Sunday, January 22, 2023

Peter Winsley: How our defence investment decisions can help lift New Zealand’s economic complexity and performance

China and the United States are the world’s two superpowers and New Zealand needs good relations with both. We look to the United States to uphold liberal democracy and the international rule of law. New Zealand is part of the Five Powers (“Five Eyes”) arrangement which largely focuses on surveillance and intelligence gathering and involves combat capabilities. The $2.4B cost for the P8-A Poseidons to replace the Orions is part of the price we pay for Five Powers membership. It is a good political investment.

Australia is New Zealand’s closest ally. Our current defence expenditure is about 1.5% of GDP, compared to Australia at about 2% (2020 figures). Australia expects New Zealand to invest more in defence, and support for this seems to be growing in Parliament. However, we also need to uphold our nuclear-free policy, given Australia’s plans to acquire nuclear-powered submarines.

Despite shared values and close defence ties, the United States and other democracies restrict New Zealand’s primary industry exports. In contrast, our free trade agreement means China is by far our largest export market.

The dilemma seems simple: how do we harmonise our liberal democratic values with the economic benefits of our relationship with a China we regard as autocratic?

Liberal democracy has its flaws and is under threat. President Trump promoted insurrection on 6 January 2021, and later threatened to “cancel” parts of the US Constitution if he was again elected as President. New Zealand is currently enacting swathes of race-based legislation that weakens or removes democracy in areas such as resource management, local government, public lands and waters. New Zealand is still a democracy, and so far, free expression is only being limited on the margin. However, our democracy is slowly eroding, and we are in an increasingly weak moral position to lecture China on its governance and human rights policies.

Despite their frictions, the United States and China both benefit economically from trade, and they need to cooperate to address global issues such as climate change and pandemics. They need each other and the world needs them. However, increasingly they are locked into strategic competition over key technologies, military capabilities, and the interpretation of international laws, rules, and norms. These relate for example to space, cybersecurity, artificial intelligence, and some intellectual and resource-based property rights.

Potential flashpoints include freedom of navigation in international waters, claims over the South China Sea, Taiwan, and North Korea’s bellicosity and its nuclear weapons programme.

New Zealand is dependent on a few commodity exports and lacks many knowledge-intensive manufacturing and services (KIMS) businesses that can export sophisticated and differentiated products, whilst retaining core business operations in New Zealand.

Harvard University publishes an Atlas of Economic Complexity that ranks the complexity of a country’s exports. Economic complexity is a good proxy for prosperity. It also signals resilience. That is, the more complex a country’s export mix the greater its ability to avoid or manage commodity-based economic shocks, such as the wool price collapse in New Zealand in 1966 and the global oil price shocks in the 1970s.

Economic complexity reflects a country’s past innovation performance. It also signals its generativity – the ability to create something new, and the willingness to promote younger generations’ wellbeing and long-term futures.

From the founding of Glaxo in the late 19th century to Rocket Labs in 2006 and Kea Aerospace in 2018 New Zealand has always been good at creating new, knowledge-intensive businesses. However, it struggles to grow them to scale in international markets while retaining core competencies and benefit streams in New Zealand. This reflects factors such as the small size of the domestic market and shallow and short-term capital markets.

Government procurement programmes can give KIMS businesses the market scale and the longer timeframes they need to invest and grow. It can ensure that New Zealand businesses develop the technologies and capabilities to help the economy diversify and become more knowledge and skill intensive, with these capabilities both anchored in New Zealand and looking outwards to international markets.

New Zealand in its trade and its domestic procurement agreements has in the past taken a purist free trade approach which has made it difficult to preferentially favour our own KIMS. There are ways around this. Many countries explicitly favour their own defence and security industries. New Zealand industry had substantial input into the ANZAC frigate building programme in the 1990s because of the political support for this.

Furthermore, since 2001 a Treaty of Waitangi clause has been included in all our Free Trade Agreements. This reserves New Zealand’s right to implement special domestic policies for Māori that are not offered to persons of other countries that are party to the agreement. There are also preferential rules in our procurement policies favouring Māori businesses.

Dame Anne Salmond and others point out that Te Tiriti o Waitangi protects the rights of all New Zealanders, not just Māori. This effectively means we can use the Treaty clause as we wish to protect the interests of all New Zealanders, for example by ensuring that key government procurement contracts go to New Zealand businesses. Professor Jacinta Ruru from Otago University could run a masterclass for trade and defence officials in applying Te Tiriti to almost any property or investment transaction in New Zealand.

Recent technological advances, New Zealanders’ entrepreneurialism, and the greater investment we could make in defence and security from now until the 2030s create an opportunity to help diversify our economy and reduce our dependence on commodity exports. This may also strengthen our foreign policy independence, as well as lifting productivity and the prosperity this leads to.

