On 6 June 2014, the government announced that it had given
approval for Defence to conduct a limited competitive tender between Navantia
of Spain and Daewoo Shipbuilding and Marine Engineering of South Korea for the
construction of two replacement Auxiliary Oiler Replenishment ships (AOR). The
Minister for Defence claimed that the decision to exclude Australian companies
from the tender and involve only two overseas companies was due to: the urgent
need to replace the vessels and avoid a capability gap; the current low
productivity of shipbuilders involved with the Air Warfare Destroyer (AWD)
project; and value for money considerations.
Although the committee has only started its inquiry into the
future sustainability of Australia's strategically vital naval ship building
industry, its consideration of the proposed tender process for the supply ships
has highlighted a number of concerns.
They relate to the lack of contestability and competition in
the limited tender, the level of industry engagement in the process so far and
the absence of long-term strategic planning that led to the decision.
As such, the committee recommends that:
the tender process for the two replacement replenishment ships be
reopened to include Australian companies;
the government undertakes open tender processes for any future
the tender must make clear that a high value will be placed on
Australian content in the project.
The committee heard that local major shipyards could be
upgraded to build the supply ships in Australia. Furthermore, the relatively
small upfront costs for the improvements should not be considered in isolation
but with a view to the long term benefits, especially when such infrastructure
is regarded as a fundamental input to capability. The committee has heard that
such an investment would support the construction in Australia of large
vessels, including the supply ships, and that long term dividends would result
from such investment. By excluding Australian companies from the tender, the government
has not allowed these matters, including the amount of investment required to
upgrade current facilities and the long-term benefits of this investment, to be
fully explored and contested.
It should be noted that investment in infrastructure in
Australian shipyards becomes a permanent asset and builds on the considerable
infrastructure that already exists. Defence, in collaboration with industry,
should consider undertaking a complete and thorough audit or stocktake of
Australia's shipyard infrastructure and incorporate the findings into a
strategic plan for future naval shipbuilding.
A number of witnesses put forward proposals that could
address the urgency of the purchase, without having to resort to a limited
tender that excludes Australian ship builders. They include a modular build for
the supply ships in Australia or a hybrid build to include both Australian and overseas
ship builders. The committee is concerned that the government’s delay in making
a decision to acquire the vessels following the election has led it to select a
tender process that prevents an open, competitive and indeed, fairer process.
Evidence provided to the committee indicates that the government
has an overly simplistic understanding of the factors driving productivity in
the ship building industry. The committee heard that the productive performance
on the Air Warfare Destroyer (AWD) project was well within what was expected to
be world’s best practice. As the work on the AWD vessels progresses and the
skills base and experience continues to develop, further productivity gains
could be anticipated.
The committee heard that the Defence Minister used the
findings of the independent, but not publically available, review of the AWD
program undertaken by Professor Don Winter and Dr John White as justification
for excluding Australian companies from the supply ship tender.
Given the strategic importance of the naval ship building
industry to Australia and the importance of the analysis contained within that
report to the future of the industry, the committee recommends that the
government release this report in full.
National security concerns are central to any consideration of
Australia’s naval shipbuilding industry, as well as the priority that should be
given to developing and retaining the skill base and experience to support that
The committee looked at the much broader economic benefits
that accrue from a local build or Australian involvement in the production of a
naval vessel. They include the development and maintenance of a highly skilled
workforce, the benefits that innovation brings to the wider economy and the
economic and employment growth that flow from investment in research and
The committee also recognises the importance of having the
skills base, experience and local know-how necessary to support the Royal
Australian Navy’s vessels through their operational life. This self-reliance is
central to Australia's interests.
Defence industry policy and decision to conduct limited tender
The Department of Defence has a defence industry policy that
recognises the vital contribution Australian industry makes to Australia's
security. Among other things, the policy seeks to increase opportunities for
Australia's defence industry to identify and make the most of business
opportunities and to compete for acquisition projects.
The procurement process for the supply ships shows no
evidence that Defence consulted with industry or encouraged open discussion
about possible Australian engagement with the project.
Indeed, it appears as though local shipyards were shut out
of all consideration.
The committee is of the view that Defence should have
consulted with local shipyards and allowed them to present their case when it
comes to building the supply ships in Australia.
The way in which the decision for a limited tender was taken
and announced was a significant blow to Australian industry. The lack of
consultation was at odds with Defence's stated industry policy objectives,
which seek to promote competitive, collaborative and innovative industry.
Decisions, such as the acquisition of the supply ships, are
extremely important for both Defence capability and for the sustainability of
Defence industry in Australia. They involve huge amounts of taxpayers' money
and have long-term implications for Navy's future procurement strategies and,
importantly, its capability. Such decisions should be well considered and based
on sound research and analysis.
A local vibrant and sustainable industry able to support
navy vessels throughout their operational lives is critical to Australia's
national interest. In this regard, the prime contractors in Australia and the
many SMEs engaged in naval shipbuilding need to have certainty and the
confidence to continue to invest and participate in the industry.
The way in which the tender process was announced and the
exclusion of Australian industry from this process has clearly undermined this
The committee is not convinced that a limited tender
involving only two companies is the best way to obtain the necessary
information to proceed to second pass.
The committee makes the following recommendations:
committee recommends that the tender process for the two replacement
be opened up to allow all companies, including Australian
companies, to compete in the process; and
make clear that a high value will be placed on Australian
content in the project.
The committee recommends further that the government require that an
open tender process be used for any future naval acquisitions.
The committee notes that Defence has identified areas where potential exists
for Australian industry to become involved as sub contractors in the
replenishment ship project. In this regard, the committee recommends that
Defence become actively involved in encouraging and supporting Australian
industry to explore such opportunities.
committee recommends that the government release the report of the independent
review of the AWD program undertaken by Professor Don Winter and Dr John White.
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