Defence Procurement Statements by Senators

I would like to raise for consideration in the Senate today the future of Australia’s naval shipbuilding industry and dispel some of the myths that colour perception around this issue. We are at a critical juncture. Within a month, we have had the launch of the NUSHIP Hobart, but we have also had the announcement by BAE that they will not respond to the Pacific patrol boat tender, which raises valid concerns about the future of Australia’s naval shipbuilding industry. But I think it is important that we dispel some of the myths so that we can get to the crux of the issue and see how we can work collectively, as a parliament and as a nation, to ensure that this vital industry continues.

The first of these myths is that reform is not required and somehow we can just continue as normal. Political leaders often claim that national security is the first and foremost role of government, but unfortunately actions do not always bear this out. Investment decisions in defence capability are long term in nature, and neither the taxpayer, Defence nor industry gets value for money when defence is used as a political football.

I have been advocating for some years the need to have a bipartisan defence plan. That draws on the Danish approach of having a five-year plan which is approved by the various parties in their parliament. It provides medium- to long-term stability for both the defence department and the industry sector that supports it. Importantly, it lifts the capital productivity of the investment that stakeholders make into national security and defence. ASPI very kindly sponsored a workshop with key stakeholders to discuss this proposal. Whilst undoubtedly there was not uniform agreement and there are some issues to work through, it is viable and it is by far preferable to our current approach. For those who are interested, there is a paper on the ASPI website and there is a link from my website, where I explain that concept in more detail.

The first principles review also highlights that we cannot continue as we are. It highlights that we need a paradigm shift in thinking to treat defence industry as a fundamental input to capability. Surprise, surprise: that means that Defence and government have an interest in ensuring that key areas of industry remain commercially viable. This is a fundamental culture shift within Defence: that we actually have an interest in the commercial success of industry and we should find ways to constructively and collaboratively engage with them while still maintaining probity as we expend taxpayers’ money. The defence industry policy has for years, under governments from both sides, been the penultimate chapter in a white paper, deliberately separated from defence procurement policy. It is no longer viable to go down that path. Instead we need to see how our procurement policy interacts with our need to keep key areas of industry sustainable so that we decide on priorities and schedule—our approaches to procurement—and those, when they are submitted by Defence to government, provide that pathway for sustaining industry. A practical example of this is provided by the RAND report which was recently produced. It indicates that governments of Australia need to commit to a schedule and a scope of shipbuilding that removes the peaks and troughs so that we actually keep those industry sectors viable.

That leads to the second myth that I want to dispel: that somehow the ‘valley of death’ can be fixed by a decision overnight. The 23 May launch of Hobart was a great celebration. It was a significant milestone in a process that started over a decade ago with the 2000 white paper and continued with the decision in 2005 to contract ASC as the shipbuilder and, in 2007, the selection of the hull design by Navantia. Note that time frame: the work occurring today was approved over seven years ago. Given this time frame, the media releases that have come out today attacking the government because of BAE’s decision are just examples of the shallow politics that we have arrived at in this nation, brazenly ignoring six years of inaction with no decisions by a Labor government to commission the construction of warships in Australia. If work on the AWD and LHD, both commissioned by the Howard government, is now just coming to a close, you do not have to be particularly partisan in nature to do the maths and work out that a decision for follow-on work for these programs would have had to be made several years ago. This kind of shallow political attack just reinforces in my mind the need for a bipartisan defence plan where we can work collectively to agree a way forward that will lead to an affordable, sustainable and effective naval shipbuilding industry.

The myth associated with this is that somehow we can just make a snap decision to get the ball rolling. Well, snap decisions have unintended consequences. You just have to think of the pink batts scheme, with lives lost and money wasted. That kind of unintended consequence is not something that we can chance when it comes to the equipment that the men and women of the ADF will use when they are serving this nation.

