When announcing the limited tender for the new supply ships, the
Minister for Defence made a direct link between the decision to restrict the
tender to two overseas shipbuilders and the productivity of local shipyards.
Indeed, he cited the 'current low productivity of shipbuilders involved in the
AWD program and value for money considerations' as two of three reasons for
proceeding with the limited tender.
He made his meaning clear that 'Australian industry must be internationally
competitive and meet international productivity benchmarks'.
In this chapter, the committee considers this statement about the need
to acquire two new supply ships and Australia's competitiveness to build them.
The committee's main focus is on the productivity of Australian shipyards and
the cost effectiveness of building the ships in Australia. In this regard, the
committee believes that it is important to place the decision to conduct a
limited tender for the supply ships in the context of the experiences with the
The AWD project is being delivered through an alliance-based contracting
arrangement between ASC AWD Shipbuilder Pty Ltd, Raytheon Australia Pty Ltd and
the Government, represented by the DMO. This project—to acquire three Hobart Air
Warfare Destroyers and their support system—is one of the largest Defence procurement
projects in Australia and intended to form a critical element of the ADF's
joint air warfare defence capability. It received first pass approval in 2005
and second pass in 2007. The three ships were to be built in Australia.
In 2010, however, signs of trouble surfaced in this key acquisition program.
At this time, difficulties were encountered in relation to the engineering and
construction of some of the first AWD hull blocks. To address this problem,
block work was reallocated between BAE, Forgacs and Navantia and the Alliance
Operational Schedule was amended. On 6 September 2012, following stakeholder
review and support for the time-line extension and resource considerations, the
then Minister for Defence announced that the AWD schedule would be
re-baselined. This measure would extend the period of work for the Alliance and its partners,
including the shipyards in Adelaide (ASC) and Newcastle (Forgacs). According to
the minister the revised project plan would:
reduce peak demand on project critical resources and facilities
and project risk;
not increase the cost of the project nor result in the loss of
any jobs; and
very importantly, help retain skills in the naval shipbuilding
The re-baselined construction schedule was intended to help Navy reduce
the demands and risks associated with accepting into service two major
capabilities (LHDs and the AWD) at around the same time.
In November 2013, DMO noted that the key challenge for the AWD project was:
...to maintain an efficient, sustainable workforce that is
successful in progressing the consolidation and integration of the AWDs,
leading into through-life support activities for the destroyers and future
initiatives to protect the naval shipbuilding industry capability ahead of the
future submarine program.
Concerns about the project, however, did not abate.
On 18 December 2013, the Minister for Finance announced that, since the
Coalition had assumed government, he had received detailed briefings from key
stakeholders associated with the AWD program. In his assessment, there were 'clearly
issues associated with this important program' and he foreshadowed the
establishment of an independent review. The review was intended to give government an independent perspective on all of
the issues with the program and to make some recommendations on the best way
On 25 February 2014, the Minister announced the appointment of former United
States Secretary of Navy, Professor Don Winter, and former Transfield chief, Dr
John White, to conduct jointly the independent review of the AWD program.
While this review was underway, the ANAO released its performance audit report
on 6 March 2014 on the AWDs. The report, which was highly critical of the
performance of the project, drew widespread media and industry attention.
In brief, the ANAO audit found:
Despite the contractual arrangements put in place to manage
the project, the AWD Program has experienced a range of delivery issues,
including significant immaturity in detailed design documentation, major block
construction problems and substantially lower than anticipated construction
productivity. The design and construction issues have led to extensive, time‐consuming and costly
On 4 June 2014, a brief summary of the findings of the independent
review on the AWD project, commonly referred to as the Winter review, were made
public. In the review's assessment there were two direct causes for cost and schedule growth:
the initial program plan for AWD development and production was
unrealistic in its cost and schedule estimates; and
the Alliance, as structured, composed and staffed, has been
unable to effectively manage the AWD Program.
It also identified the following contributing causes:
systems engineering on the AWD Program has been of limited
the AWD Alliance and ASC were unable to effectively manage the
AWD block subcontractors; and
the oversight provided by the Commonwealth of Australia has been
of limited effect.
