Saturday, April 23, 2016

Will it REALLY cost 30% more to build submarines and surface warships in Australia?

Will it really cost 30% extra to build submarines and surface warships in Australia, compared with importing them from an overseas constructor? If the people making this claim are basing their projections on the Air Warfare Destroyer (AWD) project, then you can see their point. But you need to treat a scary claim like this with care: they’re making a general extrapolation from a very particular example.

The AWD project was hamstrung by a couple of things: first, it had been nearly a decade since the Australian shipbuilding industry had constructed a modern major warship. The technical, supervisory and management skills necessary to do so had all atrophied and needed to be re-learnt. Secondly, the shipyards needed new investment so they could handle new fabrication and assembly processes. Both of these cost money. Rebuilding industry skills and capacity, once they have been allowed to wither and die, is expensive. And that cost is being amortised over a one-off project to build three destroyers. No wonder it’s expensive, and no wonder critics point to the cost and argue that Australia can’t, and shouldn’t try to, build warships in-country.

There’s another technical issue that affected the AWD program as well, but I’ll get to that later.

Thanks to the previous Labor government’s indefensible time-wasting, we’ve almost re-created the market conditions that cruelled the AWD project. But if we’re planning to revive those skills and that infrastructure to build the RAN’s new fleet, then those conditions should apply only at the start of this new project.

Our next major purchases are not trivial: Australia plans to build 12 Offshore Patrol Vessels (OPV); 9 new Anti-Submarine Warfare (ASW) Frigates; and 12 new Submarines. We’ll also be building 21 new Pacific Patrol Boats – not demanding in technical terms, but requiring good management along with good design and construction skills. Importantly, they’ll deliver cash flow and profit to their builder, Austal, and help solidify the naval construction sector’s skills and capacity base.

Given the recent(-ish) history of Australian naval construction, and the level of scrutiny that the whole Submarine/Frigate/OPV enterprise will attract, I’m inclined to accept the publicly stated estimates of parent designers and constructors who understand how to design a new vessel and transfer technology and skills to an overseas partner. 

There are precedents for success, even here in Australia: the ANZAC Frigate program delivered 10 ships on time, on budget and with extremely high levels of Australia and New Zealand Industry Participation (ANZIP). Even allowing for Australia-specific design modifications (some of them a first for the baseline MEKO200 platform) and fluctuations in the dollar exchange rate, the out-turn cost of building these ships was not so different from what we’d have had to pay if we had simply bought them off the shelf from Blohm+Voss in Germany.

Much of the cost of the new submarines and ships will be in items that we need to buy from an overseas supplier, such as guided weapons and their launchers and handling systems, sensors, elements of the communications and combat system, and so on. The local cost will be driven by platform construction, assembly and integration. These are the areas where a smart partner can tackle risk and cost. 

If Dr John White from TKMS says that building 12 of his company’s submarines in Australia would cost no more than building them in Kiel, then I’m inclined to believe him, but I’d want to check the fine print and the terms and conditions. The same goes for the French DCNS bid.

Given our history with the AWD project, you’d need to look carefully at the history of high-technology tech-transfer programs; they’re not easy and if you’re doing it for the first time, they’re not quick.

This is what I was referring to earlier when I mentioned a technical issue that had an adverse impact on the AWD project. The Spanish ship designer, Navantia, had never undertaken such a complex technology transfer process before, so fell into many of the traps that lie in wait for young players. The process of fabricating hull and superstructure blocks to drawings that didn’t reflect then-current Spanish shipyard practise was difficult, to say the least. The difficulties were compounded by the design changes necessary to make the Navantia design suitable for RAN service, the shortage of welding and supervisory skill in the Australian yards that fabricated the blocks, and the structure of the AWD Alliance that was supposed to deliver the ships. We all know the result.

Interestingly enough, exactly the same lessons emerged from the development of the Vickers Supermarine Spitfire in England during the mid-late 1930s. There truly is nothing new under the sun in all of this. And remember how successful the Spitfire became.

So – to answer my original question: will it cost 30% extra to build the RAN’s new ships and submarines in Australia? Not if a proficient parent yard in France, or Germany, or Japan is given the freedom do to an efficient and effective job. How much more (if anything at all) might it cost, in that case? It’s hard to say, and the figures need to be calculated correctly if they’re to have any meaning. Furthermore, if the submarine design in question is good enough, and has a sufficiently robust upgrade path, then the broader question becomes: What can the bilateral relationship with that company’s parent government give us, both in the naval construction domain and in a much broader sense? A good submarine backed by the promise of the right bilateral relationship may be more compelling than an outstanding submarine that isn’t sustained by a relationship of similar warmth and intimacy.

One aspect of the indigenous build proposal that hasn’t been canvassed over much is the broader local benefit of doing the work in-country. If we pay, say, AUD$20 billion to have 12 submarines built in Germany, that’s money lost to the economy. If we’re going to spend that sort of money (and the 2016 defence White Paper says we must) then we should aim to get the maximum return on that investment: corporate and personal tax; development of skills, new jobs, new supply chains, new export markets; the creation of knowledge that we can use to maintain and upgrade those ships over their life; the development of a technology base that sustains and enhances other industry sectors.

Consider this: because we built the ANZAC frigates in Australia, with a locally developed combat system based originally on an off-the-shelf product made by Saab (formerly Celsiustech) in Sweden, we were able to design, develop and implement a world-leading upgrade to those ships that embodies major platform modifications designed by BAE Systems, the development by Saab of what is now an all-Australian combat system of considerable performance and the creation of an all-Australian family of new active phased array radars by CEA Technologies. Those radars will now be fitted to the RAN’s nine new ASW Frigates. If they aren’t paired with an advanced derivative of the Saab 9LVMk3E combat system, designed and developed in Adelaide, then I’ll be very surprised. And disappointed.

The benefits of local investment must be taken into account when assessing the cost of a major defence purchase. That’s not meant to be a defence or justification for a 30% premium; it’s a genuine strategic issue. The Government's plans to acquire no less than 33 submarines and surface warships create unprecedentedly good market conditions for industry. If, under these conditions, the shipyards reckon they can build submarines and warships in Australia without incurring such a premium, then let them prove it – and hold them to their word.

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