A $90B commitment and a choice between domestic or overseas production
The Australian Government plans to spend $US89B procuring nearly 40 new warships and submarines in the next 20 years, representing a doubling of the Government’s annual capital investment in the Australian Defence Force . However, the Government faces a choice; should it commission the construction of these ships in Australian shipyards and support the local economy, or should it reduce the cost of the vessels by 40% by constructing them overseas or purchasing the them ‘off-the-shelf’ .
The economic implications of this choice are stark. Construction of the ships and submarines in Australia would support the beleaguered Australian shipbuilding industry, protecting 7,950 existing jobs and creating several thousand more over the next 20 years . Alternatively, sourcing these vessels overseas could save up to US$30B , equivalent to US$3000 per Australian taxpayer, though this gain would be mitigated by the public costs associated with the likely collapse of the Australian shipbuilding industry.
Political considerations also loom over this decision. Historically, the current governing party has indicated it is open to overseas procurement of Navy vessels, while the primary opposition party has expressed “resolute opposition” to an overseas build . The prior submarine program, the Collins Class, was constructed in Australia and was delivered late and over-budget, as well as being beset by technical issues that have at times resulted in the operational availability of the fleet being half that of comparable countries’ navies . These issues have substantially dented the credibility of the Australian shipbuilding industry.
Committing long-term to a shipbuilding industry in Australia
The rise of isolationism as a political movement has put significant pressure on the Australian Government, resulting in a sharp shift in both policy and rhetoric. At the end of 2014, while arguing in support of procuring the submarines from overseas, the Australian Defence Minister stated that he “wouldn’t trust [government-owned shipbuilder] ASC to build a canoe” . Yet, in 2016, the same Government announced it was launching a $US35B program to build the 12 submarines in Adelaide, Australia. The Australian Prime Minister announced that the submarines “will be built here in Australia … with Australian jobs, Australian steel, and Australian expertise”, and that the Government now held the view that “every dollar we spend on defence procurement as far as possible should be spent in Australia” .
This announcement came alongside consistent reports of competing tenders that offered Japanese-made and German-made alternatives and would carry a cost of $15B-$18B, a 50% saving on the selected bid .
The Government’s preference for domestic manufacture has continued for ongoing tenders. In March 2017, the Government announced the launch of a $US27B tender for the construction of the next generation “Future Frigate” that specified the location of the build as Adelaide, Australia .
Further, in the absence of private sector demand, the Government has adjusted the planned construction timeline for the Navy warships over the next 10 years to eliminate a predicted demand gap or ‘valley of death’ in 2018-20. Smoothing the utilization of Australian shipyards avoids the loss of over 1,000 jobs in 2018-2020. .
Making the best of a domestic situation
The Australian Government has committed to supporting the domestic shipbuilding industry for at least the next 20 years. However, there are several steps it can take to minimize the overall cost to the taxpayer and preserve flexibility for sourcing vessels in the future.
- Leverage predictable demand to reduce Australian shipbuilding cost
The Australian Government should engage in a continuous-build strategy where predictable demand allows a “regular drumbeat” of the same type of ship to be produced in a facility. This will maximize the learnings gained from the first ships produced and increase efficiency over time.
- Avoid short-term over-expansion of the Australian shipbuilding industry
The cost-premium of domestic production is not equal across all ship types . Accordingly, the Government should seek to utilize the existing domestic shipbuilding capacity to build ships where the cost premium is lowest (e.g., amphibious ships) and build other vessels overseas. This will avoid a short-term over-expansion of the domestic shipbuilding industry that would enhance the political imperative to protect it, and tie the hands of future governments.
- Explore labor reform in the Australian shipbuilding industry
The primary driver of the 40% cost premium of Australian shipbuilding is high labor costs compared to other developed countries . Given the lack of competitiveness of the industry on a global stage, the Government should seek to reform the labor and union agreements in place at the Australian shipbuilders.
Questions for the class
- Is it acceptable for a government to spend taxpayer dollars on overseas goods when a domestic alternative is available?
- Should governments be held to different standards than private-sector organizations when considering overseas procurement?
- ‘2016 Defence White Paper’, Australian Government Department of Defence, http://www.defence.gov.au/WhitePaper/Docs/2016-Defence-White-Paper.pdf, accessed Nov 2017
- John Birkler et al, ‘Australia’s Naval Shipbuilding Enterprise: Preparing for the 21st Century’, Rand Corporation, https://www.rand.org/content/dam/rand/pubs/research_reports/RR1000/RR1093/RAND_RR1093.pdf, accessed Nov 2017
- Daniel Hurst, ‘Tony Abbot pledges open tender for submarines to win over SA Liberals’, The Guardian, February 8, 2015, https://www.theguardian.com/australia-news/2015/feb/08/tony-abbott-pledges-open-tender-for-submarines-to-win-over-sa-liberals, accessed Nov 2017
- David Wroe, ‘Our sub fleet world’s worst’, Sydney Morning Herald, December 12, 2012, http://www.smh.com.au/federal-politics/political-news/our-sub-fleet-worlds-worst-report-20121212-2b97g.html, accessed Nov 2017
- David Wroe, ‘Defence Minister doesn’t trust Australian shipbuilder to make ‘a canoe’, Sydney Morning Herald, November 26, 2014, http://www.smh.com.au/federal-politics/political-news/defence-minister-doesnt-trust-australian-shipbuilder-to-make-a-canoe-20141125-11tqv7.html, accessed Nov 2017
- Paul Karp, ‘France to build Australia’s new submarine fleet as $50bn contract awarded’, The Guardian, April 25, 2016, https://www.theguardian.com/australia-news/2016/apr/26/france-to-build-australias-new-submarine-fleet-as-50bn-contract-awarded, accessed Nov 2017
- Brendan Nicholson et al, ‘Home-built submarines deemed too expensive, too risky, September 9, 2014, http://www.theaustralian.com.au/national-affairs/defence/homebuilt-submarines-deemed-too-expensive-too-risky/news-story/9c1915cf98b40dd1e7c44516cc2a1caf, accessed Nov 2017
- ‘$35 billion Future Frigate Tender’, Australian Government Department of Defence press release, March 31, 2017
- ‘The Government’s plan for a strong and sustainable naval shipbuilding industry’, Prime Minister and Minister for Defence joint press release, August 5, 2015