Resource Allocation and Management in Defence: Need for a Framework

Need for a Framework

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• Publisher: KW Publishers
• Year: 2013
• Print ISBN: 9789381904459
• eBook ISBN: 9789385714962
• Edition: 1

The question that faces governments and militaries the world over is how best to allocate resources for management of defence in the new age. This book, by Shri A.K. Ghosh who has an economics background, explores the framework for change in resource allocation and capability building. It emphasises the importance of introducing programming in Indian defence to serve as a link between defence planning and budgeting. Them is match between defence planning and budgeting needs to be connected by the introduction of resource constrained budgeting, having a multi-year perspective. The RMA, force modernisation, cost-benefit analysis,management of risks, and internal and external audits are among the many issues the author has provided a perspective on. It is argued by the author that defence needs to be viewed as a giant business and, where possible, business practices should be introduced. The book is recommended reading forth planners and decision-makers of defence management and will benefit readers from the armed forces as well. The lay readers interested in the subject of national defence and security will also find it useful and interesting.

1

Economics and Resource Allocation in Defence

Economists have attempted to apply the principles of economics to policy-making and resource allocation issues in defence from the 1950s onward and had a fair degree of success in bringing reform in the budgetary process, particularly in the USA. This kind of attempt is still to be made in India, though the budgetary allocation to defence in absolute terms and in relation to allocation made for other activities of the government is quite significant.

If we look back to defence budget issues that were being debated in the 1950s in the USA, which ultimately led to the adoption of programme budgeting in defence in the early 1960s (a technique which basically involves application of economic principles to budgeting), we shall find that allocations to defence were not very different from those of India today, though the issue of purchasing power has to be kept in view. The principles underlying programme budgeting subsequently came to be adopted in many countries, particularly for defence, because of the soundness and reasoning behind them.

Therefore, it is necessary to know what these principles are, and under what conditions they are likely to lead to optimum allocation of resources in defence.

The basic nature of economic problems, like the nature of war, remains the same. Therefore, revisiting the issues, particularly in the general context of allocation of resources in the field of defence, is always rewarding, particularly if we are looking for reforms in the budgetary process.

Two fundamental facts provide the foundation for the field of economics. The first is that the ‘ends’ are unlimited. The second is that economic resources for attaining the ‘ends’ are limited or scarce. Since the ends are unlimited and the means limited, resources need to be allocated in a manner that would lead to maximisation of attainment of the ends. As George J. Stigler put it, “Economics is the study of principles governing allocation of scarce means among competing ends when the objective of the allocation is to maximise the attainment of the ends.”¹

Thus, economics is basically concerned with allocation of resources among competing ends to maximise attainment of the ends and since the means are limited, it emphasises the necessity for exercising choice in the achievement of goals.

Many of the military problems can be analysed in this conceptual framework. Limited resources mean limited output. Attention gets focussed on ‘outputs’. After conceptual clarity about these ‘outputs’ is achieved, the next point that comes up is that, owing to the limitation of resources, a choice must be made as to what quantities of each ‘output’ need to be produced to get the ‘best value for money’. Therefore, an important field of enquiry is how these choices are being made and on what basis.

An economist naturally analyses military problems in terms of his accustomed framework, using logic of choice. “Military problems can be formulated as economic problems of maximisation, subject to constraints.”² Constraints, of course, are of resources. We are not talking only of budgetary resources. The nation turns over to the military Services certain resources, some of which are specialised ones—bases, military capital equipment and trained manpower inherited from past periods. Others are general resources like the budget, which, with certain limitations, can be spent on anything

The task of the Services and of the Ministry of Defence (MoD) is to use these resources in such a way that our military power or ‘military worth’ is maximised. So, when we approach the question of optimum utilisation of resources for maximisation of the military worth, a total look is required at both the ‘inherited resources’, which are specialised, as also the general resources like the defence budget. “Of course, there is no way of measuring military power or military worth—in the general case—any more than there is a way of measuring an individual’s, a family’s, or a firm’s utility or preference function.” But, as Hitch goes on to add, “The conceptual framework helps greatly even if we can’t fill all the empty boxes. It tells us how to seek solutions.”³

This is the basic point: the approach of economics will not enable us to fill the so-called ‘empty boxes’, but it will help us in determining how to go about in trying to fill them up.

Allocation of Defence Resources: Necessity of Choice

It is not just the issue of allocating budgetary resources. There are several tasks to be performed involving choice and hard decisions, which vitally affect the allocation of resources. The tasks include: choosing of doctrines, force structure, equipment, etc with a view to maximise military worth, for any given level of available resources. As Charles Hitch put it, “In this respect, it is essentially a problem of economic choice—of relating military worth or effectiveness to cost in terms of resources and alternative ways of achieving specific, well-defined security objectives.”⁴ The principal mechanism for allocation of resources is the annual defence budget. But it fails to serve as a mechanism for rational allocation of resources, if it is not linked to defence planning which involves setting up of defence objectives, considering alternative means of achieving the objectives, capabilities to be developed keeping in view the resource constraints and setting up of priorities in terms of resource allocation decisions. Planning, in the context of programme budgeting based on principles of economics, has to perform these functions. Putting together various schemes and projects, ongoing or otherwise, and arriving at an acceptable financial total cannot be called planning, as we must link them to defence objectives in the context of the overall defence strategy which involves hard choices because of limitation of resources, and has, therefore, to be a top-down process.

Here a basic problem is encountered. Planning, in the sense mentioned above, has to be done in terms of missions and tasks to be performed in the context of strategic goals and the weapon systems to be acquired, military units to be raised and maintained in terms of divisions, air wings and ships—the ‘outputs’ of the Defence Department to achieve the objectives—while budgeting is done through such ‘inputs’ or intermediate products as personnel, operation and maintenance, procurement, etc.

