Pragmatism needed to sustain defence shipbuilding

It is easy to mock big Australian defence projects. Some of them have been lemons on a world-class scale, none more so than the Collins-class submarine. It was a fiasco of the 1980s that produced a dud sub at an insane cost. On paper the Collins was the best conventional sub in the world, unless you wanted to go to sea in it or take it to battle. Then it was a complete dud.

Not only was the whole Collins process grotesquely expensive but for the first 15 years of the Collins it produced more or less zero submarine warfare capacity. Hydraulics, noise, the engine, integrating the weapons system: the problems were endless. Former sub commanders not connected to the bid to get the next generation of subs built in Australia were scathing in their assessment of it. It costs many billions of dollars to keep the things in the water.

The attempt now to rehabilitate the memory of the Collins, to turn it into the Phar Lap of Australian defence acquisitions, the best beast of all cruelly cut down by the machinations of lesser spirits, is laughable except that it will feed into the fairly crude, and increasingly nutty, political debate about our naval shipbuilding industry.

It’s not as if the Collins was our only fiasco. The Air Warfare Destroyers are many hundreds of millions of dollars over budget and a long time late. But even when we buy rather than build, we cannot always avoid fiasco. We bought a batch of used Sea Sprite helicopters so unfit for purpose that they never came into service at all.

On the other hand, there have been big successes. The F111 fighter bombers were at least as controversial and troubled in development as today’s Joint Strike Fighters but they became a good plane for Australia. The Super Hornets and the Globemasters do all we want of them. Sometimes we build things well too. The Anzac frigates were good ships, well built at a reasonable price. They were delivered as well as you could expect for a project that size.

The question is: where do we go from here with a naval shipbuilding industry? Why have there been so many mess-ups? How do we avoid it in the future? What can we afford? What do we need?

The most important recent document in this space is Defence Minister Kevin Andrews’s speech to the Australian Strategic Policy Institute’s conference this week. Andrews has started well in defence, though he has mountains ahead and miles and miles to ride before he sleeps. He is well suited to the portfolio. He is senior, sober, conservative, respectful of institutions, cautious, pragmatic and willing to put in the hard work. The wild gyrations of our politics in the past couple of months have, paradoxically perhaps, opened up space for him to act pragmatically and to exercise the proper authority a defence minister should.

Much as Scott Morrison in Social Security, Andrews is trying to lead a national debate, in his case on shipbuilding, a debate that acknowledges political reality but also acknowledges fiscal reality and serves the national interest.

In this speech, Andrews committed the Abbott government to sustaining a domestic naval shipbuilding industry. This is very important in principle. It defies the strain of purist economic rationalism within the Liberal-Nationals coalition. For it is impossible to make a case for a naval shipbuilding industry in economic terms. Just utterly impossible.

All defence industry anywhere in the world, certainly among our key allies such as the US, involves a degree of government participation and subsidy, a degree indeed of socialism. Kim Beazley used to enjoy making the rhetorical point that the US defence industry is the best argument that the Left never made for the success of government economic intervention.

But Andrews is also conscientious in trying to craft a reasonable compromise. And so as a nation we need to face up to the costs of trying to build a substantial part of our defence equipment at home. Perhaps the second most important statement in Andrews’s speech was this: “Australian taxpayers currently pay a price premium of at least 30 to 40 per cent greater than US benchmarks to build naval ships in Australia.”

A 30 to 40 per cent cost premium is a staggering figure. No defence minister would use such a figure unless it was robust. Andrews has announced that the RAND Corporation is conducting an inquiry into Australian naval shipbuilding. Its results will be known before the defence white paper comes out some time around the middle of this year.

RAND will have done a highly rigorous analysis of Australian costs and outcomes. It is inconceivable that Andrews is using a figure that contradicts RAND. The comparison is even worse when you consider the US itself is some considerable distance from being the most cost effective, or most efficient, shipbuilder in the world. US Assistant Secretary of the Navy Sean Stackley recently told the US Senate that about half the shipyards in the US that build navy vessels are one contract away from closing. They are so fragile because of the pressure of foreign competition.

The cost premium for building in Australia involves not just money but capability. Collins was such a dud that for years we had no usable submarine capability. But the money is important too. Building in Australia meant that we basically paid for four AWDs but got three.

This was kind of affordable, kind of manageable, in the long, sustained defence build-up that took place under John Howard and the resources boom. Howard was the best prime minister for the defence forces that we’ve had in peacetime, and in Robert Hill and Brendan Nelson he had effective, authoritative ministers.

