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Appendix 6 - Extract containing a summary of main issues and points for discussion from a discussion paper published by the committee on 25 August 2006
Discussion paper
Work in progress
Australia's Naval shipbuilding and repair industry
Summaries and discussion points
Introduction
Summary
Today's modern military forces rely on new and high
technology to build greater defence capability—they want qualitative efficiency
based on advanced technology rather than quantitative force based on manpower.
The increasing pressure for more highly sophisticated and
expensive systems, coupled with dwindling demand for ships has created major
challenges for the naval shipbuilding industry worldwide. Advancing technology
and the increasing costs associated with the design and development of
state-of-the-art communication and combat systems in particular, has meant that
few countries or companies on their own can produce such sophisticated systems.
These challenges have also influenced the business approach. For example, the
department of Industry, Tourism and Resources referred to the emergence of
'globally integrated production systems'.[1]
Some witnesses spoke of the requirement for Australia to establish a
'consortium of shipbuilders and designers who can pool their capabilities and
develop the interaction and specializations needed'.
A critical issue for Australia, which must rely on overseas
companies for vital components of its naval ships, is ensuring that Defence has
the necessary access to, and sovereignty over, intellectual property.
Advances in technology have influenced the way ships are
constructed most notably with the trend toward building ships in modules.
Integration of modules and systems has become a key element of shipbuilding. It
means that only one major site is needed to assemble the various parts of the
ship that have been constructed elsewhere. Thus, a wide network of sites for
construction of ship modules, which according to AIDN accounts for 60 to 80 per
cent of fit outs, is now involved.
A growing synergy in technologies is also occurring which is
influencing the industrial base of naval shipbuilding. Although the industry is
highly specialised, there are strong parallels with the infrastructure needs of
the oil and gas sector and more generally the resources sector. A new approach
to manage these synergies is required not only by the prime contractors but by
governments who must have a wider appreciation of Australia's heavy engineering
sectors.
The quest for advanced technology and need for integrated
systems has also linked naval shipbuilding directly into the information
technology market. In effect, naval shipbuilding can no longer be viewed as a
discrete industry sector with capacity and productivity assessed on the basis
of individual shipyards. Shipbuilding in the new technology era is part of the
emerging heavy engineering sector.
The changes occurring in the naval shipbuilding and repair
industry as outlined above present a particular challenge for Australian naval
shipbuilders who need high order technological as well as managerial skills and
for Defence which requires the expertise to oversee all the complexities
involved in a major acquisition. Defence faces a particular challenge in
managing the reconfiguration of the business model which now involves a complex
web of relationships between the prime contractor, which may be a consortium,
and the many sub contractors, a number of which have key roles in the
integration of complex systems and may themselves be joint ventures. To manage
a project effectively and properly, Defence requires not only strong
technological and managerial skills but an approach that ensures transparency
and accountability.
It also requires Defence to consider demand flows and their
implications for the Australian workforce. A number of the matters touched on
in this introduction will be covered in the paper.
1. The capacity of the Australian industrial base
to construct large naval vessels over the long term and on a sustainable basis
The capacity of Australia's industrial base to construct large
naval vessels depends on the integration of four main elements: Australian
shipbuilders willing and able to undertake major naval projects; the network of
enterprises supporting the industry; the infrastructure necessary for modern
naval shipbuilding; and the available skills base and workforce.
The Australian prime contractors
Summary
The four prime contractors in the Australian naval
shipbuilding market are proven competitors and capable and willing to invest in
Defence's demanding future workload. There are heavy demands placed on prime
contractors, especially the increasing pressure for complex ships with highly
sophisticated and expensive systems and the rising costs associated with the
continuing search for improved capability. The committee is aware of mixed
views about whether the Australian naval shipbuilding sector can support four
primes and that some rationalisation of the industry may be required.
Discussion
The committee welcomes opinions on:
- how Australia's major shipbuilders, servicing a relatively small
market, can keep pace with the rapid advances in technology and the increasing
demand for improved capability (e.g. joint ventures);
- the benefits and risks of foreign ownership of prime contractors
operating in Australia; and
- whether industry rationalisation is inevitable in Australia.
