determined in this way, the resulting programme is much like a very old house: some parts have been modernised and added to, others abandoned halfway through, with no particular overall shape or plan. In turn, the process through which the defence budget is settled is a reflection of the way in which most countries handle public spending decisions, as a trial of strength between finance ministries and spending departments.

In practice, governments have two different and contradictory policies about public spending. On the one hand, governments exist to do things, and they are judged partly on the activities they have carried out. On the other hand, doing things costs money, and governments generally try to avoid spending money. Sometimes, this is for reasons of economic ideology, or to please foreign lenders (or both). Sometimes, it is in the hope that tax cuts can be afforded, or it reflects the wishes of electorates who want decent public services, but are not prepared to pay for them. In theory, the defence budget, like every other, should be assessed on the basis of ‘what the nation can afford’, but in practice, there is no way of determining what this affordability is. In the end, judgements like this are political, rather than economic, and reflect what is felt to be important by those in power. A generation or more ago, for example, many governments preferred to pay for increased activity and employment rather than to fund high unemployment. Recently, the opposite has more often been true.

The process is complicated by the common fixation today on financial, rather than real outcomes. Because inflation is unpredictable, and largely beyond government control, and because gambling on the currency exchanges can cause wild fluctuations in exchange rates, which enormously alter the costs of imported goods, knowing in advance how much effort the defence budget can actually afford is almost impossible. Moreover, there are often penalties imposed for spending too much, and money not spent has to be returned to the finance ministry at the end of the year in most countries.

As a result, there are essentially two processes occurring at the same time in a defence ministry:

In general, these two imperatives are in conflict with each other, but the second is much more powerful than the first. It is far more easily quantified, and far more visible than the former, which is essentially a matter of judgement. Moreover, a force structure carries with it many costs from year to year. Not only do equipment projects take some time to complete, but infrastructure tends to be fixed, and armed forces cannot be run on a hire and fire basis to please accountants. While the exact figure will vary from country to country, it would be common for perhaps 75% of defence expenditure to be committed before the financial year even begins. By definition, any cuts which must be made will come from the remaining 25%, and, as the financial year progresses, this figure will reduce sharply. So, the areas which will be chosen where money can be saved are in effect the only areas where this is possible, whether or not the results make sense. Cutting training, recruiting or the provision of spares is unlikely to do any good — or even save any money — in the long run.

A concentration on financial management is therefore bad for a well-organised programme. One is in effect concerned with measuring numbers, the other with doing things. Nonetheless, these are the limitations under which defence planners have to work, and the rest of the chapter is concerned with how to make the best of them. Possible approaches are:

cost-effectiveness calculations;

better balance between commitments and resources; and

improvements to structures and processes.

Inputs and outputs

The concept of ‘value for money’ is often mentioned at this point, and it is a useful idea to bear in mind, as long as it is not taken too seriously. The concept itself assumes that the amount of money that is spent (the input) is known, and that the results of spending it (the output) are also known. From the examination of alternatives, that with the best input/output ratio, in theory, can be pronounced as the best value for money.

There is little doubt that the idea of trying to relate inputs and outputs is sound, and this has to be the basis for comparative examinations of proposals to spend money. The problems lie in the application.

Lack of knowledge

It is sometimes possible to be fairly sure of the inputs. But, any ambitious project, any foreign purchase, or anything which has not been produced yet, always costs more than expected. Moreover, some cost-savings only show up over long periods of time: a modern aircraft will probably cost three to four times as much to support during its lifetime as it costs to buy. Savings made in one area (by closing a naval base, for example) often show up as costs elsewhere (such as social security payments). Nonetheless, the uncertainties involved in predicting output are far greater, since it is impossible to know how equipment will perform until it is actually used.

Financial dominance

It follows from the above that, since cost is not easy to define, and effectiveness is very difficult, ‘value for money’ is never a precise measure, and may be next to useless. In practice, it is usually hard to prove that the cheapest solution is not the most cost-effective, and this is often the way the decision is taken.

