2005 PARTNERSHIP ACTION PLAN ON
DEFENCE INSTITUTIONS BUILDING (PAP-DIB)
TRAINING COURSE FOR THE
CAUCASUS AND REPUBLIC OF MOLDOVA
SESSION III: FINANCIAL, PLANNING AND RESOURCE
ALLOCATION PROCEDURES IN THE DEFENCE AREA AND
THE MANAGEMENT OF DEFENCE SPENDING
THE EFFECTIVE, TRANSPARENT AND ECONOMICALLY
VIABLE MANAGEMENT OF DEFENCE SPENDING
Adrian Kendry
Senior Defence Economist
DSED, PASP Division
NATO HQ, 1110 Brussels
a.kendry@hq.nato.int
April 27, 2005
PAP-DIB TRAINING COURSE,
TBILISI, GEORGIA
1
THE SIZE AND MEASUREMENT
OF DEFENCE EXPENDITURES
PAP-DIB Objective on Defence Expenditures and Budgets
•

What is meant by defence expenditure? The NATO definition
and experience. Usability, Input and Output Indicators

Measurement and Interpretation of Defence Expenditure
data.

April 27, 2005
Efficiency and Value for Money
PAP-DIB TRAINING COURSE,
TBILISI, GEORGIA
2
THE SIZE AND MEASUREMENT
OF DEFENCE EXPENDITURES
Reducing the 2.5 million size of the European armed forces
(ending conscription and reshaping the armed forces)

•
Modernization and Transformation of Armed Forces and the
shift toward a higher capital-labor ratio in European armed
forces

Transparency in defence and security planning, budgets and
expenditures; the link to closer integration and co-operation
with the Alliance

Accountability for, and Auditing of, the Defence Budget.
April 27, 2005
PAP-DIB TRAINING COURSE,
TBILISI, GEORGIA
3
WHAT ARE THE PURPOSES OF
DEFENCE BUDGETING?
The Process:


PLANNING: Identify force requirements and capabilities
 PROGRAMMING: Assess (i) how and (ii) when
capabilities will be acquired and (iii) their estimated costs
and (iv) their affordability
BUDGETING: Allocate appropriate funds to programmes
(subject to competing demands both across the
Government Sector and within the Ministry of Defence)
April 27, 2005
PAP-DIB TRAINING COURSE,
TBILISI, GEORGIA
4
PLANNING :
THE FUNDAMENTALS
Identify National Economic Position/Prospects and
Foreign/Security Policy Interests/Threats and Priorities


Define Missions/Objectives and Military Tasks


Analyse Required Forces and Capabilities
Assess the “Gap”: the difference between projected
Requirements and Availability
April 27, 2005
PAP-DIB TRAINING COURSE,
TBILISI, GEORGIA
5
PROGRAMMING: THE
FUNDAMENTALS

From Planning, estimate the required:
 Equipment Acquisition: level and rate (assessing the trade-off
between the various Services of the Armed Forces)
 Manpower: How is the reorganisation and downsizing to be
implemented?
 Logistics and Infrastructure: Can domestic suppliers meet the
requirements? Can they provide low-cost and reliable systems ?
 Operational Requirements, Recruitment Targets and
Maintenance Schedules
Investment Appraisal to assess Options and Alternatives: the role
of cost-benefit analysis
April 27, 2005
PAP-DIB TRAINING COURSE,
TBILISI, GEORGIA
6
BUDGETING: THE
FUNDAMENTALS



Develop Budgetary Estimates based upon the costing of:
 Equipment procurement
 R&D commitment
 Operations and Maintenance, including logistics
 Military and Civilian Personnel
Assess life cycle cost implications of different programmes
Evaluate the type of contracts that will ensure credible, reliable and costeffective supply of the required capabilities, materials and manpower
April 27, 2005
PAP-DIB TRAINING COURSE,
TBILISI, GEORGIA
7
THE FINANCING OF EQUIPMENT

Allocating funds toward defence modernisation (new
equipment, adequate R&D effort)


Controlling the Operations and Maintenance
(upkeep) component of the defence budget
Ensuring a capable and competitive supplier base

