The long-term importance of Treasurer Josh Frydenberg’s economic statement this week is that Australia has moved from a country with a strong balance sheet to one that is now much weaker and could get a lot worse.
Frydenberg’s frankness is refreshing, but as a nation we now need to stand back and assess the long-term implications.
And one of the biggest single long-term impacts is that we can no longer afford to first gamble $90 billion, and then $225 billion, on an incredibly high-risk submarine project that also leaves our defences very vulnerable in the next couple of decades.
And we need to brace ourselves for future Senate hearings that are likely to show that someone grossly misled parliament over the cost of the project.
Revealing the truth will enable all Australians to see what a financial mess we have got ourselves into.
As I pointed out on Tuesday the COVID-19 pandemic has made Australians much more aware of where we went wrong and what needs to be done. The days of political games on major issues are coming to an end.
And so, some five years ago senior defence officials under oath declared to a Senate estimates hearings that the then stated French submarine cost of $50bn was calculated on an “out-turn” cost basis”- ie it was adjusted for future inflation.
The officials were able to correctly point out $50bn in future dollars made the French price much closer to the German and Japanese bids of around $25bn in the then dollars of the day.
But five years later, last March, navy officials declared to the parliament that the original $50bn French tender was not in “out-turn”, or future, dollars but rather in constant 2016 dollars.
As a result, the current estimate of $90bn mainly reflects a change of definition rather than a disastrous cost blowout. Maybe there is an explanation but, on the surface, one way or the other, the parliament appears to have been misled and there is a risk of a jail sentence. I will not comment further.
For what it is worth in 2018 I was the first commentator (thanks to experts in this field) to lift the cost of the project to $90bn on an ”out-turn” or future dollars basis.
I also estimated in 2018 the total cost of the project would be around $225bn, which has now been confirmed by the navy, but I suspect it is now way too low.
It is possible that the navy is right and that when the submarines finally arrive in the second half of the 2030s and 2040s they will still be a potent weapon. But Australia remains underprepared during the next two decades.
Worse still, many experts believe that the conventional lead acid battery-powered submarines (albeit vastly improved) will be well and truly outdated before the current decade is out, let alone over future decades.
In other words, we are at risk of developing a $225bn lemon.
I am not in the business of making that call but when the original technology gamble was announced we were a country with a strong balance sheet that might manage to afford such a high-risk strategy. We no longer have that luxury.
It is true, when combined with our frigate construction and other naval equipment, that we have strong Australian content provisions in the contracts. But we are using overseas defence groups with their own supply chains and I keep hearing anecdotes where the French and others keep putting forward their own supply chains as a better alternative than developing ones in Australia.
Developing a high-technology supply chain has the potential of being the biggest spin-off benefit in the submarine contract and will be a great benefit for the nation’s defence.
And as I pointed out on Tuesday, Australia needs high-technology advance manufacturing by medium-sized companies – exactly what the submarine contract is designed to do. But are our navy engineers strong enough to deal with the French and others?
The nations around us are being hit hard by COVID-19, which increases the medium-term dangers in the region. The US and the high-powered naval board advising Australia urged us not to take this high-risk gamble.
Down the track the United States will also need to prioritise its defence expenditures because its balance sheet is also weakened. Both the US and Australia gambled on the Joint Strike Fighter, which has simply not delivered the regional air superiority that the Australian government believed it was buying. Australia will be even more dependent on the United States F22 and other aircraft to muster an air defence.
So, we are a bit like a country at the casino that placed a bet (the JSF) and lost and then went for all or nothing on the next spin of the wheel.
This is too serious a matter to be left to defence chiefs and ministers of defence.
The Frydenberg statement now requires a much harder look at our future obligations and whether the project is about to be enveloped in misleading parliament allegations.
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