Jon Stanford and Michael Keating. the mistaken decision on submarines.Apr 29, 2016
The government has made a bad decision on acquiring the future submarines (FSMs). It’s bad for the Navy, bad for the taxpayer and it represents a major regression in terms of industry policy.
It’s bad for the Navy because in terms of capability the decision fails to deliver on the objectives set out in the latest Defence White Paper. DCNS’ conventional Barracuda class boats will not be ‘regionally superior’ submarines in terms of their technology. By the 2030s, if operating in the South China Sea, they will be confronted by nuclear attack submarines (SSNs), of greatly improved performance compared to current models. The FSMs will not be, as the Prime Minister said, “the most sophisticated naval vessels being built in the world”. But on a ‘bang for the buck’ basis, they may well be by far the most expensive with the longest delivery timeline.
An advanced, nuclear powered Barracuda class submarine, with underwater endurance limited to 100 days only by crew resilience and a submerged speed of 30 knots, could claim regional technological superiority. But no conventional submarine (SSK), however advanced, will be technologically superior in the South China Sea in the 2030s, nor will it be safe to send RAN submariners on offensive operations there on such a platform.
The irony is that if the government’s power projection ambitions were to be pursued, the nuclear powered version of the advanced Barracuda class would be the ideal platform for the RAN. Yet Defence’s requirements have led DCNS to remove the single element in the Barracuda class that provides its overwhelming technological advantage, namely the nuclear reactor, and replace it with an updated version of the diesel electric propulsion that powered Australia’s first submarines over a century ago. It’s the naval equivalent of removing the engine from a Ferrari and replacing it with a motor from a Citroen 2CV.
The ridiculous corollary of this is that it will cost Australia a lot more to procure the dumbed down version of the Barracuda submarine than it would have done to buy far more capable nuclear powered Barracudas as a military off-the-shelf (MOTS) purchase from France. If the Navy had acquired, say, four nuclear boats supplemented by six conventional submarines of an existing design to undertake the other roles required of the FSM, the overall cost could have been around $20 billion, as against over $36 billion plus at 2016 prices (the oft-quoted $50 billion represents future inflated costs). The Navy would also have been much better off in terms of capability.
Another benefit of a MOTS purchase is that the new submarines would have been available a decade earlier, thereby avoiding some significant risks. There would be no need to attempt, at high cost, to upgrade the obsolescent Collins class, with a high risk of failure that would leave the Navy without an effective submarine capability for a decade or more. There are also major design risks in a new submarine, particularly in integrating American systems with the French platform and transferring power hungry systems from a nuclear design with a high availability of electricity. This could delay delivery of the new submarine beyond the current unacceptable timeline and increase the already unacceptable cost.
The implications for industry policy constitute a particularly egregious element in the procurement decision. In this context, we need to remember that the Abbott government showed the door to the car industry. The end of the age of entitlement meant that around $500 million a year, not high by international standards, was too much to pay to support a high technology industry that, directly and indirectly, employed around 200,000 people.
Now the government is keen to support an industry with a cost disability, according to the RAND Corporation, of up to 40 per cent. Given the likely moderate local value added in an industry where all the sophisticated hardware is imported, the effective rate of protection (assistance to value added) will be much higher than this. Indeed a leaked paper from Defence last week suggested an effective rate of protection of 500 per cent would be required to build the submarines in Adelaide. Even at the height of the Fraser government’s protectionist excesses in the early 1980s, the effective rate reached ‘only’ 143 per cent for the car industry.
The government justifies a local build on the basis of job creation, developing an innovative industry and the ability to undertake through life sustainment of the submarines in Australia.
On the Prime Minister’s figures, 2,800 jobs will be created directly and indirectly, a far cry from the 200,000 jobs that are related to the car industry. Some early estimates suggest we are looking at a cost of around $4 million for every job created.
There is only value in building an innovative industry if it is internationally competitive. Little thought appears to have been given to developing an industry plan directed towards this objective. If this was an issue, the government would have given much greater attention to the German bid, which offered a substantially lower price ($20 billion), much earlier delivery, no cost penalty for a local build and the transfer of substantial digital technology to Australia.
The defence argument for local acquisitions can be the last refuge of a scoundrel; in the past it was even applied to protecting the clothing industry. We already know that we do not need to build military assets, including missiles and systems, in order to maintain and upgrade them. We do not build RAAF fixed wing assets or missiles in Australia yet we deliver high quality through life support. Australian industry was perfectly well able to maintain the British-built Oberon class submarines and, indeed, to upgrade them.
It’s not too late to amend the decision and deliver a better outcome. The submarines have not yet been designed, commercial terms have not been agreed and contracts have not yet been signed. A much improved approach could maintain DCNS as the preferred supplier, while providing the Navy with the capability it needs much sooner, at a reasonable cost to the taxpayer and with positive industry benefits in South Australia.
The first step would be to negotiate with the French government (and the US) to acquire four nuclear powered Barracuda class submarines as a MOTS purchase. If agreed, the Navy could also acquire six conventional Scorpene class SSKs from DCNS, to be built in Adelaide on a fixed price contract if the cost penalty is acceptable. All these submarines would be delivered in the early 2020s with no need to upgrade Collins.
If the acquisition of the four SSNs is ruled out, the capability requirement should be amended to exclude offensive operations in contested waters far from home. This would mean focussing on operations that are well within the capacity of a SSK, namely sea denial in Australia’s littoral and reconnaissance and intelligence gathering in neighbouring waters and archipelagos. This would require acquiring between six and nine SSKs of an existing design, to be built in Adelaide if the price is right.
Of course, there would be political difficulties in making these changes. This would require strong leadership by the Prime Minister. Better this, however, than taking significant risks with Australia’s defence, imposing a large and unnecessary burden on taxpayers and going down in history as modern Australia’s most protectionist Prime Minister.
Jon Stanford and Michael Keating are Directors of Insight Economics. Previously they worked together in the Prime Minister’s Department, where Dr Keating was Secretary.