Importantly, and relevant to this committee's inquiry, the review also
considered systemic issues that could affect any other naval shipbuilding
programs in Australia, and identified the following:
the limited base of shipbuilding activity in Australia materially
impacted the AWD Program; and
the Commonwealth of Australia has not developed a long term
shipbuilding plan that can cost-effectively support the needs of the RAN, while
sustaining the Australian industrial shipbuilding base.
In the joint media release accompanying the publication of the summary
of the Winter review, the Minister for Finance referred to the Auditor General's
finding of a $300 million cost overrun with the AWD project. He stated clearly
...the position that we inherited was a deteriorating position.
The overall project is 21 months behind schedule. The remedial action we are
announcing today and that we are proposing to implement over the next couple of
months is designed to make up as much time as possible. But I don’t believe we
will be able to make up all of the time. The first ship was due for delivery in
December 2014. Manifestly we’re not going to be able to reach that deadline.
In this same media release, the Minister for Defence spoke of the need
for the project to improve and further that the government was 'not going to tolerate
the sort of outputs that have been put on the table from a productivity
perspective particularly'. He indicated that the government would 'demand
commercial discipline in the project and we’re going to have it'.
The Minister for Defence sent an unmistakeable message to industry:
...if we can’t get this right, if we can’t get this to an
acceptable benchmark standard, it doesn’t say a lot about our future capacity.
Now we’ve got potentially another 8 future frigates that we would like to build
in Australia, but I am sending a very clear message out today. If we can’t fix
this, that is something that will certainly be in jeopardy, because I don’t
believe the Government will support an enterprise that cannot deliver
Announcement of tender for new supply ships
Two days after the release of a summary of the findings of the Winter
report, the Minister for Defence announced what he termed 'the first set of key
initiatives in the Abbott Government's long-term strategic naval plan'. They
included three major decisions:
first pass approval for Defence to conduct a limited tender
process between Navantia of Spain and Daewoo Shipbuilding and Marine
Engineering (DSME) of South Korea for the construction of two replacement
replenishment vessels based on existing designs;
bringing forward preliminary design work to ensure Australia
maintains the necessary capabilities to retain the option of building the
future frigate in Australia; and
bringing forward an open competition with Australian industry to
construct more than 20 replacement Pacific Patrol Boats.
In his statement, the Minister, referring directly to the government's
first pass approval to conduct a limited competitive tender process for the
supply ships, attributed the decision to, among other things:
the current low productivity of shipbuilders involved in the AWD
value for money considerations.
During his announcement, the Minister, when referring to the viability
of Australia's shipbuilding industry, placed a heavy emphasis on the need for
productivity improvements and cost-effectiveness.
Productivity—compensated growth tonnage
As an indicator of the performance of Australian shipyards, the Minister
for Defence cited the following figures for the AWD project—the international
benchmark 'is 60 man-hours per tonne, we set the benchmark for that program at
80 man-hours per tonne, currently it is running at 150 man-hours per tonne...'
To his mind, getting back on track was 'essential to the future of naval
Mr King explained the usefulness of using this compensated growth tonnage
measure as a way of comparing how many man-hours it takes to build a tonne of
ship. He noted that building a tonne of a supertanker was easier than building
a tonne of
a submarine, so First Marine International (FMI), an independent, internationally
renowned organisation, had developed a series of co-efficiencies that would
allow this comparison. He confirmed the accuracy of the statistics on
productivity quoted by
the Minister that: 60 man-hours was the world benchmark for compensated growth tonnage—the
best in the world; Defence set 80 man-hours per tonne as a target for the AWD;
and the first ship came in at 150 man-hours per tonne.
According to Mr King, the first ship always takes more man-hours per
tonne and that the DMO expected the AWD project could achieve the 80 man-hours.
He informed the committee that in 2010, when the shipyards were getting into
the production phase, the DMO engaged the FMI to evaluate every shipyard. The FMI
produced a report for the years 2011, 2012 and 2013 and Mr King provided information
based on the reports to each shipyard so they could be fully aware of their
productivity against compensated growth tonnage.
