Jon Stanford. Defence procurement and the new submarine11/12/2015
When people remember Gough Whitlam, few would identify him as an economic rationalist. Economics was not his primary interest and, partly because of the perceived urgency of implementing “the programme” after 23 years in opposition, partly because of the incompetence of some of his Ministers, the budget blew out excessively on his watch. Yet in terms of microeconomic reform his record was, in many ways, better than that of previous and subsequent Coalition governments. Even including all the reforms by the Hawke/Keating governments in the 1980s and 1990s, Whitlam’s 25 per cent tariff cut in 1973 remains the single greatest stand alone initiative to open the Australian economy to international competition.
A lesson from the past
Whitlam’s economically rational approach also spilled over into defence procurement. This is an area, as experience demonstrates, that provides spectacular opportunities for squandering public money, not least in the naval shipbuilding industry.
By the early 1970s, the Royal Australian Navy (RAN) needed to replace some obsolescent warships of British origin, many of which had been built at high cost and over excessive lengths of time in Australia’s government-owned shipyards. Defence’s preference was to design and build locally an Australian light destroyer, the DDL project. When the Whitlam government came to power, design work on the DDL had been going on for some years under the Coalition and the Navy was an enthusiastic supporter of the project.
While there would have been significant political benefits in endorsing the project, clearly the risks of a local design and build would have been high. The complexities of integrating a new platform with overseas sensors and weapons, even the less complex systems available in the 1970s, would have led to substantial risks. Building ships locally to an original design would have inevitably resulted in higher unit costs, even in an efficient shipyard, than purchasing a ship from a longer production line overseas. On the basis of the local shipyards’ demonstrated past performance, bringing the project in on time and on budget was highly unlikely.
In 1973, soon after coming to office, the Whitlam government considered the proposed DDL project. While recognising the need for a new acquisition, it also considered that there was no unique mission for a surface warship in the RAN that would justify the costs and risks of designing and building a new Australian platform. The government therefore rejected the DDL and told Defence to go away and look at overseas platforms. Grumpily, Defence came up with two options. The Navy liked the handsome British Type 42 destroyer platform but not its sensors and weapons systems. It approved of the US Oliver Hazard Perry class (FFG) systems and missiles but not the platform, which had a single propeller shaft and resembled a container ship. Typically, Defence sought to mix and match. It wanted the British platform with the US missiles and radars and an American 5-inch gun.
The Whitlam government faced Defence down again. It rejected the mix and match option as being excessively risky and an Australian build as not cost-effective. In 1974 it ordered the FFG ships with all their systems, to be built in the United States with no significant modifications. The Navy was not happy. The Perry design had been described huffily by Defence project staff as “a second rate escort that falls short of the DDL requirements on virtually every respect”. But the government understood that the frigate would provide technological superiority in our region at low cost, with the Australian ships coming off a production run of over 50 vessels. The RAN did not require the world’s best frigate; it was unlikely to be confronting the Northern Red Banner Fleet in the Barents Sea.
In service, the FFGs have been successful. They were minimalist platforms that did the job, to the extent that subsequent governments decided to build two more ships locally (a decision that initially seemed disastrous until Transfield acquired the Williamstown shipyard from government and delivered them on time and on budget). They were also tough and durable. The Perry class USS Stark survived two hits from Exocet missiles, while the Type 42 HMS Sheffield, with significant aluminium in its platform, was destroyed by one. Critically, because they were not unique ships for which the RAN had parent navy responsibilities, through life support and maintenance, undertaken in Australia to US schedules, was cost effective.
More recent history
To clarify, through life support for the FFGs was cost-effective during their planned economic lives, but then Defence delayed the procurement process for their replacement, namely the air warfare destroyers (AWDs). Seriously bad decisions then raised their ugly head.
First, at a time when the US was retiring their Perry class FFGs, Australia decided on a unique major upgrade for its six ships, including improved sensors, modern systems, better anti-submarine weapons and vertically launched anti-air and anti-ship missiles. Awkwardly for those who believe we need to build ships locally in order to modify them, ADI (later Thales) in Sydney won this contract in competition with the Transfield shipyard in Williamstown that had very recently built the last two FFGs. The cost and timeline for the upgrade blew out substantially, with the modifications then being limited to four of the six ships. The other two FFGs were scrapped much earlier than intended. The cost ended up being $1.6 billion for four ships as against a budget of $1.266 billion for six, a blowout per ship of 90 per cent. Two ships short, they were also delivered two years late. In addition, there have been suggestions that the additional weight exceeds the ships’ design parameters, potentially creating stability problems.