The supply chain
Summary
Overall, it would appear that Australia's network of suppliers
together with the contribution of major overseas companies who have established
a presence in Australia provide an adequate supply chain to sustain Australia's
naval shipbuilding and repair industry.
Discussion
The committee is interested in views on the capability of
Australian firms to support the shipbuilding industry in Australia, especially:
- whether their capabilities are being effectively tapped and
developed and how actively Defence encourages them to engage in the Defence
industry;
- measures that could be taken to increase the capability of
Australian firms to support the naval shipbuilding industry and to extend the
local supply network beyond that already servicing the industry; and
- the adequacy of incentives to entice Australian companies to
conduct research and development in the naval defence industry.
The committee also invites comment on Australia's reliance on
overseas subsidiaries to supply some of the high technology systems. In
particular:
- although subsidiaries are located in Australia, whether their
ties to an overseas parent company undermine or weaken the ability of Australia
to sustain a modern and effective shipbuilding industry; and
- the steps needed to ensure that Australia has access to the
necessary resources and expertise to support the vessels through life. For
example, the Allen Consulting Group surmised that 'unless Australian industry
has the capacity to repair AEGIS, the benefits of a local build of the AWDs in
terms of providing the capacity to sustain self-reliance must be questioned'.[2]
Infrastructure
Summary
Overall, it would appear that Australia has the infrastructure
necessary to sustain a naval shipbuilding industry but that further investment
would be required to manage the proposed LHD project. This additional
investment is required even though a number of witnesses suggested that some
existing facilities are underutilised.
Discussion
The committee invites views on:
-
the claims that facilities in Australian shipyards are
underutilised, particularly in light of the proposed further investment in
Western Australia and South Australia; and
- the wisdom of investing in infrastructure required to accommodate
the LHDs, which according to some witnesses is a one in 40 year project.
Cooperation between the states in
meeting infrastructure needs
Summary
The Western Australian and South Australian governments have
entered into an MoU regarding the AWD and LHD tenders.
Discussion
The committee welcomes opinions on cooperation and
competition between the states and how this may influence Australia's
capability to sustain a naval shipbuilding and repair sector. It is
particularly interested in the significance of the MoU between SA and WA.
Workforce and skills
Summary
It is generally recognised that Australia has a well skilled,
productive labour base to draw on for naval shipbuilding but that skilled
labour shortages represent a challenge for the industry. Views differ as to the
extent of the challenge and whether skilled labour shortages present a risk to
upcoming projects.
There was general agreement that it is important for Australia
to retain an element of design capability to enable designs to be modified to Australia's
specific requirements and for through life support, but views differ as how
best to retain such capability.
Discussion
The committee invites view on whether:
- current government and industry skills initiatives are adequate
to mitigate risks to upcoming naval construction project costs and schedules;
- a temporary skilled migration program is a satisfactory way to
address shortfalls in the workforce;
- design and systems integration skills can be sufficiently
fostered without indigenous design and construction, in order to maintain
autonomy in ship maintenance, repair and upgrade; and
- strategies to retain required skill sets for through life support
are sufficient. Is a more strategic, overarching approach required? Can critical
skill sets be identified and policies developed and implemented to ensure these
skills are retained in Australia?
Intellectual property
Summary
In the new era of shipbuilding, access and control over
intellectual property is a key determinant of shipbuilding and repair capacity.
Sovereignty over IP facilitates growth and access to export markets. Without
ownership or access to IP, Australia is left dependent on system providers'
developments and upgrades.
Control over IP is an element of shipbuilding where Australia's
capacity is vulnerable. Australia is largely reliant on overseas ship designs
and weapons systems. The ability to negotiate and manage contracts guaranteeing
access to IP has therefore become a key criterion for successful naval shipbuilding.
