At the ASPI land power conference a few weeks ago, the PM promised an enterprise-level naval shipbuilding plan based around a rolling-build program. This will bring joy to the hearts of the burghers of South Australia and their industry and union allies who have lobbied long and hard for the outcome, but whether it bodes well for the taxpayer and navy will depend on how the scheme is implemented. If the precedent set by the beleaguered Air Warfare Destroyer (AWD) program is anything to go by, there’s a real risk that the taxpayer will pay a substantial premium and the navy will wait a very long time for its ships.
A rolling-build program for the RAN will probably require an expansion of the surface combatant fleet from 11 vessels to 14 or 15. Alternatively, the service life of the ships will have to be truncated leading to more frequent replacement. Either way, billions of dollars will have to be found for the initiative—money that could otherwise have been used elsewhere in the ADF. For this reason, a rolling-build program will have real strategic consequences for Australia as important as anything likely to be contained in the forthcoming White Paper.
An expansion of Australia’s surface fleet would help the United States and its other allies at a time when American pre-eminence is under serious challenge. But it will do so at the expense of other capabilities such as submarines and combat aircraft. Just as importantly, locking into a naval shipbuilding program in perpetuity is betting heavily on surface vessels, which are increasingly vulnerable to new technologies. These are substantial costs and risks to take for the sake of generating employment in South Australia.
Given the very high costs and strategic implications, any plan to establish a continuous naval shipbuilding program should be accompanied by a comprehensive analysis of the costs, benefits and risks of the program compared to alternative procurement options. Like that other supposed ‘nation building’ project of recent times—the National Broadband Network—the taxpayer deserves to see what the costs and benefits of an investment of this scale will be.
But even if it’s the right strategic direction and the cost-benefit stacks up, the devil’s very much in the details as far as implementation of the plan is concerned. Any enterprise-level plan will have to deal simultaneously with a set of difficult and interrelated issues, including the sale of ASC and the choice of builder for the future submarines, frigates and perhaps also patrol vessels, not to mention the ongoing maintenance of the Collins fleet and the remediation of the AWD program. Finding a way to bring these moving parts together won’t be easy, especially given it’s hard to anticipate the interests and intent of potential commercial participants. Any plan will need to include a sequenced road map showing how the various elements will be brought into harmony. In some ways, we should expect to see a process outlined rather than a prescriptive plan.
One of the biggest issues that future governments will have to manage is the regulation of the monopoly shipbuilder that a continuous build program will unavoidably create. As sole customer of a sole supplier, the government will have limited leverage. Incentives and sanctions can be used to try and reduce the price premium, but there’ll still be one. And while proponents of a local build claim myriad economic benefits from domestic construction for the national economy, the economic case for such claims is at best contestable—we weren’t convinced when we looked at the case earlier, and nor was RAND.
One way to manage the monopoly would be to establish a Naval Shipbuilding Office to oversee the performance of both Defence and the monopoly supplier—including setting profit margins and productivity improvement targets. As in other areas of the economy where monopoly supply arrangements arise (such as the provision of utilities) independent regulation and oversight is essential to avoid the taxpayer being taken advantage of. The case for independent oversight is further bolstered by the poor performance over the past fifteen years of ASC as the monopoly submarine sustainment provider to the RAN.
Finally, there’s a simple way to avoid the most acute risks entailed in a rolling build program. Rather than commit to a rolling-build program today, the government could initiate an Anzac replacement program with a production schedule consistent with transitioning to a continuous-build program later, but with any further work contingent on achieving value-for-money levels of productivity. That way, the monopoly supplier would have a strong incentive to contain costs and improve productivity. However if the government commits upfront to continuous production, there’s a very real risk that the monopoly shipyard will become complacent, bloated and inefficient.
The ASPI Strategic Insight, ‘An Enterprise-Level Naval Shipbuilding Plan’ was released today and is free to download.