At the National Press Club yesterday Mike Keating and Hugh White again drew attention to the very serious problems of our proposed submarine purchases. We will be following their addresses further.
The following is a repost from December 16 last year.
For eight months in Pearls & Irritations, Jon Stanford, Michael Keating, myself and others, have drawn attention to major problems with the proposed build of the Shortfin Barracuda submarine in Adelaide by the French company, DCNS. With the exception of Brian Toohey and Michael Pascoe. I cannot recall one journalist who has seriously examined the problems of our future submarines. Yet those problems are screaming out for careful analysis.This post highlights the background to the submarine decision and the serious lack of public debate.
Jon Stanford, Mike Keating and others have argued that the FSM is bad strategic policy, bad for the Navy, bad for the taxpayer, bad for our defence, bad for employment because of the few jobs that will result and bad for SA.
When all the major issues are in the public domain there is going to be embarrassment all round. And all for the sake of saving Christopher Pyne!
Our under-resourced journalists may be interested at last about a political or security scandal surrounding the FSM but they have shown little interest so far in the fundamental policy issues. Just imagine what a lather News Corp.would have got into if a Labor Government had got into a mess like this.!
See reposts of earlier articles by John Stanford which bring together most of the key issues. This is followed by links to another 9 posts in Pearls and Irritations on the subject.
Our White Mans Media is so dependent on news feeds from America that it does not recognise a major local story which is under its nose. Interest is invariable about politics and personality at the expense of important policy. John Menadue.
REPOST from 22 September 2016: JOHN STANFORD. Business welfare under the Coalition – Naval shipbuilding.
This is the second of two articles by Jon Stanford on the Coalition’s approach to industry protection and ‘business welfare’. Part 1 (Motor Cars) can be found at Jon Stanford. Business welfare under the Coalition: two case studies.
At the outset, we need to understand that there are no significant defence reasons for building naval platforms in Australia. Self-reliance means that Australia must be capable of maintaining its defence platforms and systems to a high standard and returning damaged assets to full availability as quickly as possible. Australia does not produce a single missile or weapons system that is employed on its ships, not even a 5-inch gun. Apart from the excellent CEA Technologies naval radars, almost every defence system in the ADF comes from overseas. We do not build any fixed wing platforms for the RAAF, nor do we make the Abrams tank. A sensible acquisition policy should focus on value for money, with local procurement only occurring when it represents an efficient use of resources.
Initially, the Abbott government took a rational approach to naval shipbuilding. In order to save money and obviate the need to upgrade the Collins class, Tony Abbott sought to buy Soryu class submarines off the shelf from Japan. The government was critical of shipbuilder ASC (remember the “canoe”) and stated that future warships would only be built in Australia if productivity increased significantly.
Two years later and this approach has been overturned. The Turnbull government proposes to acquire twelve submarines of French design (DCNS), to be constructed in Adelaide at a cost of $56 billion. At $4.6 billion per boat, this is an eye-watering price for a conventional submarine. By comparison, India is acquiring six French submarines, admittedly of a smaller size, for a total of around $4 billion. A Virginia class nuclear submarine, twice the size and far more capable, currently costs $3.6 billion in the US.
Apart from its unacceptable cost, the DCNS proposal involves substantial risks. The delivery schedule is so tardy that the Collins submarines will need major upgrades, at a probable cost of at least $15 billion, so as to remain in service well into the 2040s. This gives rise to safety concerns. Uniquely, the French proposal involves converting a submarine designed for nuclear propulsion to diesel-electric. Apart from inducing much mirth on the part of submarine experts worldwide, this involves substantial technical risks. Piers Ackerman quotes a senior Defence official as saying “If you asked someone to devise a new submarine program with the highest risk factors at every stage, you could not have done a much better job. It will almost certainly end in tears and possibly a catastrophe”.