Discussion
The committee is interested in views and experiences in the
following areas:
- whether access to and control over IP is given sufficient focus
in the negotiation of naval acquisition contracts;
- given that modern shipbuilding involves complex contractual
arrangements between multiple parties, who carries responsibility for ensuring
satisfactory IP outcomes;
- whether Australia, as a relatively small power, has sufficient
leverage to negotiate the IP outcomes it requires for sovereignty over fleet
maintenance and repair; and
- whether there is sufficient investment in research and
development to facilitate the generation of Australian IP.
2. The comparative economic productivity of the Australian shipbuilding
industrial base and associated activity with other shipbuilding nations
Summary
There is no available data that would allow a comparative
analysis of the productivity of Australian shipyards against overseas yards.
The committee therefore finds difficulty in making a definite determination about
the comparative economic productivity of the Australian shipbuilding industrial
base with other shipbuilding nations. Evidence, however, suggesting that Australia
may not be as productive as overseas producers included:
- some projects in Australia such as the ANZACs are believed to
have attracted a local build premium;
- Australia is a relatively small market and the demand for naval
vessels is not as large as for some overseas producers—Australia does not have
the economies of scale enjoyed by some of its potential competitors; and
- Australia cannot compete with countries such as Japan, China and South
Korea in the production of larger and less complex steel ships such as
tankers and carriers.
Evidence suggesting that Australia may be as productive as overseas
producers in constructing naval vessels include:
- the naval shipbuilding industry in overseas countries is
subsidised or protected in someway by government; (removing or discounting such
barriers may show that Australian producers can match the productivity of
overseas producers);
-
the success of Incat and Austal in producing very fast vessels;
- the bench-marking studies carried out for Tenix and Raytheon Australia;
- greater efficiencies when it comes to modifying or customising a
ship in Australia for Australian conditions; and
-
the acknowledged world class standing of Australian welders,
engineers and technicians.
This summary looked purely at the matter of the cost to the
Australian Government of building a ship in Australia as against a ship
purchased from overseas. To this stage, it has not considered the wider
advantages or benefits that accrue to the country when a major ship project is
undertaken in Australia.
Discussion
The committee invites comment on whether, without taking
account of other considerations such as wider economic benefits and national
security, it is safe to assume that:
- Australia does not have a significant competitive edge in the
construction of major naval vessels, with economies of scale a major
impediment; and
- the naval shipbuilding industry is highly protected in most naval
shipbuilding countries which narrows the opportunities for a country such as Australia
to compete internationally.
The committee would be interested to learn of any studies that
would help it obtain a better understanding of the productivity of the
Australian naval shipbuilding and repair sector compared to overseas producers.
The committee is also interested in views regarding the
opportunities for increasing exports in the NSR sector.
3. The comparative economic costs of maintaining, repairing and refitting
large naval vessels throughout their useful lives when constructed in Australia
vice overseas
Summary
The committee underlines the following points on the issue of
comparative economic costs of through life support (TLS).
- There is a lack of data which reflects the difficulty in making a
direct comparison.
- ACIL Tasman has estimated that annual TLS costs could be twice as
high if foreign supplies had sourced the ANZAC Ship Project. This is due to
shorter repair turn around times and lower stocks of spares from local sources
of supply. However, the Department of Industry, Tourism and Resources (DITR)
has cautioned that local equipment can be used for an overseas build, thereby
avoiding the higher costs associated with repairing overseas-built ships
in-country. The department argued that the ACIL Tasman TLS estimate must be
discounted by the proportion of equipment that could be sent overseas to
support an offshore build of the same vessel.
- The committee's evidence is unanimous in the view that building
warships in-country will deliver greater TLS savings than from an offshore
build—Defence added the qualification that TLS savings from an in-country build
depends on the complexity of the ship. It used the example of the less complex
LHDs, stating 'there could be relatively few savings in whole-of-life cost from
choosing to build locally'.[3]
- The TLS productivity saving from an in-country build derives
mainly from developing the skills and knowledge during the construction phase
needed for TLS.