Furthermore, based on comparisons of yards all around the world, the FMI
provided training and advice to the Australian yards on the most efficient way
to improve their business. Mr King explained that the FMI stated in its last
report that basically: BAE had made substantial improvement; ASC had shown no
demonstrable or noticeable improvement despite its efforts; and Forgacs had
AWD experience and acquiring new supply ships
Mr King drew on his extensive experience with the AWDs to highlight some
of the difficulties experienced with an Australian build. While he did not agree
fully with the findings of the Winter report he, in the main, concurred with
the overall summary presented by the Minister for Finance, which identified
the initial program plan;
inadequate government oversight;
the alliance structure which seemed incapable to manage issues if
and as they arose; and
the performance and capabilities of ASC and major subcontractors.
According to Mr King, when Defence embarked on the AWD program,
the South Australian government and Defence SA made a compelling offer. He explained:
We thought of everything that we could think about to start
up that air warfare destroyer project. We looked at the drawing packs. We
looked at the time. We developed a schedule. We created a longer schedule than
has ever been developed for any comparable ship in the world in order to give
Australian industry an opportunity to get on top of it and get it right. And
guess what? Despite all those best efforts, despite being what I thought was as
practical as I could be, despite industry doing as much work as we thought we
could to understand that problem, and we spent $255 million between first and
second pass looking at every practical thing we could ...but despite all that,
and even when we came to build an existing design, we are still having budget
problems and we are still having schedule slip.
One of the lessons to be learnt from the problems with the AWD project, as
Mr King observed, was 'you have got to temper marketing and ambition with
experience and the reality of what we face'.
He then proceeded to apply the AWD experience to future projects explaining
that with the AWD there was a design that had been built 4½ times. He again
stressed that, at the time, he thought that the DMO had given the AWDs all the consideration
that could reasonably be given in order to embark on the project. With the AWD
problems in mind, he referred to the prospect of building the supply ships in
...suddenly, magically, this time we can transfer all that
design work or even some of that design work to Australia and there will not be
a problem. There will be a serious problem.
Mr King stated that exactly the same problems would emerge if Defence
were to build the AOR in Australia.
Defence industries response
Representatives from Defence industries took note of the connection
between the observations made about the productivity of Australian shipyards in
the context of the AWD with the decision to tender for the replacement
replenishment vessels. Indeed, Mr Christopher Burns, Defence Teaming Centre,
noted the negative comment made about the productivity of Australia's naval
shipbuilding industry based on statistics contained in the Winter report.
To his mind:
Industry was advised that, due to their poor productivity,
evidenced by the unreleased Winter review, Australian industry would not be
afforded the opportunity to tender for the Navy's replacement replenishment
ships. With no mention of the unsolicited hybrid build proposals offered 18
months earlier by ASC and BAE, the government announced that it would offer
their partners in South Korea and Spain limited competitive tenders for
Australia's replacement replenishment ships, effectively cutting ASC, BAE and
Australian industry out of the opportunity.
The Defence Teaming Centre questioned the basis for these assertions about
poor productivity and posed a series of questions, especially about comparing
the productivity achieved on the first ship as yet uncompleted with that of a
mature shipyard producing ships at an advanced stage of a continuous run.
Mr Thompson, AMWU, informed the committee that the union accepted that
the performance and construction of the three destroyers was a problem which
had caused schedule and cost overruns. The union stressed, however, that the
problems were not the result of the production workforce and poor performance—a
finding supported by the ANAO.
According to the union, the ANAO audit did not have anything to say in relation
to the productive performance.
Indeed, the AMWU suggested that the workforce engaged in building the AWDs was
a productive workforce. It understood that the production workforce and its members
have an important role in building industry's capacity and improving
The South Australian Minister for Defence Industries, the Hon Mr
Hamilton-Smith, also referred to the criticisms levelled at the AWD project and
argued that partly they were being used to justify the decision about the two
supply ships. By way of reference, he noted, however, that if one talks to the
gas and energy industry about projects of this size, a 21-month delay and a
$300 million overspend on a project of this magnitude would not be a surprise. He
was of view that it was wrong
to exaggerate any issues with the AWD's first of type as some form of justification
against building the supply ships here.