Hidden assumptions

The usual reason for invoking the idea of ‘value for money’ is to cut costs and reduce staff. Thus, a proposal to hire 5% extra staff to save 10% of the current time to process recruitment applications would not, in practice, be considered ‘value for money’, whereas a cut of 10% in the same staff would be so considered if it only resulted in a 5% increased in the delay. Governments do not produce financial outputs, so the benefits of investment are almost always theoretical,33 whereas changes in financial inputs are not only very visible, but also politically important.

In spite of these limitations, there are some by-and-large ways of comparing inputs and outputs, which will be returned to later in the chapter.

Commitments and resources

The usual reason for continual crises in a defence programme is an imbalance between commitments and resources. This occurs for one of two main reasons:

a political desire for a defence posture which cannot be afforded with the money made available; or



a political desire to hang on to defence roles and tasks which are now not affordable.

Such imbalances will produce periodic crises until they are corrected. Financial measures will not solve the problem — any more than haemophilia can be cured by a bandage — and are likely, in fact, to make it worse. Intelligent use of resources, as will be discussed later, can ease the problem, but is, once more, not a long-term solution.

There are, of course, powerful incentives to try to take on, or retain roles which cannot be adequately funded. Giving up a presence abroad, or giving up a capability is often politically awkward to do, and there may be powerful regional or international pressure not to do so. Equally, there may be strong political reasons to become involved in a new area of operations, even if the capability is not really there: it is awkward to explain that it is desirable to play a role in UN peacekeeping, but that the country cannot afford to do so. The usual response is to ask the military to do more with less, and what results is a slow degradation of capabilities across the board.

Structures and processes

Successful planners have a clear focus on what they are trying to achieve, followed by a determination that the defence programme should help them achieve it. This sounds obvious, and perhaps it is, but there are any number of countries around the world where force structure has evolved haphazardly and responsively, and where, in consequence, money is not being spent as sensibly as it should be. There are certain countries around the world which, by common consent, produce a great deal of defence capability (output) from a relatively modest input. A selection might include Sweden, Israel and Singapore, where the focus is on a limited range of tasks, which are then adequately funded, an attitude that has brought them a substantial capability in the areas where they need it. By contrast, it is still not clear where the huge amounts of money added to the American defence budget in the 1980s actually went, because much of it was spent haphazardly on programmes which were later cancelled.

The usual method of force planning is by crisis management, and by ‘patch and mend’. Busy civilian and military officials spend all their time trying to cope with the latest financial cuts, with the result that, once the blood has dried, nobody really knows where the defence programme itself is going. Financial criteria have triumphed again. Perversely, however, this kind of panic exercise often increases costs to the defence budget. Stretching out procurement, for example, a good old standby in situations of this kind, generally increases the total cost of the project over the years.

This traditional method of defence programming might be described as the method of arbitration. The various uniformed interest groups will put forward their wish lists, which will be, in total, much more than the money available. In spite of the posturing, and claims of grave damage to the interests of the nation which will result if a single project is cut, something will have to go to balance the books. But, what is eventually decided will owe more to force of personality and lobbying power than to logic, and there will have to be at least an attempt to apply equal misery to each of the functional areas. Moreover, what will be cut is usually what is possible, rather than desirable. This is, more or less, a recipe for continual problems, since nothing is done, from year to year, to bring the programme itself into better balance.

A better method is to go deep into the structure of the programme itself, and to take away control of its formulation from the services, and give it to the central staffs of the defence ministry. The services will, of course, continue to originate some ideas, but only the central staffs are responsible for putting the requirements into the programme. This will make it much easier to keep commitments and resources in balance with each other.