In this process, Defence rejected a very attractive $20 billion proposal from TKMS, a German company with submarine technologies that dominate the global export market. TKMS guaranteed the cost of building 12 submarines in Adelaide would be no higher than in Germany and offered a fixed price contract with early delivery to obviate the need for a costly upgrade of the Collins class. The proposal also involved a wholesale transfer of digital technology from Germany and the strong possibility of Australian industry involvement in a global supply chain. The reasons for rejecting the TKMS proposal have yet to be adequately explained.
Car manufacturing, the imminent loss of which may cost an estimated 200,000 jobs, has an effective rate of assistance (ERA) of less than eight per cent. The proposed submarine acquisition will require an ERA in excess of 300 per cent. In return, according to the Defence Minister, the project will create “1,100 jobs in the shipbuilding process, potentially 750 jobs in the supply chain”. As a pay-off for such a high ERA, this is a very damp squib. At a cost of nearly $400,000, Defence commissioned a report on the economic impact of the submarine project but has elected not to release it.
Following this extraordinary decision on submarines, we may well inquire of the government: “What do you do for an encore?” All this, and more. The next step is to provide open-ended protection to building surface warships. In doing so, the government has overturned the approach laid down in the Defence Industry Policy Statement (DIPS) that accompanied its own White Paper. Under the DIPS, acquisition policy would “seek to achieve the best value for money” while giving consideration to “opportunities to maximise internationally competitive Australian industry involvement” [my italics].
That was in February. Speaking in Adelaide in April, the Prime Minister said “I am determined that every dollar we spend on defence procurement as far as possible should be spent in Australia”. Seemingly regardless of cost, risk and delivery, major warships will in future be consolidated by a monopoly shipyard in South Australia. Further, the so-called ‘valley of death’, the peaks and troughs in demand that are the bane of the naval shipbuilder’s life, will be eliminated by having a rolling build program. This means that in order to maintain a continuous workload, modern naval assets will be replaced well before the end of their effective lives. This must be the ultimate example of the tail wagging the dog.
The ERA for this policy has yet to be calculated but could run to the hundreds of per cent. As the Australian Strategic Policy Institute (ASPI) suggests, “mindful of what the Prime Minister said in Adelaide, future defence contractors will be packing in as much local content as they can, with the risks borne by the ADF and the costs by taxpayers”.
Why did policy change so radically after the White Paper was published? One need not be a cynic to suggest that the only thing that changed between February and April was that an election started to loom large, with a couple of seats in South Australia in the balance. When the consequences of this policy change eventually become apparent, some researcher will be able to calculate the cost to the taxpayer, if not the benefit, of keeping Christopher Pyne in parliament.
It is not as if the government is building this new policy on the back of a productive and efficient naval shipbuilding industry. ASC in Adelaide has been consolidating three air warfare destroyers (AWDs) for the last ten years. They have been plagued with cost and delivery overruns. Finance Minister Mathias Cormann has noted that “these ships are costing $3 billion a ship when equivalent ships from other parts of the world would have cost us $1 billion a ship”. Not only is the cost of the ships unacceptable, but they are already years late in delivery, leading to significant additional costs for the RAN. Moreover ASPI warns that now the more straightforward shipbuilding tasks for the AWDs have been undertaken, we should watch this space. “On past experience, the hard parts are yet to come.”
This is bad enough but worse is to follow. The White Paper included a planned investment of up to $5 billion for combat system upgrades for the AWDs. While no detail was provided, ASPI has reverse engineered this and concluded that the original Aegis systems (which were acquired years ago) are now out of date. So on completion, the AWDs will need to undergo a major and costly refit. An innovative solution to the valley of death problem, therefore, is to spend so long building ships that they are obsolescent when completed. They can then move seamlessly into their mid-life upgrade with no blip in the workload.