Mr Hamilton-Smith noted that cost overruns, when you have projects of up to $8
billion or more, are a part of the business.
These are complex projects and one ought not over-egg these overruns...I
think DMO and the federal government generally can be a little sensitive when a
project runs overboard and run off looking for scapegoats or people to lay the
blame before. Rather, we need to focus on how we get the deal flow right, how
we get the continuity of work right, estimating projects accurately in the
first instance at the outset of the project and realising that the true benefit
of the project probably lies in the savings made in ship No. 3 or No. 4 in
the cycle or the run.
It should be remembered that BAE systems informed the committee that it
had submitted an unsolicited proposal to government in September 2012 setting
a hybrid build program.
It informed the committee that it has achieved significant improvements in
productivity through its work on the LHD project and building blocks for the
AWD program, noting that the Williamstown shipyard was currently at 76 man-hours
per Compensated Gross Tonne.
While, the FMI report quoted earlier supported this claim of improved
productivity at BAE, it also found that ASC and Forgacs had shown no such
In this regard, it is important to note that Defence acknowledged the
work done by BAE to lift productivity. It informed the committee that BAE
addressed problems by bringing in shipbuilding experts from the US and the UK.
It also referred to the FMI benchmarking data showing that BAE had improved in
terms of block productivity since the initial production issues in 2010.
Defence stated that it had 'no concerns about BAE’s current level of block
productivity and, as a commercial shipbuilding company, BAE undoubtedly is
looking to improve its performance'.
In its view, past events show that BAE has 'the means, ability and willingness
to react to any decrease in productivity'.
When Mr King referred to productivity, he was not speaking about the
construction workers. He informed the committee that productivity drives up the
cost of producing a ship, which does not necessarily depend on 'the ability of
to weld a metre of weld'. In this regard, he noted that Australia is probably
as good at welding as 'anybody in the world', but that it was the organisations
and structures around the ship build that count and not the individual.
Figure 6.1: Illustrates ship dimensions and block quantities.
FMI use Compensated Gross Tonnage (CGT) as an indicator of
the effort required to build a ship, as it takes account of the size,
complexity and the customer oversight required in building vessels of different
types. While the Air Warfare Destroyer (AWD) is about one quarter of the
displacement of the Landing Helicopter Dock (LHD), the AWD is a much more
complex vessel, given the levels of equipment installed on the ship. The CGT
values for both ships, however, are similar.
According to Mr King, productivity efficiency was necessary for a
shipbuilding industry to be effective and efficient and that productivity
efficiency was achieved through three main areas—module building and
outfitting, design and economies of scale.
He explained that one important way to achieve efficiency is with module
building and pre-outfitting—a practice all around the world. In his words:
What you try to do is you take a slice of the ship, called a
module, and you pre-outfit it with as much equipment as you can. This gives you
access to both sides of the module, so you can fit it out. The world benchmark
you are looking for is about 85 per cent pre fit-out or better. Clearly then
the module size is set by the beam of the ship, pretty much. You could slip it
again, but by having a module size the bigger the ship gets then the bigger the
module gets. The second thing you want to do is you want to be able to turn the
modules, invert them. The last thing you want to do is have welders or
electricians doing a lot of fitting out work over the top of the head or
overhead. What we do is we build the modules and then we turn them over so that
the workers can work 'downhand', not overhead.
He contrasted the AWD, which is in the order of an 18.3-metre beam, with
the LHD at 32 metres and the AORs, which are likely to be 23 metres.
