Four ships for the price of six?
5 Dec 2012|

Four ships for the price of six?

A few years ago, I estimated the per ship costs of the Air Warfare Destroyer program. The conclusion I came to, based on conservative assumptions, was that we were getting three ships for the price of four. In fact, numbers from Defence SA suggest that, if anything, this underestimated the fixed costs of the program.

It’s worth revisiting this proposition when analysing the prospect that has been floated recently of acquiring a fourth ship with the justification of keeping ASC’s skilled workforce in place so that it can build the future submarine when the time comes.

There’s a risk that this is a case of the industry tail wagging the capability dog. As I wrote here recently, and as Henry Ergas amplified, there are opportunity costs of ‘makework’ projects to both defence’s acquisition portfolio and to the wider Australian economy. And it’s telling that, at least as the story is reported, there isn’t even a pretence of this being a decision based on strategic or military judgements about the desirability of a fourth AWD. It’s always true that more capability is more capability, but the case remains to be made that Australia actually needs the extra capability that would come with a fourth ship.

If the benefits are far from clear, the costs are less ambiguous. To take full advantage of the ‘learning curve’ of the workforce and the economies of scale of a larger production run, the fourth ship would have to have been ordered while all of the project elements required to produce or order the long lead items were in place. Most of that work is now finished, with the first three ships now well into production. So it’s likely that a fourth ship will cost more, rather than less, than the third. Of course, once delivered, Navy will have to crew and operate a fourth AWD. On both counts that would be significantly more expensive than either of the frigate classes.

Even looking just at the build costs, the case looks unappealing. If we make the working assumption that ship number four would cost the same as ship number two, then we’ll end up paying around $10 billion for four. Back when the economies of scale were still on the table, the cost of a fourth was cited as $1.5 billion by then Defence Minister Nelson in 2007, which gives us a benchmark for efficient production costs. After allowing for the start up costs, we’re perilously close to paying enough to have bought six ships from an established production line.

Those costs have to be balanced against the costs of running down the naval shipbuilding workforce and then ramping it up again to build submarines—whenever that might be. Looking at the workforce projections and the number of people required out to the later years of is decade, it’s not immediately obvious that a single additional ship—even a large and expensive one—will make a huge difference. The future submarine project is still likely to have substantial startup costs.

Ultimately, it comes down as always to a cost-benefit calculation. In a world where governments had unlimited funds, there would be no problem in keeping defence industries at whatever level of capability we chose. But in the real world, there’s always competition for scarce resources and it’s incumbent on government to make tough decisions about how it dispenses them.

Given the habitual lack of public communication of the detailed reasons for defence acquisition decisions, it’s possible that such a study has been done and that the answer came back in favour of another AWD. But I doubt it.

Andrew Davies is a senior analyst for defence capability at ASPI and executive editor of The Strategist. Image courtesy of Flickr user jlz.

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