Secondly, following the successful local construction of the Anzac class frigates, the Howard government decided to procure the AWDs locally. Compared to the Anzac acquisition, the decision was a bad one for a number of reasons. First, there was no fixed price contract for the successful tenderer or any notion of specifying a similar cost to acquiring the ships offshore. Secondly and quite extraordinarily, while the Williamstown yard with its experienced workforce on the Anzac ships still in place was a tenderer, the contract was awarded to ASC in Adelaide that had never built a surface ship. The shipyard was dedicated to submarine maintenance and had no shipbuilding workforce. Thirdly, building three ships locally (as against ten Anzacs) was never going to be economic because of limited opportunities to exploit scale economies and learning curve benefits. Overall, if we had bought three larger and more capable Arleigh Burke ships off a 100 plus production run in the US, the RAN would already be deploying them and, rather than waiting for three smaller ships to be delivered three years late, the government would have banked significant budget savings.
There are multiple lessons to be learned from these and other recent acquisition experiences. In particular:
- Acquiring a unique platform, as Australia did with the Collins class submarines, brings with it substantial risks and almost certainly excessive costs compared to an off the shelf acquisition. Some of these costs are reflected in the parent navy responsibilities for a unique class, which lead to higher through life support costs – currently running at nearly $1 billion annually for Collins. Implication: if Australia does not have a unique defence mission, then we should not acquire a unique platform.
- Mixing platforms from one country with systems from another involves very high risks, and frequently gives rise to unforeseen costs and delays that exceed substantially any perceived military benefits. Implication: only mix and match systems and platforms as a last resort and only if the risks are understood and accounted for in the budget and timeline.
- Developments in technology mean that obsolescent platforms do not necessarily need to be replaced by similar assets. For example, some of the roles of a submarine could be taken over by aircraft, unmanned aerial vehicles or the Australian Signals Directorate. Implication: focus on the defence requirement, not the particular platform, and assess how it might be best achieved at lowest cost and acceptable risk.
- Building major defence assets locally often involves very substantial risks, higher costs and contingent liabilities that are almost impossible to justify. For example, we would not contemplate designing and building in Australia a major aircraft like the F-35 joint strike fighter or a main battle tank for the Army. There are no significant defence benefits in building platforms locally and the level of protection to naval shipbuilding is higher than for the car industry. Implication: only build major platforms locally under a fixed price contract and where the cost is comparable with that of offshore acquisition – it’s time to end the age of entitlement for the naval shipbuilding industry.
- The main role of defence industry should be through life support – as Australia’s record with RAAF assets show, we don’t need to build platforms locally in order to sustain them at the highest level. Implication: try to shift the political debate away from building defence assets, which leads us into sub-optimal acquisitions, to focussing on the benefits of maintaining Australia’s assets in top condition for the benefit of ADF personnel.
Implications for the new submarine
On the basis of the above analysis, we need to consider the implications for Australia’s new submarine’s acquisition process. Currently, three broad proposals have recently been lodged by shipbuilders in France, Germany and Japan. These proposals are for a large conventional platform, unique to Australia, with a combat system and weapons systems sourced from the United States. The government intends to select one of these proposals in the near future to be taken forward in a detailed design.
In terms of the first implication above, the fundamental question is whether Australia needs to acquire a unique submarine platform to meet its requirement and discharge its mission. The only fairly detailed definition of the new submarine’s mission was contained in the 2009 Defence White Paper:
The Future Submarine will be capable of a range of tasks such as anti-ship and anti-submarine warfare; strategic strike; mine detection and mine-laying operations; intelligence collection; supporting special forces (including infiltration and exfiltration missions); and gathering battle space data in support of operations. (Page 70.)
Subsequently, the then Chief of Navy suggested that the main task of the new submarine was “sinking hostile ships and submarines” with “the South China Sea as the area of most interest”. Overall, it seemed clear that one important role for the new submarine was power projection in waters far from home.
While this is an ambitious mission, particular for a middle power, it is by no means unique. All five of the permanent members of the UN Security Council would have a similar role for their submarines. Among western platforms, the power projection role in the South China Sea, although challenging, could be best discharged either by a Virginia class submarine from the US, an Astute from the UK or a Suffren boat from France. These are all nuclear submarines. While Australia would face some challenges in acquiring nuclear submarines, these are not insuperable. A nuclear submarine off these existing production lines may well be no more expensive than the unique conventional submarines under consideration and we would need fewer of them.
On the other hand, attempting to undertake this mission in a conventional submarine would be less effective and more dangerous. The submarine’s slow underwater speed and significant indiscretion rate would increase the risk of detection and destruction. The recent acquisition of nuclear attack submarines (SSNs) by China and India in our region suggest that any conventional boat operated by Australia would not enjoy technological superiority in the South China Sea. By the time the new Australian submarines are commissioned in ten or fifteen years time, both countries are likely to possess a fleet of SSNs, the more modern ones of which will be quieter and more efficient than the prototypes. This raises the awkward question of whether an Australian government would be willing to send young Australians into harm’s way in very expensive but technologically inadequate kit.