Economies of scale
Mr King also argued that 'one-offs and two-offs do not make for anywhere
near efficient shipbuilding'. As an example, he cited the ANZAC Ship Project, which
was built out of Williamstown in Victoria. In his view, this project was 'probably
the benchmark of economic performance in shipbuilding in Australia'. He
referred to the learning curve effect for the ANZAC build, which was not
achieved for the first
few ships. But, according to Mr King, by the end of that program, 'we were
building those ships in Australia cheaper than we could have bought them
offshore'. In his view, the main thing was that the labour rate was not such a
big factor and that there was no structural reason preventing Australia from being
an efficient shipbuilder.
He concluded, however, that Australia could not even 'be close to being an
efficient shipbuilder' unless there was 'a genuine strategic approach' to building
ships and which ships you are going to build. He stated:
Simply doing one-off or two-off ships, particularly if they
are very large and require a very high investment in infrastructure, which is
unlikely to ever be used again—our demand for another big ship is probably 30
years away—would be highly questionable.
Figure 6.2: ANZAC Class Learning Curve productivity levels
The graph illustrates productivity improvement through
continuing work on the same design. Experience with the ANZAC Class program
shows that a short series of ships, like the two Auxiliary Oiler Replenishment
ships, is not long enough to develop improvements in shipyard learning. An
experienced naval shipyard with constant throughput of work would normally
expect a learning curve of 90–94 per cent between first and second ship. It is
important to note that, because of the peaks and troughs associated with naval
shipbuilding in Australia, the ANZAC Class program did not achieve a
corresponding learning curve effect until the fifth ship.
Mr Thompson, AMWU, understood that there were productivity gains from
building a number of ships. He noted Mr King's observations regarding the ANZAC
frigate project, which by ship No. 6, was producing the vessels at world's best
practice. A few of the workers engaged in the project told Mr Thompson that, in
the end, they were 'building those ships with their eyes closed because of the
The union accepted that, from a value for money perspective, building a new
class of ship from an existing design in a new shipyard costs more than later
ones. In Mr Thompson's view, this fact reflected normal results in any
manufacturing endeavour and that building the two supply ships in Australia
would be no exception.
He argued, however, not to assume that the European shipyards do not face
similar start-up costs. He again cited the limited experience with AORs:
It has been a long time since the Spanish built the Cantabria,
which was commissioned in 2010. The Korean ship is a new design. Steel for the
first ship [for] the UK was only cut last month on 27 June.
Mr Dunk also agreed with the proposition that if the supply ships were
to be built in Australia then a two-ship build was not going to achieve
economies of scale'.
He cited the ANAO report on the AWD, which basically indicated that after completing
ship No. 4 then 'you are in the ballpark of competitiveness'. He stated
I do not necessarily accept that parts of the ship could not
have been built here for maybe some additional cost, that is to be seen, and
maybe some slippage of the schedule, and that is to be seen as well.
Mr Hamilton-Smith similarly appreciated the fact that a build-up of two
ships might not produce economies of scale in contrast to producing a run of
six such ships where there would be some benefits. Nonetheless, he sought to emphasise
the point that Australia presently faces a particular issue, which is 'to cover
the valley of death'—to keep the skilled workforce in place and Australian
capabilities in position for what is to follow. In his opinion:
The decision to fit these two ships offshore is going to hurt
Mr Burns noted that recently the New Zealand Navy announced it was also going
to replace its replenishment ship. In his view, the opportunity existed for Australia
to enter into a partnership with New Zealand to have a three-ship arrangement.
Reputation of South Korean
As noted earlier, one of the tenderers is Daewoo Shipbuilding and Marine
Engineering (DSME) of South Korea. It should be noted that in 2006 the Foreign
Affairs, Defence and Trade Committee acknowledged that the South Korean
shipyards were recognised and highly regarded for their efficiency in producing
Their business model is based on high-rate production and
they have forward orders running for many years.
At that time, Dr Stephen Gumley, then CEO, DMO, told the committee that
the production capacity of the South Korean shipyards was 'just phenomenal'.
Indeed, Lieutenant General David Hurley recalled a tour of those yards:
...we...asked the Koreans if they would be interested in building
a 20,000- tonne LHD, they looked down their noses because they 'don't build
tugs'. It was just a size they do not consider...
