It’s becoming something of an annual tradition that I get asked along to the Australian Defence Magazine (ADM) conference and get to be the token economic rationalist on Day 2. At an industry-focused conference, that’s a bit like being the crazy uncle at the Christmas dinner table. Last year, for example, I was asked to talk about whether there’s a future for non-sovereign providers of defence material—and decided instead to argue that it’s actually the sovereign providers who are an endangered species.
In other ventures onto the stage at defence industry functions I’ve variously argued that we should take advantage of other countries (PDF) that prop up their defence industries with government funding by buying the below cost products that emerge, and (with partners in thought crime Henry Ergas and Mark Thomson) that we should allow the cold winds of competition (PDF) to blow through the Australian naval shipbuilding industry in the name of efficiency.
So it makes a bit of change for me to take a different tack this year. At my talk earlier today for the 2014 ADM Congress, my starting point was that the future of shipbuilding in Australia is assured because of political buy-in, so we really should be talking about the best way to manage it. It’s not that I’ve had a roadside conversion, but I think that’s an accurate reading of the strong indications evinced by both sides of politics. Just yesterday, the Ministers of Defence and Finance announced a review into the troubled Air Warfare Destroyer program—of which more anon—and commented that the exercise:
… is a demonstration of the Government’s commitment to working collaboratively and constructively to ensure we realise both the national security benefits and the long term benefits of the AWD Program for the Australian shipbuilding industry.
So it looks like we’re going to have a naval shipbuilding industry for some time to come. The trend was already that way, but I think that the recent demise of the local car industry made it pretty much a done deal. Already the sharks are circling, and various industry players and state governments are vying for position, trying to get guarantees for work to keep their declining manufacturing base active.
But vested interests generally don’t make for good public policy, so the next step should be to work out how to protect the taxpayer’s interests—and the state of the AWD program is a strong indication that those interests need protecting. Yesterday’s announcement was no surprise to those of us who have followed the increasingly fraught progress of the program; Mark Thomson previously identified potential problems with the project’s ‘alliance’ structure and the Australian National Audit Office and the DMO themselves provided enough insight into the state of play in last December’s review of major projects to make it clear that there was a big problem. Simply put, the project has been chewing through money faster than expected, and producing ships slower than expected, and there seems to be a real chance that it will run out of money before the third ship is delivered. (Another ANAO Audit report due next month should give a more detailed picture.)
The first step is to accurately diagnose the problem, which should be the main focus of the new review. The reasons likely to be cited will be many and varied, and will include attempts to blame the Spanish designer Navantia, and there’ll be much gnashing of teeth about the ‘stop-start’ nature of shipbuilding in Australia and the resulting penalties in getting shipyards back up to speed after a period of relative inactivity. Most of the proffered explanations will contain a grain of truth, and the picture that emerges might be a complex one.
But there are clearly some significant shipyard productivity problems at the heart of the problem, probably exacerbated by overly-optimistic estimates of how quickly the shipbuilders could get up to speed in the AWD build (despite over $200 million being spent on studies and risk retirement before contract signature). Again, that’s not surprising—with the government acting as sole customer and owner of the main shipbuilder, the sector hasn’t exactly been competition central. At least it’s almost certainly better than the old government owned naval shipyards at Cockatoo Island which gave rise to not one but two Royal Commissions in 1903 and 1921.
There are many tens of billions of dollars of naval shipbuilding projects in the wings, in the form of the two at-sea replenishment ships, twelve future submarines, twenty new patrol vessels and eight future frigates in the Defence capability Plan. In fact, there’s enough work in the forward plan for industry and state governments (South Australia’s foremost) to be pushing the idea of a ‘rolling production program’ in which we build ships and submarines in perpetuity.
So the stakes are very high in this review. It’s very hard to see how a government that is being very protective of its budget could enter into a commitment of that sort on the basis of the performance it has seen so far. Make no mistake—the worse the AWD story, the more risk-averse the government is likely to be. While there’s political buy-in to sustain a shipbuilding industry in principle, in practice, funding might be hard to come by if it looks like sheltering systemic underperformance.
In particular, the AWD program has probably just done the most aspirational vision for the future submarine a major disservice. Unless there’s a clear path is identified towards a higher performing shipbuilding sector, the less risky submarine options can only become more appealing. We’ll tease out the implications of that here on The Strategist in the next few weeks.
Andrew Davies is a senior analyst for defence capability at ASPI and executive editor of The Strategist. Image courtesy of Flickr user The Waterboy.