If the answer to this is “No” but the government remains unwilling to acquire nuclear submarines, then logic suggests that the mission needs to change. Specifically, the government could discard the power projection role and leave that task to a better-equipped ally. Forget discharging cruise missiles at a “major adversary” and scratch the idea of sinking ships in the South China Sea. This then leads to a sea denial role in the context of the defence of Australia, with additional intelligence gathering responsibilities. Would this require a unique platform? Again the answer is “No”. These tasks could be undertaken by existing conventional submarines available off the shelf from a number of shipbuilders, including all three of those in the design competition for Australia’s new submarine. One obvious candidate would be the existing Soryu class, which is larger than other available designs and, in its latest guise, takes advantage of advanced Japanese Lithium-ion technology.
If the government were to change the mission to sea denial and intelligence gathering, however, then it should first look at whether a submarine provides the most cost-effective means of fulfilling this role (see the third implication above). The capability of conventional submarines in the sea denial role is compromised by their slow speed, while to send a submarine to snoop off a neighbour’s shore is not necessarily the most cost-effective way of recording wireless transmissions overseas. By contrast, some of the RAAF’s fleet of modern aircraft, including the E-7A Wedgetail airborne early warning and control platform and, in the future, the P-8 Poseidon maritime patrol aircraft, have a potent capability in both sea denial and intelligence gathering.
In short, this analysis suggests three alternative ways forward for the new submarine:
- Maintain the current mission and seek to acquire perhaps six nuclear attack submarines (at most) from the US, the UK or France.
- Reduce the scope of the submarine’s role to sea denial and intelligence gathering and acquire, say, between four and six conventional boats off existing production lines overseas (possibly from Japan).
- Examine whether the sea denial and intelligence missions can be delivered more cost-effectively by platforms other than submarines, such as aircraft already in service or currently being acquired.
None of these options requires a unique platform or merits an Australian build. Importantly, all three options offer significant savings compared to the current approach. Even if the SSN option were to be pursued (it would require difficult negotiations with the United States and assistance in maintaining the reactors), the overall cost would be significantly lower than buying 12 unique platforms with a mixture of systems, particularly if they were built in Australia.
All three options, however, would mean abandoning the current acquisition process. It is not too late to do that, but government would need to enter into an intensive process with some urgency to analyse the options in more detail. While strategic and technical military analysis is clearly required, it is of critical importance that these technical data should then be fed into an evaluation of risks, costs and potential pay-off for each option. It is not clear that such an approach, which would combine rigorous cost-benefit analysis with the investment appraisal disciplines of financial economics, is generally employed when Defence is assessing costly new acquisitions. Because Defence still has a single line budget appropriation (why?), its internal processes are often impenetrable to the keepers of the keys in Finance and Treasury.
Why I began this article by reference to Gough Whitlam and the proposed DDL acquisition was to suggest, in agreement with Laura Tingle, that the government has lost its corporate memory and its ability to learn lessons from previous approaches. It seems remarkable, for example, that our defence acquisitions keep repeating the mistakes of the past, from mixing and matching systems inappropriately and accepting excessive risks, to allowing political judgements to override efficiency considerations and the proper regard for the public purse. In the new submarine acquisition, we seem even to have learned nothing from the Collins class procurement. In both cases the French, surely laughing up their elegant sleeves, have offered us a dumbed down version of an existing nuclear submarine, with the reactor replaced by an updated version of the same diesel-electric technology that powered Australia’s first submarine, AE1, on its epic voyage from the UK in 1913.
“We learn from history that we do not learn from history,” was Hegel’s gloomy prognosis. I prefer Santayana’s view, quoted by Laura Tingle, because it seems to offer a shred of hope: “Those who cannot remember the past are condemned to repeat it”.
Jon Stanford is a Director of Insight Economics. He had a significant career as an economist in the Australian Public Service, ultimately in the department of Prime Minister and Cabinet. He has worked extensively on economic and policy issues around defence procurement and naval shipbuilding.
 Jones, Peter (2001). “1972–1983: Towards Self-Reliance”, in Stevens, David. The Royal Australian Navy. The Australian Centenary History of Defence (vol III). South Melbourne, VIC: Oxford University Press, page 220.
 Defense Industry Daily (2014), http://www.defenseindustrydaily.com/australias-hazardous-frigate-upgrade-04586/
 In the early 2000s, the US offered to sell three second-hand Arleigh Burkes to Australia for a good price so as to avoid the risky upgrade to the FFGs. The RAN rejected this, just as previously it had, with more justification, rejected the offer of the four very large destroyers of the Kidd class.
 Australian Government (2009), Defending Australia in the Asia Pacific Century, Defence White Paper, Canberra, page 70.
 Peter Layton (2015), “Australia’s next submarine – will it be the Soryu”, Defence Today, Vol 11, No 4, page 8.
 Laura Tingle (2015), “Political Amnesia: How we forgot how to govern”, Quarterly Essay No. 60, Schwartz Media, Melbourne.