The reputation of the South Korean shipyards remains high for their
productivity. Mr King referred to South Korea as the specialists in tankers—where
in one yard alone, they are 'delivering a ship every nine days'.
He noted that AORs are similar to tankers and that even other countries with their
own naval shipbuilding industry look overseas to acquire their large
replenishment ships. He gave the following example:
Norway, who is a specialist shipbuilder, a renowned
shipbuilder, who produces offshore vessels all the time—probably the world's leading,
certainly up there, offshore vessel builder—is buying its AOR from Korea. So
there is a country with a well-established, renowned capability in shipbuilding
that has chosen to buy its AOR from Korea.
In respect of DSME, Defence informed the committee that it was one of
the world's best and most prolific shipbuilders in the world, having the
highest of reputations for tanker construction. It noted that DSME had 148
commercial and naval vessels currently on order worth a combined $US 44 billion
and had built over 1,000 commercial and naval vessels, including more than 330
commercial tankers, to which the potential AOR Aegir 18A design is a variant.
Furthermore, as well as the Norwegians, DSME was currently in contract with the
United Kingdom Ministry of Defence for the Royal Navy's MARS (Military Afloat
Reach and Sustainability) Tanker.
According to Defence, Navantia was a leading and 'a proven shipbuilder
with experience with AOR design and construction, including the Cantabria
in 2008 and the Navy's two new LHDs. The Cantabria deployed to Australia
during 2013 and 'operated very successfully' with the RAN.
Furthermore, Defence noted that in recent years, Navantia had undertaken the
construction of naval vessels for a number of different navies—those of Spain,
Australia, Norway, India and Venezuela. It explained further that the Cantabria
class design was 'a development of the earlier Auxiliary Oiler Replenishment
(AOR) Patino commissioned in 1995, and was built using the same shipyard
processes as the Spanish and Australian Landing Helicopter Dock (LHD) ships'.
According to the DMO:
The Spanish shipyards have long established suitable
facilities and construction techniques, with shipyard familiarity extending
established processes across other recent successful construction projects. The
Spanish shipyards would use the same design teams, common building procedures
and standards, and build strategy for potential Royal Australian Navy (RAN) AOR
ships as undertaken for Cantabria and other recent programs.
There would be no requirement to re-engineer the block size
or other aspects of the design as would be required to undertake construction
by local Australian industry (noting it has been independently recognised that
such re-engineering effort negates any learning curve and productivity-related
The Navy League of Australia, which strongly supported the notion of
Australia maintaining shipbuilding capability, drew a parallel with the UK,
which also had a similar need to sustain a naval shipbuilding program. It
As the aircraft carrier project draws to a conclusion the Type
26 frigate program assumes great importance in sustaining industry capability
in the UK. Submarine capability is committed long term to the Astute class and
the SSBN successor program. It is significant that the order for 4 Royal Fleet
Auxiliary MARS 37,000 tonne fleet tankers was placed in Korea with Daewoo. They
are being built to a British design by BMT Defence Services.
BAC Cantabria blocks
built by Navantia in Cadiz, Spain
Figure A: Typical block under construction in Spain (462
Figure B: Aft superstructure block under construction in Spain.
Australian construction of this block required it to be constructed and lifted
as four separate blocks due to manufacturing and lifting capacity restrictions.
The League also understood that Norway, as Mr King mentioned, was
acquiring a similar but smaller ship from the same builder and had considered
that their domestic shipyards would benefit more from building smaller, higher
value, specialist vessels.
The League was of the view that there were cogent reasons for Australia placing
orders for the two support ships overseas. It argued that the government's decision
to call for a restricted tender for the construction of the two ships to
replace HMAS Success and HMAS Sirius appeared essentially
pragmatic— a decision which faced the reality of shipbuilding in Australia.
The committee agrees that the productivity of some overseas shipyards
such as those in South Korea, is impressive. Even so, submitters pointed to other
considerations, such as broader economic benefits, through-life support and
national security, that may well override considerations based on purely the
cost and schedule of a build. For example, Mr Dunk supported the argument that
factors other than
the cheapest price need to be taken into account when acquiring a naval vessel.