Success would require a political mandate for procurement policies to be used explicitly for economic development purposes, and government willingness to take technological and diplomatic risks. For larger procurement projects such as replacing the ANZAC frigates there must be multi-partisan support over several electoral cycles.

The Defence Capability Plan 2019 forecasts out to 2030 and beyond the new capabilities Defence may need. This includes intelligence capabilities, and semi-autonomous and remotely operated technologies. The Plan also reinforces the importance of digital capabilities as critical enablers across operations, and signals greater investment in cyber capabilities.

The current Plan is to grow the Defence Force by around 1500 service personnel. The Army’s size will grow to 6000 personnel by 2035. The Army would receive new equipment, which may include small scale Unmanned Aerial Vehicles (UAVs) to support operations.

For the air force the “big ticket” Poseidon purchase has been made and the existing C-130H Hercules will be replaced by a new fleet of Hercules C-130 (J) in 2024. Further strategic airlift investment may also be considered.

Based on existing published Defence documents, and using business as usual assumptions, around $5-6B of new naval capital investment may be committed from now to the 2030s. This includes and is not limited to:
  • $1B to replace maritime helicopters
  • $600M to $1B to replace the two Offshore Patrol Vessels with vessels better suited to the Southern Ocean and other tough environments
  • $3B at a minimum to replace two frigates
  • A new sealift vessel, with uncertainty over budget costs
It is understood that these investments have yet to be contracted for and different priorities can therefore be set.

New Zealand’s Defence Assessment 2021 concludes that the two principal challenges to New Zealand’s defence interests are strategic competition and the impacts of climate change. “Strategic competition” can be read to mean competition between an increasingly assertive China and incumbent powers, notably the United States. The focus on China has meant little emphasis has been placed on where Indonesia sits in Australasian strategic thinking. The Assessment recommends that New Zealand must concentrate its defence efforts on the Pacific, though it might have a wider Indo-Pacific role. A further defence policy review update is now underway.

Over the last forty or so years low-cost weapons have been able to inflict disproportionate losses on high-cost combat systems. Shoulder-launched Stinger missiles proved devastating against the Soviet air force in Afghanistan. The Falkland’s war showed how vulnerable large, high-cost warships were to subsonic, low cost anti-ship missiles. This lesson was relearned in 2022 with the loss of the Russian flagship Moskva to Ukrainian anti-ship missiles.

The Ukraine war highlights the importance of precision targeting for its cost effectiveness as well as lethality. Precision targeting depends largely on technology and componentry that is widely available, except for pariah states. The Ukrainians have showed the importance of innovation in the combat environment. This has included makeshift combat drones developed from recreational models. Some Ukrainian-made software converted readily available tablets and smartphones into sophisticated targeting tools the Ukrainian military now uses widely. Simple 3D printers make spare parts so soldiers can repair heavy equipment in the field. Technicians convert pickup trucks into missile launchers.

Much future conflict up to the 2030s and beyond is likely to be mobile, dispersed among small combat units, information-intensive and precision-based. It will exacerbate the vulnerability of forces centred on high-cost assets such as aircraft carriers, frigates, and tanks. Aircraft carriers now look like sitting ducks when facing the latest anti-ship missiles and torpedoes.

There is currently no certain defence for ships against multiple anti-ship missile attacks or Unmanned Aerial Vehicles (UAVs) swarms, let alone conventionally armed hypersonic missiles which are already being deployed.

Higher defence and security investment is needed due to the greater demands on our military. This goes way beyond combat operations and includes fisheries and other resource protection, environmental (including climate change) monitoring and response, disaster relief, peace keeping, search and rescue, Antarctic operations, and hydrographic mapping.

Increasingly defence and security services will have to address risks in the “grey zone” between peace and war. For example, seabed infrastructure is vulnerable. Around 95% of world internet traffic passes through just 200 underwater fibre optic cables. Unit 29155 is a Russian armed forces branch that operates clandestine operations in other countries. In 2022 it is alleged to have attacked utility, communications and transport infrastructure in Scandinavia, Germany, France and Poland.

Even those of us with the deepest pacifist convictions understand that Hitler had to be stopped militarily, that Kim Jong-un’s North Korea is dangerously unstable, that “Black Swan” events such as 9/11 can come as if from nowhere, and subnational conflict is possible in several smaller Pacific states. For example, the 1987 coup in Fiji was driven by racism against the Fijian Indian community. There were outbreaks of violence against the Chinese minority in Tonga in 2001 and 2006. New Zealand’s defence planning might need to give more emphasis to how we deal with subnational conflicts, preferably through early intervention before emerging conflicts get out of hand.

