Defence must offset massive risk in naval shipbuilding program
25 Nov 2020|

There are a lot of moving parts involved in the ramp-up of the government’s naval shipbuilding enterprise. It’s hard for anybody to keep track of them all, particularly as new pieces of information are sporadically disclosed in a range of forums and sources. The inclusion of both the Attack-class submarine and Hunter-class frigate for the first time in the Australian National Audit Office’s 2019–20 major projects report, due out later this month, will help and is certainly a step in the right direction.

But a compelling case can be made for an annual report on the entire enterprise, covering not just the component projects but also their enabling elements such as infrastructure, workforce, industrial capability, funding, and so on. There are precedents for annual reports on key elements of Defence’s modernisation efforts, such as the excellent annual report on defence industry and innovation programs.

In the meantime, for those who are interested in what is our now $137-billion shipbuilding program (give or take) but don’t have the time or inclination to trawl through transcripts of Senate estimates hearings, submissions to parliamentary inquiries, Defence’s annual reports, or its freedom of information disclosure log, here are some observations on key developments over the past few months.

This first part of a two-part series looks at enterprise-level issues. In the next instalment, I’ll look at individual projects.

Shipbuilding workforce

The defence minister is now providing the Senate with twice-yearly shipbuilding ‘enterprise workforce datasets’ with predictions for the Defence and industry workforces over the coming decade. Linda Reynolds presented the second one at October’s estimates. So far, the datasets include only the direct workforce, not subcontractors or broader supply chains; the Naval Shipbuilding College is working on developing those numbers.

Not surprisingly, some changes have been made since the first dataset in February this year. The total number for the current acquisition workforce has increased from 2,477 to 3,205. That’s largely because of the inclusion of the ‘combat systems enterprise’ (470 workers), the commencement of the evolved Cape-class patrol boats’ build (290) and an increase in the offshore patrol vessels’ industry workforce from 372 to 580.

It’s always wise to take declarations about the number of jobs that will be created by defence projects with a grain of salt. The OPV project won’t sustain the 400 direct workers predicted by the government at project approval. According to the October dataset, the industry workforce will peak at 600 while the build is running in both Adelaide and Henderson in Western Australia, but it settles back to a steady state of 230 once the two Adelaide vessels are complete and only CIVMEC’s Henderson shipyard continues to build. Let’s not forget that that is a good thing—building efficiently with a highly automated shipyard that requires fewer people means lower costs to the taxpayer.

The most striking thing about the datasets is the extent to which South Australia dominates the direct industry workforce numbers. Currently for acquisition projects, South Australia has 1,640 of 2,535 industry jobs (64.7%). By 2025 that grows to 3,675 of 4,465 (82.3%) and by 2030 it reaches 4,595 of 5,185 (88.6%).

Embedded in those top-level numbers are some heroic annual increases for individual projects. The future submarine project aims to grow its Adelaide workforce from 1,020 to 1,670 (63.7%) in just two years from 2023 to 2025. That’s after the air warfare destroyer and OPV workforce in Adelaide has already fallen to zero, so there’s nobody left there to transition to building submarines.

It may be that the cause of greatest risk to the shipbuilding enterprise was the decision to build both the submarines and frigates in the same city—between them they will require 4,230 of the enterprise’s 5,185 (81.6%) direct industry workers by 2030.

The sustainment workforce is spread more evenly, which acts to some degree as a risk mitigator against the concentration of the acquisition workforce. But spreading supply chains across all of Australia’s industrial centres to draw on as large an indirect workforce as possible will need to be another.

The Naval Shipbuilding Advisory Board

In 2016 the government created the Naval Shipbuilding Advisory Board to ‘provide expert, independent advice to Government on all aspects of naval shipbuilding’. Defence says the board’s role also includes ‘identifying emerging challenges that may require further consideration by Government’.

An example of the board exercising the latter function made headlines earlier this year. The ANAO reported that in September 2018 when negotiations between Defence and Naval Group over the future submarine program’s strategic partnering agreement were bogging down, ‘the Board recommended to government that Defence examine alternatives should negotiations not succeed … The Board also commented that Defence should assess whether program risks outweighed the benefits of proceeding even if negotiations succeeded’.

The board is doing its job in examining whether Defence and its industry partners are following good project management principles, identifying high-level risks, and asking how those risks are being mitigated. That’s a good thing.

But we should be wary of expecting too much of it. Its chair told Senate estimates in October, ‘Our remit doesn’t include the detailed view of cost and schedule. We have neither structure nor staff to be able to do that.’

So it’s not delving into the details of the enterprise. It won’t tell us if the current budget for its projects are right. Nor is its role to act as a ‘red team’, questioning whether the path the government and Defence are taking is the best one, whether there are alternatives and, most importantly, whether they should get off the current path. Again, that’s reasonable. But it does raise the question of who, if anyone, is performing that red team role.

When $50 billion is really $80 billion

Under questioning from Labor’s Penny Wong at October’s estimates hearings, it became very clear that the government and Defence continued to publicly use their $50 billion out-turned cost figure for the future submarine for over two years after Defence actually estimated it to be around $80 billion out-turned. And both continued to use the $35 billion figure for the future frigate for nearly two years after Defence estimated it to be around $45 billion.

That means the government’s own estimate for what it repeatedly described as a $89-billion shipbuilding program was nearly $130 billion (including a non-controversial $4 billion or so for the OPVs).

After Defence admitted there was no need to keep using the lower figures for commercial sensitivity reasons, Wong asked what the real reason was. After a prolonged silence, Secretary Greg Moriarty said, ‘When the government chooses to announce particular phases or particular prices is a matter for government.’ Unfortunately, the government has not provided a convincing reason for why it chose to understate the cost of its shipbuilding program by around $40 billion.

With even the most vocal advocates of the future submarine program lamenting its lack of public support, the government and Defence have to do better if they want Australians to continue to back this endeavour.

The other—and potentially more worrying—$50 billion figure

ASPI has previously highlighted the scale of investment in the Attack-class and Hunter-class programs before any capability is delivered. In 2018–19, we estimated that at least $20 billion would have been spent between the two programs by the time they achieved initial operating capability, which is when the first of each class is deployable. Based on a new $50 billion figure that Defence has released, that’s looking like an underestimate.

Defence recently informed the Senate’s naval shipbuilding inquiry that ‘of the $270 billion (2019–20 MYEFO price and exchange) planned investment detailed in the 2020 Force Structure Plan over the decade 2020–30, up to $50 billion (2019–20 MYEFO price and exchange) is attributable to the Naval Shipbuilding Enterprise’ (document 21).

The force structure plan takes a very broad view of what constitutes naval shipbuilding and appears to include things such as the life-of-type extension for the Collins submarine and the frigate and destroyer upgrades—not just the new ships.

But even including this broad portfolio, it’s hard to see the enterprise reaching $20 billion over the coming decade without the future frigates and submarines. That suggests the spend in the decade on those two will be at least $30 billion. That’s before either of them achieves IOC. Put another way, under the current force structure plan the navy doesn’t take delivery of an additional warship, vertical launch cell, towed sonar array or torpedo tube for that $50 billion. That’s a massive capability risk.

It’s further evidence that Defence needs to be doing more to hedge against that risk by aggressively pursuing other approaches to deliver the kinds of capabilities that the government’s defence strategic update says are urgently needed.