As we know, defence budgeting in India is prepared in terms of inputs like pay and allowances, stores, works, equipment, etc. It is not possible to link them with defence planning if it is done in terms of missions and tasks and a force structure to successfully carry them out.

If planning is done in terms of schemes and projects with price tags attached to them, then some kind of link in financial terms can be established between planning and budgeting, as we have been attempting to do. But that would not lead to optimal allocation of resources with a view to achieve defence objectives and defence budgeting would not serve the strategic purpose.

This basic problem was faced in the USA in the 1950s in the context of resource allocation in defence to establish the links between planning, which was in terms of missions and objectives, and budgeting which was input-oriented. The RAND Corporation, which was working on this, came up with the concept of ‘programming’ as a ‘bridge’ between planning and budgeting. Programming would involve, on the one hand, looking at ‘outputs’ arising out of various defence activities to link them with planning, and the associated costs of these activities on the other, which would help in linking them with budgeting. The outputs in terms of army divisions, air wings, etc were to be linked to all required inputs of equipment, personnel, supplies, facilities and funds, which are provided in the budget under various heads of appropriation.

The costs of various programmes and programme elements can then be linked to major military missions so that we may know how much defence we are buying, at what cost, as an economist would like to see. This is the advantage of introducing the programme concept in defence budgeting.

In Indian defence budgeting, the concept of programmes is missing. Planning is also not in terms of programmes indicating all the elements of the cost involved in a programme element and how it helps in achieving the stated objectives. Therefore, the link between planning and budgeting does not get established for rational allocation of resources.

Another problem towards rational allocation of resources in India is that military planning is done essentially on a Service basis. The order of priority of forces, weapon systems and activities is based on a long-term plan prepared by each Service on the basis of its doctrine and its strategic perception of the security environment. Long-term planning for the defence establishment as a whole is yet to take final shape.

But the more important point is that the annual budget which is useful for many purposes, does not lend itself very well to the task of rational allocation of resources in the defence field. The fact that “ it projects only one year ahead severely limits its usefulness as a means for the allocation of resources within the defence establishment.”⁵ Without a multi-year budget plan which deals with force planning and costs in a comprehensive manner, it is not possible to arrive at optimal decisions. The implications in budgetary terms of ongoing programmes and future cost implications of decisions made today are required to be linked to the multi-year budget plan to arrive at sound programme decisions. Without this exercise, there cannot be optimal decisions relating to programmes.

While considering the efficacy of the financial management system in defence, it was realised in the early Sixties in the USA, that it must provide among other things the data needed by the top management to make crucial decisions regarding major forces and weapons. In became clear that the financial management system, as it has evolved, could not provide it. Therefore, it was decided that ‘programming’ which would provide the necessary data in a meaningful way for taking these decisions, should be incorporated in the financial management system. This was not a easy task. The problem here was to sort out all the activities of the defence establishment and regroup them into meaningful programme elements i.e. integrated combination of men, equipment and installation whose effectiveness could be linked to national security objectives.

‘Programming’ is the economist’s conception for improving allocation of resources. It need not be confined to defence as the principles are applicable elsewhere also.

It helps in optimal allocation of resources, stressing three basic principles of economics:

• The concept of trade-off; the classic problem of trade-off is, of course, between ‘guns and butter’, when we consider the overall resources of the government. But this concept is equally applicable for the lower level of decision-making when, for example, we are considering the necessity of procurement of two systems for strengthening our defence but cannot accommodate both because of limitation of resources, and have to give up one of them, though we might have liked to have both. The same principle would be relevant when we are considering introducing an additional feature into a system, which may involve giving up another, as both cannot be accommodated because of some basic constraint.
• Because of the necessity of trade-off, it is necessary to consider the costs and benefits of alternative courses of action. Here the concept of opportunity cost is important. It is not the cost in the normal sense of the term in terms of input costs. The opportunity cost of an item is what we have to give up to get that item, because of limitation of resources or some other constraint.
• Economists stress the point that a rational decision-maker takes an action only if the marginal benefit of the action exceeds the marginal cost.

For optimisation of decision-making in defence, decisions relating to force structure and budgets should be made together, keeping in view the costs. There has to be explicit acceptance of relevance of costs in defence decision-making.

The other point is effectiveness in meeting the objective. But we should aim at effectiveness not only in one or two areas, but in the entire defence programme. That calls for putting each rupee where it will add the most to total effectiveness. That is why rational allocation of resources is so very important to ensure that marginal cost is equal to marginal benefit for each activity on which defence money is spent.

If rational allocation of resources is the goal, the cost to be considered is not just the procurement cost of weapons and systems, but the cost of the total activity. The costs are both direct and indirect. For example, to deploy one squadron of aircraft, a lot of indirect costs like training base support, logistics, communications, and so on, are required. The costs of these support elements often exceed the investments and direct operating costs of these systems. For rational allocation of resources, the total cost of the activity should be taken into account, not just the direct costs. But more often than not, this kind of cost consciousness is ...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Dedication
• Contents
• Preface
• Resource Allocation and Defence Management: An Introductory Essay
• 1. Economics and Resource Allocation in Defence
• 2. Economics and Strategy: Need for a Framework for Linking Inputs (efforts) to Outputs (results) and Means to Ends
• 3. Review of the Defence Budget
• 4. Financing Transformation of Military Forces: An Overview
• 5. Internal Audit and Internal Control: Of Greater Relevance Today
• 6. Budgeting for Desired Defence Capability
• 7. Programme Evaluation and Investments for Sustained Modernisation
• 8. Challenges in Defence Planning
• 9. Arguments for Introducing Long-Term Budgeting for Defence in India: Need and Pre-Conditions
• 10. Modernisation and Challenges Before Defence Research and Development