Assuming that this can be done, the missing ingredient for running a successful defence programme is that defence policy and force structure must be decided together, and by the same people. Again, this may seem obvious, but there is a great tendency for the two to be separated from each other. This connection must not only be a general one, it should be imposed at every level of detail. What is needed is a set of planning assumptions, formulated by an interservice staff and their civilian advisors, and agreed to by ministers. Once this document is accepted, it will be circulated with the strict instructions that everything which is in it must be costed, and nothing which is not in it must be costed.

One incidental benefit of this type of approach is that it emphasises inconsistencies and duplication between the services. It is quite possible, for example, that both the air force and the navy involve themselves in offshore protection tasks, and that rather more is being spent on these tasks — which may have never been defined and defended against scrutiny — than can really be justified. It is also unlikely that they are fully aware of what the other is doing. A neutral central staff, with a strong civilian component, can test the validity of proposals made. (‘And just how often, General, do your aircraft practice over the sea? And how many have you lost that way in the last five years?’)

Once these tasks are agreed to, and the level of effort involved has been assessed, they can be costed, in the knowledge that money is not being spent on anything which has not been fully justified. (There will, of course, be less precision about some costs in the support and training area, but even then, it should be possible to have a good idea of what is going on). At this point, it is reasonably possible to give approximate costs for maintaining and enhancing areas of capability, which — rather than the size of the specific budget — is what decision makers need to know. It is not possible, after all, to judge whether to move resources from border protection to peacekeeping deployments unless it is known, roughly at least, what is being spent on each.

Choice of weapons

These same considerations apply to the procurement of new systems for the military. Defence equipment is currently so unbelievably expensive that there is no excuse for not having a cool appraisal of what is wanted, and when. This objective, however, is always being obstructed by two fallacies which are found everywhere among those who write operational requirements:

the follow-on fallacy; and

the like-for-like fallacy.

The follow-on fallacy is that equipment now in service must be replaced by something similar, but better. Often, this is true (a training aircraft has to be replaced by another, for example), but it is not necessarily true, and must not be assumed. As the real cost of equipment increases steadily, a full replacement of everything obviously becomes unaffordable, and the usual result is a steady shrinkage in the inventory, and old equipment having to last longer.

The like-for-like fallacy is that equipment in the inventory of a potential enemy has to be met with similar equipment in a country’s own forces. Once more, this is often true, but there are many cases where, for small nations, in particular, it is often difficult or impossible.

Both of these fallacies are the result of starting in the middle of the argument instead of at the beginning. There are basically three stages which have to be gone through before equipment is selected:

deciding on the task;

deciding on the capability to be acquired; and

deciding on the equipment to be procured.

The task will flow from agreed policy and the planning assumptions. The issue of capability is much more difficult, and should always begin with the question: ‘Should we continue as we are now, or should we do it some other way?’ For example, if a nation is becoming involved in peacekeeping activities, it may be argued that the air force should replace its current short-range transporters with longer range ones. But, it may actually be concluded that, given the type of operations envisaged, it would be more sensible to hire ships and aircraft as required.

The process of deciding how to carry out a task does not have to be especially complex.34 In a case like the above, questions like the following could be asked:

How much of the task can the existing aircraft cope with?

Do the existing aircraft need to be replaced anyway?

Are there other reasons why larger aircraft might be needed?

How likely is it that ships/aircraft could be hired and what would it cost?

It will usually be possible to make some by-and-large assessments of the financial and operational implications of each course. It will be immediately apparent that such comparisons can only really be made by a neutral body, since the process would otherwise just be one of competitive lobbying.

Once the how is clear, the question of equipment selection must be addressed. This can be dauntingly complex, but is not impossible if approached in a logical way.

The point of departure, clearly, is the requirement. This needs to be realistically drawn, avoiding the over-specification (‘gold-plating’) which is always a temptation. Committees are a useful way of encouraging this realism, and, as informed but detached observers, committee members and their staffs can test some of the proposals put forward for robustness. (‘You say you need a radio that hops frequencies 500 times per second. But they are much more expensive than radios which hop only half as often. Explain what the practical operational difference is.’)