Surely this is enough? But no, there’s even more. Some of the upgrades to Aegis that the Navy requires will be difficult or impossible to integrate on the relatively small platform that Defence selected for the AWDs. Looking at the last two ships under construction, ASPI suggests that the most economical solution could be to cut our losses. “For $5 billion, the RAN could buy two larger, more capable Arleigh Burke class destroyers with the latest Aegis configuration. In so doing, it would save money and possibly even receive the vessels before the upgrades to the AWDs are expected to be completed.”
The Turnbull government’s policy towards naval shipbuilding, the centrepiece of its innovation and ‘jobs and growth’ agenda, represents one of the biggest protectionist rorts in Australia’s long and chequered history of industry assistance. Yet, as in other areas, a protectionist industry policy is not what we would have expected of Malcolm Turnbull. As he stated at a book launch in 2012:
“After all today, the Liberal Party is thoroughly committed to free trade. And yet while high tariffs are a thing of the past, we still spend billions supporting Australian industries with little analysis or understanding of its costs – politicians “save jobs” without any debate about how many other jobs are lost because of the public resources diverted.”
Yes, Prime Minister.
Jon Stanford worked in government for 25 years, being a division head in the Industry Department and latterly in the Department of the Prime Minister and Cabinet.
Comment by Hugh White
This is spot on. I’d only add that acquisition strategy for the submarines almost guarantees a disaster whoever builds them, because the design and pricing are taking place in a completely competition-free environment.
What we need is a competitive Project Development Study phase, in which two (or more) contenders develop detailed designs and provide tender-quality prices on which a fixed price contract can be based. That is standard in this kind of project, or used to be.
As it is, DCNS can offer whatever they like at whatever price they choose to demand and we will have no option but to accept it – and the longer the current phase lasts the less option we will have, because the less we could be able to stand the delay of starting again.
Hugh White, 23 September 2016.
Hugh White is Professor of Strategic Studies at the Strategic and Defence Study Centre at the ANU. He was formerly Deputy Secretary of the Department of Defence.
REPOST from 4 October 2016: JON STANFORD. The French submarine boondoggle. Is DCNS’s imaginary Shortfin Barracuda submarine Australia’s biggest defence blunder.
The Turnbull government’s decision on the future submarine (FSM) represents bad policy. It is bad for the Navy, bad for the taxpayer and bad for the future defence of Australia. Given the key role the FSM is meant to play in the future of the naval shipbuilding industry, it is also bad news for South Australia.
The Navy’s requirement is for a uniquely large conventional submarine (SSK) that can undertake force projection missions far from home. This in itself raises important strategic questions. Is this an appropriate role for Australia? Does the US want Australian submarines to operate in the South China Sea? In practice, should only nuclear submarines (SSNs) undertake such missions?
But accepting the Defence requirement for what it is, the concerns around the decision to acquire the DCNS Shortfin Barracuda submarine are considerable. They relate as much to the very substantial risks involved as to the excessive cost.
In terms of the acquisition costs budgeted by Defence, $4.6 billion represents an eye-watering price for a SSK. A nuclear-powered Barracuda costs less than half this in France. A very large Virginia class SSN currently costs $3.6 billion in the US. Most SSKs cost less than $1 billion.
The French submarine appears to be easily the most expensive out of the three proposals submitted under the competitive evaluation process (CEP). TKMS, the German contender, offered to build twelve advanced submarines in Adelaide for around $20 billion, the same cost as in Kiel. At about $750 million in Japan, an improved Soryu class submarine would cost more to build in Adelaide, but far less than $4.6 billion.
Turning to risk, there is a fundamental flaw in the process itself. By eliminating all competition before a detailed design has been produced, the Navy faces substantial risks. What if the eventual DCNS design is untenable on technical grounds? What if the price quoted by DCNS, now a monopolist, is unacceptable? Australia could be forced to buy an existing design off the shelf from overseas that may not meet all the Navy’s needs.