On a completely different scale, Australia’s near neighbour Indonesia has a population of 275 million people. In the Indonesian mass killings of 1965-66 around 500,000 to 1,000,000 people died. The victims were mainly communist sympathisers, Gerwani women, ethnic Javanese Abangan, ethnic Chinese and alleged “unbelievers“. Up to 100,000 people may have died during the Indonesian occupation of East Timor.

Our defence forces must be ready and equipped for combat operations. We should not however “shadow box” with China, a country that has been largely at peace with the democratic world since the Korean war was fought on its doorstep in the 1950s. China provides a lot of aid to less developed countries, albeit with some risks of “debt entrapment”. It seems to have been a moderating influence on Russia. Xi Jinping in late 2022 is believed to have warned Vladimir Putin against the possible use of nuclear weapons in Ukraine. This seems to have worked – Putin has stopped opining on the subject.

New Zealand naval capabilities should not be overly geared to multi-lateral fleet exercises. Such exercises require high cost, high speed frigates with advanced weapons that we will never use. For example, the newAustralian Hunter-class frigates are 10,000 ton and will cost around $A3.9B per ship (2018 estimate). This is way beyond our needs and means. New Zealand does not need multi-role fast frigates that can keep up with carriers – it needs workhorses not racehorses.

Our military needs to be more flexible and be underpinned by dual-purpose technology with both military and civilian applications. It needs to be more focused on non-combatant operations in the Pacific. For example, climate change will damage small Pacific states through rises in sea levels, soil and freshwater salinity, harm to coral reefs and to local fisheries and other impacts we cannot predict.

New Zealand could never remotely be self-sufficient in defence; however, a much higher proportion of its defence budget could be spent domestically. This could include leading-edge skill investment in fields such as design, AI, imaging, 3D engineering, and aerospace and marine precision engineering. It is such enabling technologies that can deliver wider spill-over benefits.

New Zealand should lift its defence and security investment by perhaps 0.2% to 0.5% of GDP over the next decade or so. Much of this investment would relate to security in the wider rather than the more narrowly military sense.

Our current approach to defence investment involves replacing old frigates and other major military assets with updated new versions, even though technological change and the nature of warfare have changed radically and not incrementally.

We should avoid “follow on” replacements of the Seasprite maritime helicopters and move instead straight to UAVs to carry out the functions currently undertaken by manned naval helicopters. This could involve DARPA-like calls for proposals from New Zealand businesses and entrepreneurs. It might see supercharging of the Defence Technology Agency to encompass “skunk works” and “MacGyver-like” approaches, as well as more conventional cooperative research work with other agencies and research student internships.

In short, we should show confidence in our businesses, entrepreneurs and research students and see what they can come up with when given some big defence and security challenges that New Zealand may need to face.

New Zealand needs to build up its maritime design capabilities to ensure our naval procurement responds to our challenges. We have probably invested more in America’s Cup sailing design than in ensuring our naval vessels are designed to handle New Zealand conditions. The Lake-class inshore patrol vessels commissioned in 2009 were not suited to rough New Zealand seas. The two Protector class offshore patrol vessels were built in Australia to a design used by the Irish Naval Service. Design errors meant the boats were 100 tons heavier than planned, however they were too short in length to easily handle Southern Ocean and other extreme conditions.

The sealift ship HMNZS Canterbury was built in Rotterdam based on a commercial ferry design. It cost $130M and entered service in 2007, however design flaws in its RHIB system caused a fatality and its landing craft had to be replaced. The ship was not seaworthy in some marine conditions. The overseas builders of the ship agreed to pay $85M towards remedying some of the ship’s defects.

A core New Zealand naval weakness is that it is platform-based rather than modular. This means that as technology advances, instead of introducing new modules to an existing platform the whole platform needs to be upgraded at high cost and loss of operational readiness. For example, one frigate took around three years to be upgraded. Modularity decouples a warship’s mission systems (or payload) from the platform that carries them.

Currently the Navy has nine ships in service from six different vessel classes. Only the HMNZS Aotearoa, the ice-strengthened naval tanker and support ship fulfils a specialist role that requires a single ship class. Our Navy needs more functionality through modularity and fewer classes.

Except for HMNZS Aotearoa, all ships in our existing fleet will reach the end of their economical service life between 2032 and 2035. The 2019 Capability Plan proposes to acquire in the mid-2020s an additional sealift vessel. This new vessel will have greater lift capacity than HMNZS Canterbury. The proposed new ship will provide a flexible military asset, including hospital facilities, planning spaces, and self-defence capabilities. Following 2030, HMNZS Canterbury will then be withdrawn from service.