- Personnel, however, can be posted offshore to participate in the
build in order to develop the in-country skills and knowledge for repair and
maintenance.[4]
Discussion
The committee invites discussion on the following issues:
- the findings of the ACIL Tasman study with regard to TLS and
whether they can be usefully applied to current or future projects;
- Defence's statement that 'there could be relatively few savings
in whole-of-life cost from choosing to build the LHD locally'. It expected that
the greatest savings over the life of the ship will come from full access to
and use of ship design and intellectual property across the entire capability.[5]
-
the contention that posting personnel overseas during an offshore
build is an effective way to develop the skills and knowledge required for TLS;
and
-
the contention that there is difficulty in sustaining in-country
skills once the ship transitions from the construction phase into naval
service.
4. The broader economic development and associated benefits accrued from
undertaking the construction of large naval vessels
Summary
Numerous witnesses identified economic benefits that they
consider accrue from naval shipbuilding. The committee's research identified
two major studies, relating to the ANZAC and Minehunter projects, which sought
to quantify the flow of economic benefits from the construction of naval
vessels. The extent of the economic benefits identified in these studies
depended on the model used. The more conservative figures, resulting from
general equilibrium analysis, indicated a contribution to GDP of up to $887
million for the Minehunter and $3,000 million for the ANZAC project.
Defence and DITR recommended caution in interpreting the
findings of the above studies. DITR noted that the results are specific to the
projects assessed and the assumptions made about the productivity gains
produced by those projects. Defence presented Treasury advice which stated that
not only are multiplier effects difficult to quantify, but the effects can be
negative if resources are displaced from more productive to less productive
sectors of the economy.
It should be noted that Defence explained that technology
transfer and access to IP form part of the evaluation process but that other
benefits:
such as potential spin-offs to industry at large and wider
benefits to the economy, such as increased employment, may be recognised but
play little or no part in the numerical evaluation. Such benefits will be noted
in advice to Government.[6]
Discussion
The committee invites comment on the following issues:
- whether any general conclusions can be safely drawn about the
broader economic benefits of naval shipbuilding, given that the available
quantitative analysis is confined to two specific projects;
- the likelihood that, in reality, negative multiplier effects
would arise from a high technology industry such as naval shipbuilding; and
- whether and to what extent, wider economic benefits should be
taken into account in naval shipbuilding acquisition decisions;
- who argues or should argue the case for the wider economic
benefits that accrue to a local build in advice to government.
Strategic considerations
Summary
Without exception, all witnesses accepted that national
security concerns are central to any consideration about whether Australia
should have a naval shipbuilding industry. On strategic grounds, the argument
for self-sufficiency in maintaining and repairing naval vessels was strong,
especially when it came to the ability to respond to urgent operational
requirements. Several witnesses went further suggesting that in order to have
this capability it was important for the ships to be constructed in Australia.
The government, however, noted that practical and economic
circumstances place limitations on the extent to which Australia can be self-sufficient
in the construction of naval vessels. Even with the ship repair industry, the
government argued that there could be exceptions.
It is beyond the means of any country to retain absolute
control over all aspects of its defence capability. The argument for self-sufficiency
in a particular capability turns largely on an interpretation of what
constitutes a strategically important capability. According to DITR, based on
import replacement policies, the objectives are being driven toward 'a new
conception of operational sovereignty as the objective, with economic 'make or
buy' decisions determining the cheapest way to achieve operational
sovereignty'.[7]
Discussion 1—definition of strategic capability
The committee is having difficulty using general concepts about
self-sufficiency, core strategic capabilities, value for money and the need for
in country construction to arrive at definite conclusions about the connection
between national security, defence capability, the requirement for self-sufficiency
and cost effectiveness. For example, it is unclear about DITR's statement that
global economics is changing military self-reliance objectives and the concept
of 'operational sovereignty'.
It invites comments on:
- whether DMO's definition of a strategically important industry
capability is satisfactory or indeed relevant to today's debate about self-sufficiency;[8]
and
- the significance, as mentioned by DITR, of the new concept of
operational sovereignty as the objective, with economic 'make or buy' decisions
determining the cheapest way to achieve operational sovereignty.
The committee would like some guidance or assistance in
identifying the circumstances under which it is appropriate for Australia to
relinquish its control over the design or construction of a major naval defence
acquisition or component of an acquisition to an overseas supplier. For
example, are there principles governing national security and the acquisition
of a naval defence capability that should be strictly observed? If so, what are
they and how should they be articulated to industry?