In his view:
These factors can be broadly considered as the mitigation of
strategic risk through the development of an industrial base that we need to
have, the associated development of skills and expertise for the longevity and
sustainment of that industrial base and the economic benefits of doing the work
in country through factors such as increased employment, return to the
government through taxation, innovation and potentially export.
In the following section, the committee considers the economic benefits
of having an Australian build including consideration of through-life costs.
Contribution to Australian economy
Naval shipbuilding makes an important contribution to the Australian
economy. Mr Simon Kennedy, Adelaide Ship Construction International and Smart
Fabrication, wrote of the positive returns on investment should the supply
ships be built in Australia:
Every dollar spent on a ship or submarine within Australia
goes further than the initial transaction. Australian primes engage Australian
manufacturers who engage Australian subcontractors. The training and
development required to build the ships and submarines not only contributes to
our local economy, but also our local knowledge and skills base.
He argued that if the Navy’s auxiliary supply ships were to be built
overseas, the flow-on effects of each dollar spent would not be felt in Australia.
We would be investing billions of dollars in an overseas
economy, in overseas communities, instead of our own. It would be detrimental
to Australia’s knowledge and skills base and akin to shooting ourselves in the
An ASC paper on Australia's shipbuilding industry also noted the advantages
that flow through to the national economy from investment in the Australian
naval industry—an advanced manufacturing, high value-add sector. The paper
referred to studies on the economic effects of projects such as the ANZAC Frigate
and the Coastal Mine Hunters projects showing that 'basic benefits to the
national economy from in-country construction are nearly double the value of
the investment'. Taken together with the flow-through effects of in-country
construction, it argued that 'the human capital generated by large projects and
innovation spill-overs from in-country design and development work, contribute
substantially to the national economy'.
It also referred to generating innovation and thus creating even greater
According to the Australian Industry & Defence Network Inc, naval
shipbuilding directly employs some 6,000 people and indirectly nearly 15,000
people. It stated further:
The industry makes a contribution to the Australian economy
of between (conservatively) $1.5 billion up to around $2.3 billion (based on
total multipliers) per annum.
Around 7,400 full time equivalent (FTE) jobs across Australia
can be attributed to the production of naval vessels by the five largest prime
contractors in the industry. In addition, up to 7,560 FTE jobs can be
attributed to the activities associated with through life support of naval
In the Network's view, more often than not the Defence Department's
value for money (VFM) criteria only considers the short term acquisition costs
and this drives procurement often to an overseas supplier. Furthermore, that 'a
more holistic "Whole of Life" VFM criteria would ensure a more
realistic appraisal of competing bids'.
The ACIL Allen report to the Australian Industry Group, Naval Shipbuilding
Through Life Support, produced the set of figures quoted above, including
the potential $2.3 billion contribution from naval shipbuilding and through-life
support to the economy. This report also noted other significant economic
benefits—technology transfer, transfer of expertise, and improved practices in
areas such as quality assurance, business planning, sub-contracting and dealing
with Defence. It drew attention to the 'hidden but real, financial costs that are likely to
a decision is taken to source ships from overseas or between different
to Australian design, build and sustainment'. One of the key considerations was
the possible additional costs to maintain the vessels throughout their service
It should be noted that in response to a question about the economic
benefits that flow through the economy from government spending in Australia on
naval acquisitions, Defence offered some qualification on the statistics
provided to the committee. It advised that when assessing the economic impact
of a project, three issues should be kept in mind. According to Defence, they
were not mentioned in evidence and suggested the benefits of building the
Navy’s auxiliary supply ships in-country may have been overstated. Defence then
explained the relevant issues:
All Defence capital equipment projects must ultimately be paid
for by Government by raising taxes or reductions in other areas across the
public sector to maintain a balanced budget. Consequently, defence capital
equipment can only be purchased at the cost of displacing or 'crowding out'
other areas of activity elsewhere in the economy. This applies irrespective of
whether the equipment is produced domestically or sourced from overseas.