Logically, the ideal way to meet a requirement of any kind is to produce it oneself, in facilities under one’s control. It is thus possible to get exactly what is required, when it is necessary, and in the appropriate quantities. Protracted and expensive competition can also be avoided, and all the added costs of publicity, marketing, private jets and chairpersons’ expenses, all of which have to be paid eventually by the customer. But, few countries can now afford the infrastructure which would be required to do this, and even where it is possible, current political fashion is against it. In practice, except for a few equipment producers, nations have to put up with the vagaries of the market.

What this means, is choosing from among the systems on offer, whether they exactly meet the requirements or not. The number of major producers of defence equipment is reducing,35 and in many areas, the choice of systems gets smaller every year. Moreover, few companies can afford to develop systems especially for export, and what is therefore offered is frequently of a standard comparable to that used by the exporting nation’s own armed forces. Such has been the pace of military technology development over the years that the gap between what producer nations themselves use, and what is suitable for a new nation venturing into a new capability, continues to grow. The natural desire of nations to buy the best they can afford frequently leads to procurement and logistic disasters, as equipment is delivered which is too complex and expensive to maintain.

It is particularly important to keep a sense of proportion about equipment performance. If there is a requirement for a transport aircraft with a range of 1 000 kilometres, then there is no point in paying more for an aircraft with a range of 1 500 kilometres, unless it can really be utilised. It often happens that the military edges gradually into new (and expensive) roles, simply because it has acquired a new capability. It is also often attractive to buy a proven system, even if the capability is less: if the Mk1 positioning system will show a position to within five metres, is it really worth buying the Mk2, still in the design stage, which will reduce the error to one metre? Unless one is going into intercontinental ballistic missiles (ICBMs), then the answer is almost certainly no.

In most cases, a nation will be offered a variety of competing products of which the cost and performance will be very different from one another. Choosing between them is hard enough for experienced nations, but for those coming fresh to the task, it can be overwhelming. Some pointers have already been offered, and it may be suitable to bring them together. A possible series of priorities might be to:

be very sure of the required capability;

look at various ways of satisfying it;

not be dazzled by promises of superior performance;

make sure of the capability of using and training on it;

pay attention to support and maintenance costs and problems; and

remember that whatever is bought will have to last for a long time.

There are a variety of ways — some very sophisticated — of comparing the price and performance of equipment. The problem is that, to some extent, these will all depend on assumptions. Nothing about the performance of military equipment can ever be certain, but professional judgement can often help to reduce the uncertainty. Broad-order assessments of costs and capabilities are always possible, and some sensible judgements can often be made. If, for example, two anti-tank systems are offered, one of which has greater penetrating power than the other, the first question to ask is: ‘Does it make a difference?’ If the less powerful system will not defeat the armour of an enemy’s tank, then it is a waste of money no matter how cheap it is. If both will do the job, then the cheaper one should be bought. If a radio set offers superior performance at double the price, it would be fair to try to quantify the performance in some way. It may be hard to be exact, but either the performance difference is substantial, in which case it is worth considering, or it is not substantial, in which case it should not be considered further. Note that a formal definition of ‘substantial’ is not needed for this kind of comparison.

So far, operational capability has been focused on and, of course, something that does not work will be a waste of money. But, procurement decisions need to take many other factors into account, and the procurement of defence systems is one way for small states to exercise a great deal of leverage. If a number of systems will meet the requirement, then it is quite reasonable to make the decision on the basis of other factors. These may include:

offset and licence manufacture;

financing;

linked political and industrial benefits; and

countertrade.

A nation which does not have a strategy covering these factors is weakening its own bargaining position in a market which is now, and will be for some time, biased very much in favour of the purchaser. Of course, integrating all of these factors can be a challenge, and it is not really possible to do it scientifically. Systems for weighting various factors depend, in the end, on subjective judgements. But, a clear and logical process involving all those with an interest, very often points to a clear winner.