The committee understands that in some cases Australia simply
cannot afford or attain the level of skill, knowledge or technological
expertise in a particular critical defence capability. It is seeking advice on
the steps that should be taken to ensure Australia maintains a level of
capability that would not compromise national security.
Discussion 2—strategic capability and value for money
The committee would like to gain a better understanding of:
- the difficulties applying an acquisition policy that places a
high priority on retaining self-sufficiency in identified core strategic
capabilities, but at the same time emphasises value for money; and
- what the term 'value for money' means in the broader context of
naval shipbuilding and national security'.
5. The role of Defence in Australia's naval shipbuilding and repair
industry
Assisting industry improve productivity
Strategic planning and policy on
Australian industry involvement
Summary
Defence's long term capability requirements and objectives
are articulated through the Defence Update, the Defence Capability Strategy and
the Defence Capability Plan (DCP). Some witnesses raised concerns about the
adequacies of the current documentation that Defence makes available to
industry on its future strategic plans and, indeed, on what appears to be
weaknesses in the planning process.
The committee notes that the recent Defence Capability Plan
identified on a project-by-project basis the areas of expertise that Australian
industry could currently supply.
There appears to be a lack of certainty in how Defence
applies its policy on local involvement in the naval shipbuilding industry.
There is no uniform level of AII specified for each project. On the one hand, a
'bidder's failure to satisfy all of the Australian industry involvement
outcomes may... potentially disqualify the bidder from contention'. At the same
time, Defence 'retains the right to select a bidder whose approach may not satisfy
all Australian industry involvement outcomes set out in the RFT if other
aspects of its approach provide offsetting benefits'.[9]
Defence stated that proposals for local industry involvement
are evaluated on the basis of value for money and tenderers are required to
show how cost-effective involvement in the project by Australian industry has
been maximised.[10]
According to Defence, 'This does not always mean that goods and services
sourced from local industry must be cheaper than those available from overseas.
There may be instances where paying more for a local source of supply yields
offsetting strategic or other benefits which mean that value for money has been
achieved'.[11]
Some witnesses have suggested that the AII program lacks a
clearly articulated strategic approach. In 2003 the ANAO found that:
- the lack of specific guidance as to what defence industry
capabilities are required is a significant omission from Defence industry
policy and makes it difficult to determine how well the strategic objectives of
the Program are being met; and
- there was no evidence of a systematic endeavour to gain synergies
by linking the AII plans of one capital equipment project with those of any
other project.
The committee is aware that Defence is currently undertaking
a review of Defence's procurement policy.
Discussion
The committee notes the call for Defence to develop a long
term strategic plan for Australia's naval shipbuilding industry. It would like
some guidance from industry on the key matters that it believes should be
included in such planning and the preferred level of detail.
The committee also invites views on:
- how Defence can make its priorities clearer and provide a better
understanding of its intentions when using vague terms such as 'value for
money' and 'sustaining key strategic capabilities'; and
- the project-by-project approach and whether it hinders the
development of a coherent and overarching policy designed to best use
Australian industry to ensure that Australia sustains key strategic
capabilities.
The committee welcomes comment on:
- the effectiveness of the AII Program in the NSR sector;
-
the need for greater rigour in assessing the performance of the
AII Program;
- whether a Strategic Plan for the NSR sector that identifies core
in-country capabilities could give the AII Program more focus; and
- suggestions that Defence should develop key performance
indicators for the AII program.
Smoothing demand
Summary
Australian demand for naval vessels has historically been
uneven and significant peaks and troughs are projected for the coming build
programs. Numerous submitters called for smoother Defence demand to help
alleviate costs and secure the sustainability of the industry base in the
longer term.
Defence considered that it is industry's responsibility to manage
cyclical demand. It outlined that scheduling major acquisitions is complex,
involving consideration of the budget implications of other major projects and
the interdependence of some capabilities with others. Ultimately, the
scheduling of naval construction work reflects Defence's capability needs not
the perceived needs of the industry.