This scenario is not impossible because the French proposal involves major technical challenges. Nobody has ever converted a nuclear submarine to a SSK before. Many submarine experts doubt that it can be done. The hull forms are different. The use of pump-jet propulsion in the Barracuda, while a breakthrough technology in SSNs, may be far less efficient at the low speeds associated with a SSK.
Another technical risk with the DCNS proposal is that, unlike the other two contenders, it doesn’t incorporate air-independent propulsion (AIP). AIP allows a SSK to remain submerged for up to three weeks, albeit moving at slow speeds. Because of improved anti-submarine technologies, which allow SSKs to be detected when ‘snorting’ (recharging their batteries close to the surface), AIP is a sine qua non for an advanced SSK in the twenty-first century.
A major risk with the French proposal is the tardy delivery schedule, with the first submarine not entering service until the 2030s. This will necessitate a major upgrade to the Collins submarines to keep them in service until the 2040s. This involves massive risk. Collins cannot be converted to embody AIP. Deep diving will become increasingly dangerous as the platform ages. While the likely cost of the upgrade to Collins is in excess of $15 billion, it may not deliver a credible submarine capability.
Given the ADF’s preference for American weapons and systems, a further risk is that the US will refuse to allow the full transfer of sensitive technology to a French platform. The recent comprehensive leak of DCNS’ top secret submarine data is likely to make the US more wary of providing sensitive technologies to France. This means that an American combat system, as well as US cruise missiles and torpedoes, may be unavailable.
One popular theory suggests that the choice of the Shortfin Barracuda is merely an artifice to allow the nuclear version of the platform to be acquired down the track. Peter Jennings, Executive Director of the Australian Strategic Policy Institute, certainly thinks so: “it’s probably a good bet to say that the reason we’ve gone with the Barracuda is that some of the 12 builds can be nuclear.”
If this is Defence’s cunning plan, it is highly questionable. First, the Germans and Japanese do not produce nuclear submarines and so were participating in the CEP, in good faith, on the basis of a false prospectus. Secondly, it is also a highly risky approach to replacing Collins. Even if we started now, it would take 15 years to develop the hard and soft infrastructure required to operate SSNs. We do not know if this will ever be politically acceptable in Australia. We have not undertaken any process to determine whether a French SSN would be more appropriate to the Navy’s needs than an American or British design. We may well also need to procure SSKs to complement the putative long-range SSNs, and the Shortfin Barracuda is unlikely to be the best available platform for that role.
Overall, the risks involved in the DCNS proposal are so high as to be unacceptable, particularly in light of the costs involved. A senior Defence official is quoted as saying “If you asked someone to devise a new submarine program with the highest risk factors at every stage, you could not have done a much better job. It will almost certainly end in tears and possibly a catastrophe”.
Fortunately, it is not too late to change course. To date, the only agreement with DCNS is for the development of a detailed design. The solution is to keep the competitive process alive by extending the CEP and resuscitating the other proposals. As Hugh White has said, “what we need is a competitive Project Development Study phase, in which two or more contenders develop detailed designs and provide tender-quality prices on which a fixed price contract can be based. That is standard in this kind of project, or used to be.” As well as proposing a tender price for building them overseas, each contender would also be required to provide a detailed plan for building the submarines in Adelaide under a fixed price contract.
Apart from the benefits of re-establishing a competitive process, extending the CEP would also help repair relations with Australia’s friends in Japan and Germany. There was considerable angst in both countries not only about the outcome of the CEP but, more fundamentally, about the process itself. Both the German and Japanese proposals were rejected by Defence for reasons that were regarded by the proponents as being largely spurious.
Extending the CEP would not delay the acquisition. Indeed, the FSM may be in the water sooner than currently projected. At the same time, the major risks in the current process would be substantially reduced and there is a much greater likelihood that the Navy would be provided with the right submarine at an acceptable cost.
SEE FURTHER LINKS IN PEARLS & IRRITATIONS ON FUTURE SUBMARINE.
John Menadue. Mr 300%. 18/11/16.