But times and fiscal circumstances have changed. Of all possible Australian leaders now, Abbott has a commitment to defence most deeply ingrained in his DNA, and Andrews’s methodical unflappability and seriousness of purpose are probably the best combination we could find in a minister.

But it is all desperately fragile.

Still, Andrews is working systematically to lay the basis for a sustainable Australian naval shipbuilding industry.

All advanced nations that do defence work to some extent buy that work, subsidise it with wealth from other sources. Provided the costs are not exorbitant, as they plainly are in Australia at the moment, the benefits are substantial. There are a lot of jobs. There is a technological base with many innovation spin-offs. And of course it’s easier to service things you’ve built, though in truth that is a fairly marginal consideration.

So how can Andrews possibly imagine his government can bring about a sustainable naval shipbuilding industry at a reasonable cost? Andrews proposes three key innovations, reforms, structural changes — whatever you want to call them.

First, Defence will be required to favour “mature designs” in its new kit. Because of Australia’s distinctive geography we often have special needs in our defence equipment. If we are going to have submarines they must be long range if they are to be the asymmetrical, deterrent, potentially offensive weapons that submarines are designed to be. Every other nation that needs subs like that builds or buys nuclear subs. Politics prevents us from even having a conversation about nuclear subs so we need unusually long-range conventional subs. That’s very challenging technically.

But too often once our defence boffins have got hold of the idea that they can modify, or best of all design from scratch, some bit of defence kit they never stop tinkering. In the end Australia often ends up trying to produce a tiny volume of a completely unique weapon or platform. You can’t do this at reasonable cost. At its worst this gives you the Collins madness, an orphan class of subs of which only six were built, making them splendid museum pieces, but not part of an ongoing production line achieving economies of scale and constant quality upgrades.

That’s one reason the economics always favours buying over building. But nonetheless you can build, and pay a premium for it, so long as the premium is reasonable, and 40 per cent over the already high US cost base is not reasonable. So, big change No 1 is less bespoke, more standard, less distinctive, more conventional. It’s better to have something good that works well rather than something magnificent that never works at all.

Andrews’s second big reform is to try to get naval shipbuilding onto a “continuous build” basis. At its clumsiest, the Abbott government in its early months gave the impression it thought Australian industry couldn’t do anything in defence. David Johnston’s “I wouldn’t trust them to build a canoe” was the extreme lunatic point of this disposition.

Now, Andrews has made it fairly clear that the government is likely to build the replacement frigates in Australia, as well as the offshore patrol vessels and the Pacific patrol boats. If the government builds eight or nine frigates, and manages to sell one or two more to New Zealand, you could almost put the frigates on a continuous build basis. You would then design each frigate to last 24 years and be replaced by a new frigate at the end of its life. This is a much shorter life than we normally expect from our ships. But often the capability at the end of the notional life of our ships is entirely fictional. A serious nation would embrace continuous build for economic rationality and platform capability.

If there is some Australian build in the subs, and the patrol boats get built locally as well, then you could have a rationalised industry working on a continuous basis. The feast and famine syndrome in shipbuilding is a mortal enemy to efficiency and cost containment. No government did more to make this worse than the Rudd and Gillard governments. In six years they did not commission a single Australian-built ship. And they ripped tens of billions of dollars out of defence. Thus Labor spokesmen made eloquent speeches about their commitment to Australian defence industry, but employment in the industry declined by thousands when Labor was in office.

In shipbuilding, Labor produced the Valley of Death, the gap in work from the end of the AWDs to whatever comes next. You cannot keep a shipyard and its vast workforce hanging around while government fumbles and procrastinates. If you create a gap like that, then try to restart the industry a few years later, you incur massive start-up costs.

The final reform Andrews proposes to bring the cost premium of Australian built naval ships within reason so that it can be sustained economically and produce the ships Australia needs is for all stakeholders, including unions, is to pursue a “productivity culture”.

Australia has a terrible record with protected industries. The demise of our car-building industry is the latest tragic case. Once an industry believes it is forever protected by government, whether through tariffs or because government is the only customer and politically cannot go to an overseas provider, then the cost structure inevitably blows out. Unions win concession after concession, pay rise after pay rise. Smooth smart-silly managers slyly tell you that labour is a small component of the project’s overall costs. A penalty rate here, a union veto on shift arrangements there, an extra entitlement, each change seems small and affordable. Then you blink your eyes and you wake up with an uncompetitive cost structure. If a naval shipbuilding industry is to survive, management and unions need to buy into global standards of productivity.

Can we do all this? If the answer is no, we will end up with neither jobs nor defence capability.