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ASC: to sell or not to sell, that is the question

Posted By on June 20, 2016 @ 12:30

Image courtesy of Flickr user Tax Credits

We need to consider the future position of ASC. The recent announcements on submarines [1] and naval shipbuilding [2] have resulted in a marked increase in the clamour around a potential sale of the Adelaide-based naval constructor. Laura Tingle in the Australian Financial Review has suggested a sale [3] may be under consideration as the value of ASC has gone up considerably since the SEA 1000 announcement. Kym Bergmann has also raised the same question in the Asia Pacific Defence Reporter [4].

The impetus for this renewed interest in the potential sale of ASC is obviously the continuity of work that the shipbuilding and submarine decisions provide to the company. This is a step-change from the position in 2014–15 when it wouldn’t have been possible to give ASC away given the ongoing problems with the Air Warfare Destroyer [5] together with the political furore over ‘canoe-building [6]‘ hovering in the background.

It seems that anything with a value in the Australian defence industry space needs to be sold off, but is that the best way forward?

The case for selling is that ASC currently has value—and why not strike while the iron is hot? Apart from getting ASC off the Government’s hands and out of the political spotlight this is the only reason—apart from more ideological arguments about the operation of the free market, and what role the government should play in the national economy. Selling ASC can therefore be quantified by the price that a potential buyer might be willing to pay, or the Government might be willing to accept. Loading up ASC with shipbuilding and submarine contracts for the next 40–50 years has increased the potential price immeasurably.

The negative side of the ‘sell-or-not-to-sell’ equation is sovereignty. The facilities at Osborne are strategically important and valuable to Australia. At the moment, as a Government-owned enterprise (issues of management aside) the Government enjoys the highest level of sovereignty over those facilities. That sovereignty currently provides almost unlimited choice with respect to investment, development and utilisation of the facilities, but ASC operates with benefits not available to, or affordable by, other commercial entities in Australia. The capabilities and skills resident in ASC are also strategically important and valuable. Preservation of that sovereignty is important particularly in the ability to maintain and upgrade maritime forces but doesn’t necessarily rest solely on ongoing government ownership.

The options on the future ownership of ASC are therefore (in increasing order of priority):

  1.       Maintain Government ownership but lease the facility for submarine and/or shipbuilding. This option could require ASC to be split (again) into separate submarine and shipbuilding entities, with separate leases for each activity. Under such an arrangement the Government would retain sovereignty over the facilities, but would be removed from the day-to-day operational aspects. This could be expected to improve efficiency (given that the leasee would most likely have management expertise and a background in ships and/or submarines), but could restrict the potential for ASC to grow into other industrial areas. Such an agreement would also need to consider who pays for infrastructure upgrades over the life of the lease.
  2.       Maintain ASC as a Government-owned operation. Under this option significant effort would need to be made with respect to management and overall efficiency, and discrepancies in the market due to issues such as worker entitlements would need to be removed so that the playing field were levelled. ASC would also need to overcome the current ‘cargo-cult’ approach to business development and start to conduct itself along more commercial lines, rather than just wait for work worth nearly $1 billion a year [7] to be handed out from Defence.
  3.       Sell ASC, but place conditions on the sale so as to restrict the amount a foreign entity could procure, and to ensure that majority ownership remained in Australia. Such an approach has been used previously in the sale of Qantas, and is needed to ensure continuity of sovereignty over the infrastructure, not just over the contractual activity.

A complicating factor in this is the current situation with the AWD program, and how the current project risks are handled. A sale/lease that doesn’t include AWD in the mix becomes incredibly complex and messy. A delay until Sydney is complete and in service will mean that the optimum time to address the ASC ownership issue may have passed. Another complicating issue is the decision to build the first two OPVs at ASC [8] in that the sale/lease for the shipbuilding aspects is likely to include the intellectual property of multiple companies.

In summary therefore, although its future has been secured by Government announcements, ASC is at a crossroads. Recent decisions on ships and submarines has increased the value of the company and the initial reaction may be to sell the company in two tranches to the designers/builders of the Future Submarine [4] and Future Frigate [9].

The issue of sovereignty is a key factor in the assessing the value of ASC and this needs to be a fundamental consideration in determining the way ahead. Whatever the future form, ASC’s infrastructure and capabilities need to remain under Australian control.



Article printed from The Strategist: https://www.aspistrategist.org.au

URL to article: https://www.aspistrategist.org.au/asc-sell-not-sell-question/

URLs in this post:

[1] submarines: http://www.minister.defence.gov.au/2016/04/26/prime-minister-minister-for-defence-joint-media-release-future-submarine-program/

[2] naval shipbuilding: http://www.minister.defence.gov.au/2016/04/18/prime-minister-and-minister-for-defence-continuous-naval-shipbuilding/

[3] suggested a sale: http://www.afr.com/business/manufacturing/turnbull-plots-massive-overhaul-of-shipbuilding-20160427-gogehu

[4] Asia Pacific Defence Reporter: http://www.asiapacificdefencereporter.com/articles/772/DCNS-of-France-wins-the-CEP

[5] the Air Warfare Destroyer: https://www.anao.gov.au/search/site/Air%20Warfare%20Destroyer%20Program

[6] canoe-building: http://www.theaustralian.com.au/national-affairs/defence/shipyard-couldnt-build-canoe-minister/news-story/a0453d906a478fe2f29e1f53472600b1

[7] $1 billion a year: http://www.aspistrategist.org.au/building-submarines-in-australia-is-asc-the-problem/

[8] build the first two OPVs at ASC: https://www.pm.gov.au/media/2016-04-18/shipbuilding-announcement-defence-minister-and-chief-navy

[9] Future Frigate: http://www.australiandefence.com.au/news/three-shipbuilding-announcements-in-one-day

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