Discussion
As noted above, the committee notes the call for Defence to
develop a long term strategic plan for Australia's naval shipbuilding industry
and would like some guidance on what this plan should encompass.
The committee invites views on the difficulties cited by
Defence in smoothing the demand flow.
Industry—informed provider
Reviews of past projects and
premiums for local builds
Summary
The committee notes the absence of meaningful data that
would help to inform industry about the factors that shape or influence major
acquisition decisions, especially analysis of past projects and premiums
offered to Australian companies.
Commercial-in-confidence concerns may well prevent some
information from being available. Even so, regular and frank analysis of the
successes and failures of projects and the extent of assistance given to a
project (local premium) could assist industry. This knowledge would help keep
industry better informed about the performance of particular projects and also
make Defence more accountable for its decisions and the way in which it manages
major projects. Indeed, Mr John O'Callaghan, Head of the Australian Industry
Group Defence Council, thought that Defence needs to be 'a bit more mature
about putting on the table' some of the lessons from experiences such as the
problems with the modernisation of the FFGs and the Collins Class submarine. In
his view, such an approach might help industry avoid the sort of problems that
have arisen.
Discussion
The committee would welcome opinions on the suggestion that,
in order to have a well-informed industry and an accountable buyer, Defence
publicise information such as analysis of past projects or on the policies
governing local premiums. It would be interested to learn of major impediments
to implementing such a proposal.
The need for local premiums and preference for local
involvement touches on matters such as the tension that exists between
capability and affordability, previously raised in the discussion of strategic
considerations.
Defence—an informed and skilled purchaser
Informed buyer
Summary
A few submitters questioned whether Defence has the appropriate
level of experience and expertise to carry out effectively an acquisition
program involving complex naval ships. Defence is aware of the need to have
qualified personnel in-house and is taking steps to recruit such staff. It also
has access to outside experts to assist it in its acquisition program and
processes.
Tendering and contracting
Summary
DMO has undertaken steps to improve its tendering and
contracting procedures and practices. Industry's response appears to be
positive. Even so, this paper has highlighted the growing complexities in
managing major naval acquisitions especially with the complicated network of
relationships and partnerships involved in the project. The paper has also
commented on the absence of meaningful data and information especially on the
successes and failures of past projects. This is most notable in the discussion
of local premiums. Clearly, Defence must develop and adhere to high standards
on probity and accountability in its procurement practices.
Discussion
The committee would be interested to learn if there are, in industry's
view, areas of weaknesses in DMO's NSR tendering and contracting procedures
that could be strengthened.
The committee also invites comment on the probity and
accountability aspects of Defences procurement practices and procedures.
Government's intervention in the market place
Competition
Summary
According to Defence, it wants 'a vibrant and competitive
Australian maritime industrial capacity' that enables it 'to maintain or
enhance the capability baselines of the Naval ships so that they are fully
capable to meet the mission requirements in the context of the evolving threat
environment and strategic requirements'.[12]
It also wants value for money and looks to competition to stimulate managerial
innovation, drive innovation and the development of new technologies and
promote general cost consciousness among defence contractors. A competitive
environment acts as a check on excessive monopoly pricing and helps to drive
down cost premiums.[13]
The demand for naval ships in Australia, however, is relatively
small and Defence is the only buyer. It faces the challenge of meeting its need
to sustain key naval capabilities in country cost effectively but in a market
with few suppliers. This raises questions about the extent to which government
or Defence should intervene in the market place to create a competitive
framework.
Discussion
The committee invites comment on how Defence best manages a
market with only one buyer and few suppliers. For example:
- the usefulness of contract management tools—fixed price contracts,
alliance contracting, open book accounting, close monitoring of rates of
return, greater use of benchmarking, stricter specification of AII;
- whether Defence should be directly intervening in the market
(e.g. awarding particular projects to specific companies with a view to
maintaining future competition);
- the extent of sole sourcing in naval shipbuilding contracts and
the opportunities for Defence to introduce greater competition in these
contracts; and
- the role of competitive teaming.
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