Many of the resources already used within Australia for the
production of defence capital equipment, or earmarked for potential use, can
eventually be deployed in other parts of the economy; possibly in more
productive applications. If Australia is required to pay a substantial price
premium to ensure that an item of defence capital equipment is produced
in-country, it suggests that more productive uses for these resources are
available over the longer term. Consequently, a price premium is normally only
justified for the domestic build of equipment if the equipment has an
especially high military-strategic value to the Australian Defence Force and
overseas supply is impractical. The construction of an auxiliary supply ship in
Australia does not satisfy either of these criteria. Moreover, any payment of a
price premium will erode the purchasing power of the Defence budget and require
that Defence reduces its expenditure on other military capabilities. A premium
therefore has a direct opportunity cost.
Although investing in the domestic build of an auxiliary supply
ship will generate so-called multiplier or flow-on effects and may create
so-called spill-overs by contributing to broader workforce skilling, it is not
clear whether these effects are any higher than if the investment in the build
had been re-directed and used for other purposes. That is, it is not clear that
the multipliers or spill-overs associated with building the ship are any
greater than those associated with other types of economic activity.
When considering the costs of an acquisition, industry participants
emphasised the need to take account of the through-life expenses which may be
many times greater than the initial cost of acquisition. Indeed, the Foreign
Affairs Defence and Trade Committee noted that as a rule of thumb applying to
large constructions, including a typical warship, most estimates suggest 30 per
cent in initial acquisition costs compared to 70 per cent through-life support
Likewise, Mr Fletcher noted the significant through-life support costs as
compared to the purchase cost:
...one of the challenges before our nation is for the Defence department
to seriously look at whole-of-life-cycle costing when making procurement
decisions, because generally whole-of-life-cycle sustainment cost is up to two,
three or four times the procurement cost, so you get a very different answer if
you model whole-of-life-cycle costing versus the initial procurement.
Mr Fletcher also stressed the point that the initial penalty for upfront
procurement in Australia would be defrayed, if the 'whole-of-life-cycle costs
and the information, knowledge and skills base is preserved and maintained for
future upgrades and sustainment of those vessel'.
Likewise, Mr Hamilton-Smith argued that the decision to build off-shore 'will
cost the Commonwealth government far more through the full life cycle than any
possible savings made in the initial procurement'.
The committee has already noted that investment in infrastructure may
have long-term benefits for the costs in maintaining and upgrading vessels:
that by constructing vessels in Australia, the economic costs of maintaining,
repairing and refitting large naval vessels throughout their operational lives could
Thus the savings generated by having the infrastructure available for the
maintenance and upgrade of the Navy's fleet should be a major consideration.
But the argument about through-life support also extends to the know-how and
the skills base needed
to sustain and upgrade the fleet. In other words, if Australia is to maintain
and modernise its naval vessels, it needs an experienced, knowledgeable and
productive workforce to repair and service these vessels throughout their
Some suggest further that naval ships should be built in Australia so that the
country will acquire the knowledge and experience necessary to maintain, repair
and upgrade its vessels.
There is no denying that the AWD project has run into trouble and that
productivity is a problem. As the work on the second and third AWD vessels
progresses and the skills base and experience continues to develop, the
committee understands that further productivity gains could be anticipated. The
committee accepts, however, that the benefits that derive from economies of
be expected with the two-off build of the replenishment ships. Furthermore, the
committee is aware that some overseas shipbuilders, notably the South Korean
shipyards, have an impressive and proven track record in producing large
tanker-like vessels cost-effectively and without delays.
Even so, the committee notes that cost and schedule are not the only
factors that should be taken into account when considering the procurement of a
major naval acquisition. The committee has 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 of a highly skilled
the growth that comes through research and development, knowledge transfer and
the benefits that innovation bring to the wider economy. The committee also understands
the importance of having the skills base, experience and local know-how necessary
to support the vessel throughout its operational life. This self-reliance is
central to national security and is discussed further in the following chapter.
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