The third myth I want to dispel is that the government is not supporting the naval ship industry. As I have said, we cannot fix things overnight, but we can take steps, and the first of those is the Pacific Patrol Boat Program. In 2014, the government announced that it was bringing that program forward. The tender was released to industry and, as it happens, responses are due in exactly 18 minutes time; at 2 pm today the tender closes. So the government is taking steps to accelerate that program. The government has invested some $78 million to accelerate engineering studies of the viability of using the air warfare destroyer platform as the basis of the future frigate, incorporating the Australian designed and built CEAFAR radar.

The government is not afraid of facing bad news and problems. The government has been criticised for highlighting management problems within AWD. As any business leader will tell you, the quickest way to go broke is to ignore problems. At estimates earlier this month, evidence showed that industry partners within the Air Warfare Destroyer Alliance were highlighting productivity issues within ASC as early as 2011-12. Despite this being flagged with the Department of Finance, who are the owner of ASC, and even the secretary of Defence saying that he had to go and see his opposite number, things did not improve. We now face a cost overrun, which has been made very public, of around $1.2 billion. Defence have indicated, though, that, with the change of government and a willingness to face the issues within ASC, cooperation has increased and there has been a sustained increase in productivity. The government is currently working to boost the industry expertise within ASC to ensure that this productivity continues.

The other myth I want to dispel is that Australia cannot build ships competitively. You only have to look back to the Anzac class to see quality ships delivered on time and on schedule. Look at Austal, who provide 15 per cent of the US Navy’s fleet. They have exported some 92 naval vessels to eight countries. So clearly comments about things like a 30 or 40 per cent premium do not actually apply, particularly to the private sector.

Estimates also heard evidence that the out-turn costs for the third Air Warfare Destroyer—with these increased productivity measures—is going to be in the order of $1 billion. On top of that, you have to add other things for the whole program. But as you look forward, to purchasing ships in the future, what it says is this: if buying a hull from the Spanish is around a billion dollars, and to produce one here is around a billion dollars, then the sunk cost we have made—to establish the shipyard, to do the first of type, to build the ships—cannot be factored into the future; we cannot say, ‘This is how much it is going to cost us in the future.’ So we can build ships competitively.

In terms of evaluating value for money, RAND highlights that the spillover effects are real and measurable, and they place a value for shipbuilding at around 1.7. Governments of both persuasions have consistently refused to consider that the generation of new intellectual property and productive capacity emerging from complex Defence projects is valid to be considered as part of value for money. This has skewed recommendations to governments of both persuasions for many years. This must change if the Australian taxpayer is to get value for money. Complex programs and submarines and ships are certainly two examples of where this factor of 1.7 should be applied.

As I have mentioned frequently in this place, as you look at through-life costs, a small unique fleet configuration demands that Australia create and sustain the ability to build, modify, repair and certify these platforms of safe use, because this has been demonstrated to save money and increase availability over time.

The other comment that is often made is that Australia cannot build quality. Again, I come back to Anzac class: both the original ship and also the AMSD upgrade that has proven to be world beating, with the Australian built CEA system and the Saab Australia designed combat system. In the light of the Coles report, we see that Collins is not a dud sub; it is actually a very capable platform. Whilst AWD has been delayed, one of the hallmarks of Australian things when we build them is that we will seek quality, even if we have to change schedule. So you cannot say that it is not quality even if it is late and initially over cost.

Finally, there is the myth that somehow the competitive evaluation process for future submarines is flawed. In the July edition of the Asia Pacific Defence Reporter, the CEO of ThyssenKrupp, the German bidder, is quoted as saying that he welcomed the competitive evaluation process and that ‘This was normal in Europe where potential offers from prime contractors can be very difficult to compare but offered the opportunity for dialogue with the Commonwealth before a fixed set of requirements was established.’ It goes on to say: ‘So Minister Andrews’ decision was a good one in the circumstances’.

In summary, Australia needs a viable shipbuilding industry as a fundamental input to maritime capability. We have and can continue to build the best ships at the best price, but it will take a long-term bipartisan approach. If we do this, if we implement FPR and Rand, we will see affordable ships and a sustainable continuous build of ships and submarines to support our defence capability.