April 27, 2005
Defence transformation and C4ISR
PAP-DIB TRAINING COURSE,
TBILISI, GEORGIA
8
TRANSPARENCY AND GOOD
GOVERNANCE IN DEFENCE
BUDGETING

Government Budgets and Allocations:



Scrutiny by Parliament
Appraisal by Parliament (Select Committees)
Appraisal by Independent Bodies (National Audit
Office/Government Accounting Office)

Feedback to Parliament/Legislature and the
Accountability of Government
April 27, 2005
PAP-DIB TRAINING COURSE,
TBILISI, GEORGIA
9
FINANCING DEFENCE REFORM


Financing improvements in existing force
structures, training and equipment
Defence transformation and the financing of more
integrated and connected capabilities
April 27, 2005
PAP-DIB TRAINING COURSE,
TBILISI, GEORGIA
10
DEFENCE TRANSFORMATION IN
A CONNECTED WORLD
The Revolution in Military Affairs and Changing
Threat Perceptions:



Network Centric Warfare
 Battlefield Digitization
4
 Jointness in C ISR
The Revolution in Industry/Technology Affairs:
Platforms, Software and Systems Integration
 Traditional and New Firms entering the Defence
Supply Chain
Consolidation and Reorganization within the Defence
Industrial Base


April 27, 2005
PAP-DIB TRAINING COURSE,
TBILISI, GEORGIA
11
DEFENCE TRANSFORMATION IN
A CONNECTED WORLD
The Revolution in Business Affairs:
Modernization in Acquisition
 Competitive Sourcing
 Outsourcing
Public-Private Partnerships and PFI



The Revolution in Procurement Affairs:
Multi-sourced environment
Incentives for timely delivery with quality assurance
 Promoting Interoperability
 Increasing competitiveness in the supplier base


April 27, 2005
PAP-DIB TRAINING COURSE,
TBILISI, GEORGIA
12
TRANSFORMATION AND EFFECTIVE
DEFENCE SPENDING
Transformational
Transformational
Defence
Warfare
Management
Globalisation
•Doctrine
•C4ISR
•Mobility
•Asymmetrical threats
•Value for money
•Cost reduction
•Input output
analysis
•Competition
•Lean logistics
•Smart acquisition
•Consolidation
•Commercialisation
•Cooperation
•International industrial
integration (I3)
April 27, 2005
PAP-DIB TRAINING COURSE,
TBILISI, GEORGIA
13
R&D AND DEFENCE EXPENDITURE
FINANCING R&D AND DEFENCE
TRANSFORMATION:
SELF-SUFFICIENCY
COLLABORATION
Indigenous
Research,
Joint Research,
Development,
Development
and
Production
Production
April 27, 2005
LICENSED PRODUCTION /
CO-OPERATION
No Indigenous R&D
OFF-THE-SHELF
No Indigenous
Development
or Production
Indigenous Manufacture
PAP-DIB TRAINING COURSE,
TBILISI, GEORGIA
14
DEFENCE INSTITUTION BUILDING
AND THE ECONOMIC DIMENSIONS OF
DEFENCE RESOURCE MANAGEMENT
% OF DEFENCE EXPENDITURES 2003
COUNTRY
CAPITAL
OPERATING
USA
29
71
UK
24
76
FRANCE
25
75
GERMANY
18
82
ITALY
14
86
April 27, 2005
PAP-DIB TRAINING COURSE,
TBILISI, GEORGIA
15
THE FINANCING OF PERSONNEL




Incentives for military recruitment
Contract forces and competitive wages
Funding the reduction and re-organisation of
military personnel
Realistic assessment of the funding of personnel in
the context of the overall budget
April 27, 2005
PAP-DIB TRAINING COURSE,
TBILISI, GEORGIA
16
FINANCING OPERATIONS AND
MAINTENANCE


National and trans-national consolidation of industry


Improving the supply chains
Improving the armaments regulatory framework
Continuous improvement strategy for ensuring that the
“tail” does not undermine the “teeth”
April 27, 2005
PAP-DIB TRAINING COURSE,
TBILISI, GEORGIA
17