In the 1980s Harry Duynhoven, MP for New Plymouth actively campaigned for the Danish Thetis-class patrol frigate to be built in New Zealand with design assistance from Danish industry. Others in the Just Defence lobby group favoured the British Castle Class patrol vessel commissioned in 1982. This was 1,427 tons, with a 20 knots top speed and a 10,000 nmi range.

Duynhoven was ahead of his time as the Thetis class had several big advantages over competing frigate options. It was about the same size as the ANZACs, however it has a range of about 8700 nmi compared to the ANZACs’ 6000 nmi. It is also ice-strengthened. The Thetis class was also more advanced in its StanFlex modular design system that allows different modules to be carried on the same platform depending on the intended mission.

The one advantage the ANZAC frigate had was a 27-knot maximum speed compared to 21.8 knots for the Thetis class. However. the slower Thetis-class speed can be an advantage as it means these vessels cannot be expected to participate in high speed, carrier-led task forces engaging in potentially confrontational naval exercises.

A former New Zealand Defence Minister Dr Wayne Mapp is an advocate of the Canadian Harry DeWolf-class vessel. This is ice-strengthened, of 6,615 tons, a speed of 17 knots and a 6800 nmi range. It seems inferior to either the ANZAC or Thetis designs on most criteria.

New Zealand industry was actively involved in the ANZAC frigates project in the 1990s. Our industry has some strengths in design and build and we can source components from almost anywhere in the world. A vessel based on an updated Thetis design as the platform and more differentiated modules dependent on mission would seem ideal for New Zealand.

It is critical to have design and build processes and capabilities within New Zealand. It doesn’t matter if you must import most of the inputs if you control the core design and build functions.

It is sensible to invest more in dual-purpose technology that serves both civil and security markets. Examples might include distributed generation, cybersecurity technologies, and environmental monitoring UAVs that can switch to being missile platforms.

There are some interesting defence-related businesses in New Zealand, all with specialised niches. HamiltonJet has long had a significant niche in patrol craft water jet propulsion. Rocket Labs makes New Zealand one of a small number of countries that launches satellites.

Kea Aerospace in Christchurch is working on stratospheric aviation that can revolutionise data acquisition and communications for applications such as environmental monitoring, precision agriculture, disaster management and maritime domain awareness. Dawn Aerospace is pioneering space plane technology.

Small UAVs with both civil and military applications have been developed in Auckland at a fraction of the cost of overseas equivalents. The New Zealand Konihi can be built for around $5000 compared to the United States Dragon Eye system at around $85,000.

Much of New Zealand’s future combat strength may well be in UAVs and missiles they launch, whether using army, naval or air force platforms. The United States is deploying a Marine Littoral Regiment (MLR) to Okinawa, organised into smaller units armed with UAVs and missiles rather than tanks and artillery.

In future New Zealand soldiers could be organised in squads of twenty or so operating their own UAVs and other weapons systems from the backs of 4WD vehicles. Given the littoral environment there may be opportunities for smaller New Zealand designed combat craft to play a role in our defence planning.

New Zealand’s defence and security investment should favour multi-purpose technologies. It should be geared to economic development through procurement processes and a knowledge and skills rather than a capital-intensive focus. Skills developed and knowledge created in fields such as defence-related marine technology, UAV aerospace, digital, AI and cybersecurity would be expected to be portable to civilian markets, creating valuable spill-over benefits to the wider economy.

If the above strategy was successful, we could apply it to other non-defence and security challenges. Examples could include distributed sustainable energy systems and energy storage. Eventually we would see a higher rating for New Zealand in the Economic Complexity Index (ECI). This would reflect an economy more sophisticated and differentiated in products and services and less prone to trade barriers. We would also have many new sources of learning and knowledge application, spurring innovation in new fields and in paths untrodden.

I drew on good articles by Andrew Watts and Dr Peter Greener. I was impressed by the quality of key Defence documents – they were written by thinkers with no sign of Colonel Blimp being present.

Dr Peter Winsley has worked in policy and economics-related fields in New Zealand for many years. With qualifications and publications in economics, management and literature. This article was first published HERE


David Lillis said...

Hi Peter.
A fascinating blog. Did New Zealand really pay $2.4 billion for four P8-A Poseidon aircraft?

Seems a lot but then we have a lot to protect.
David Lillis

Ricardonz said...

And what's the rationale behind staying nuclear free? Had an X-ray lately? Nuclear power technology is not what it was in 1945 or 1984, it should be on the table for rational debate. Since our current administration do not understand debate - "we reject the premise of ...." Check how many people have been killed by hydro-electric dam failures. Cheers