Reporting to cabinet's National Security Committee in February 1999 on the implementation of the far-reaching Defence Reform Program, Defence officials revealed that savings from the changes were significantly ahead of target.

But they acknowledged that the rapid pace of implementation had caused "reform fatigue" in many areas of Defence, with morale falling, key managers and specialists resigning and the risk of industrial action rising.

Defence officials proposed to address the problem by "substantially improved internal communication".The Howard government launched the reforms to slim down the Defence bureaucracy and tighten its focus on supporting front-line troops and operations.

Under the plan, savings realised by abolishing or outsourcing more than 22,000 service and civilian jobs and shutting down 30 bases and defence establishments would be reinvested in increased combat capabilities.

Defence reported that annual savings were expected to reach $280 million in 1998-99, $30 million above budget forecasts, rising to more than $1 billion a year by 2002-03.

But the upheaval caused by the reform program came at an awkward time for the armed forces, who were facing demands for increased operational readiness and deployment because of heightened instability in Australia's neighbourhood, centred on the looming independence referendum in East Timor.

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The same NSC meeting that received the reform update directed that a second brigade be brought to 28 days' readiness "in order to ensure that the government has options to respond to the range of demands that could arise in our region".

The reform task was further complicated by the government's decision to hold the complement of Defence personnel at 50,000, which was 7300 more than had been originally envisaged under the reform plan, further stretching budgets, crimping savings and heightening the pressure on remaining staff.

Under the new staffing target, 31,700 would be combat forces (65 per cent of all Defence personnel), up from 24,300 (42 per cent) previously, including 23,000 in the army, 14,000 in the navy and 13,000 in the air force.

Defence admitted it was also pushing at the boundaries of what the private sector could cope with in terms of providing outsourced services, with the rate of "market testing" of positions increasing from 1000 to 4000 a year.

"While there is clear management commitment and impetus ... the implementation timetable is very aggressive and there have already been concerns expressed by industry about their capacity to cope with the pace," Defence said. "In some areas there may be a need for a limited moderation of the pace."

In its assessment of the reform program, the Australian National Audit Office criticised Defence management of the process and questioned the scale of savings and costs incurred.

But the government auditor acknowledged Defence had realised substantial savings which had allowed it "reinvest significantly in enhancing military capability".