Australian industry involvement
Defence recently released its Defence Issues Paper 2014 in which
it recognised its reliance on Defence industry 'to supply and maintain the
equipment required for military operations', which, it reasoned, 'necessitates
a robust in-country industrial base'.
The paper also noted the present day pressures on the industry and the need for
government to make decisions about supporting this industry and setting
priorities within budgetary constraints. With regard to the maritime sector, it
stated clearly that the government wanted to see shipbuilding continue in
Australia, but not at any cost. In this chapter, the committee looks at the
government's decision to undertake a limited tender for the supply ships and
its implications for Australia's local shipbuilding industry.
Australia's Defence industry policy
In 2010, Defence released a new defence industry policy for a 'smarter
and more agile Defence industry base'. It recognised the vital contribution
that the industry makes to Australia's defence and security. The policy
statement had four key elements whereby the government:
sets clear priorities that encourage investment;
commits to establish a stronger relationship between Defence and
seeks to increase opportunities for Australia's defence industry
to identify and make the most of business opportunities within Australia and
places a high priority on removing barriers to the growth of
local firms by giving Australian companies the opportunity to compete for, and
win, work in Australia and global procurement programs based on their merits.
The policy also made clear that Defence had expectations of defence
industry which, it stated, 'must become more resilient and self-reliant if it
is to prosper and grow in the future'.
The 2013 White Paper similarly recognised the importance of Australia having a
skilled, efficient and competitive industry to support Defence and that the
industry needed backing in order to develop the skills required. It stated:
While building new skills within the maritime sector is
important, it is equally important to maintain the skill level of the existing
maritime workforce. The Government is committed to a program of naval shipbuilding
that will ensure that the skills developed during construction of the Air
Warfare Destroyers and Landing Helicopter Dock ships will be available to be
applied to the Future Submarine Program and Defence's broader long-term needs.
To do otherwise would result in a later delivery of the future submarines at a
higher cost than is necessary, thereby resulting in a loss of capability for
In 2013, before being elected to government, the Coalition gave its
commitment to supporting local defence industry:
Consistent with getting best value for the taxpayer, and
effective and sustainable capability for the ADF, a Coalition government
intends that the ADF be equipped by Australian-made goods wherever possible.
The Coalition's intention was not to implement any local content requirements
but to make clear that Australian businesses 'should be given every opportunity
to compete for Defence contracts'.
In its policy statement on Defence, the Coalition indicated that it would work
with the Australian defence industry 'to avoid production troughs by
co-operating closely with companies, big and small, to provide consistency,
continuity and a long-term focus to the purchase and sustainment of defence
Industry's interpretation of the decision to tender for the supply ships
Some in the defence industry, however, interpreted the decision to
conduct a limited tender for the supply ships as a slight to local shipyards.
Mr Andrew Fletcher informed the committee that the South Australian state
government was not consulted prior to the announcement to tender for the replenishment
Similarly, Mr Hamilton-Smith informed the committee that the decision
was unexpected. He explained that the South Australian government was aware of
the argument that the supply ships, by their nature, were less complex than
submarines and air warfare destroyers and that an overseas build could be put
forward. According to Mr Hamilton-Smith, the South Australian government believed
that industry based in the state could take carriage of the project, but just 'needed
to have notice and get on with the job'. They were 'surprised and disappointed by
this decision, suggesting that 'Australian and South Australian workers and
businesses are poorer off for it'.
Mr Burns, ABDI, spoke of an industry that wanted to be recognised and
respected for its significant role in the development and delivery of ADF 'military
capability and the preservation of the nation's sovereignty'. He referred to an
industry that was looking for:
...the opportunity to compete under the construct of holistic
whole-of-life benefit to the nation and on a level playing field, where the
lowest price is not the determinant of value for money; an industry that would
rather collaborate and partner with government and Defence than be subjected to
orchestrated campaigns to discredit it in order to justify going offshore to
acquire low-risk hardware at the cheapest price.
In his view, successive governments over the last few years have 'left
the industry confused'. He suggested that it was an industry that truly
questions whether the Australian government or the department wants 'a defence
industry at all'.
If Defence wants a viable industry then, according to Mr Burns, it 'needs to
support and partner with it, to collaborate and deliver military capability'.
He told the committee that industry was 'extremely disappointed about being
Mr Dunk, Australian Business Defence Industry, also registered
industry's concern with the decision. He indicated that the ABDI concurred with
the government's stated position that 'defence is not a job creation program'.
He also agreed that there could be no doubting that 'the government and the
Australian people expect that the tenders will provide value for money'.
In his view, local industry must be 'considered in defence decisions as having
value and not just treated as a disposable commodity'. He noted:
Industry capability is easy to dispose of or put into
terminal decline but extremely difficult to redevelop should it be required. A
more mature way of thinking about the industrial capabilities needed in country
and developing, sustaining and supporting them is therefore required. The
development of a transparent framework through which these very factors can be
considered and the treatment of industry as a fundamental input to capability
To Mr Dunk's mind, the situation with the Navy replenishment ships was
basically a manifestation of the failure of government to appreciate the value
and contribution of Australia's defence industry. He suggested that the
decision taken on the supply ship was a continuation of the 'repeated inaction
on the part of successive governments and the department to a problem that has
been well known for an extended time'.
In chapter 6, the committee referred to the need to develop the
necessary skills base and know-how to support naval vessels throughout their
This requirement was seen as necessary for security reasons. In the following
section, the committee's focus is on retaining these skills.
Valley of death
There have been a number of people who refer to the potential demise of Australia's
naval shipbuilding. For example, the AMWU stated in a recent paper that the
naval shipbuilding workforce was facing a 'valley of death'. It noted that current
project work ends in three shipyards in 2015: BAE in Melbourne, Forgacs in
Newcastle and Austal in Perth'.
The Australian Industry & Defence Network Inc referred to concerns
raised by industry representatives about the considerable loss of skills,
talent and industrial capability. It noted further in 'some extreme instances
the period of low demand may force the closure of infrastructure and facilities
supporting the industry'.
In this regard, Mr Burns argued that if the supply vessels and the frigates,
are not built in Australia the industry will dissipate:
The problem is that in the future you will want to build
submarines. You will not be able to take the workforce that maintains the
Collins over to build future submarines because the Collins submarines are
going to be going for many, many years to come. That workforce will be stressed
as it is just keeping the Collins going. You have to build another workforce to
build future submarines. If you have lost your shipbuilding capabilities,
particularly the management of shipbuilding, you are going to be presented with
the situation yet again where you have to build a workforce from scratch that
will cost hundreds and hundreds of billions of dollars.
The Government of Victoria acknowledged that while restricting the
tender to Spanish and South Korean shipbuilders sent 'a positive signal to
these countries on our ongoing engagement with them, the potential negative
impact on Australia's local shipbuilding capacities is deep and long-term'. In
its view, the Commonwealth Government has 'an ongoing responsibility to address
the potential "valley of death" for Australian shipbuilding that such
a decision contributes to'.
It highlighted the fact that the Victorian shipbuilding industry had
demonstrated its skills and capabilities in design, engineering, fabrication
and maintenance of naval vessels over many years, which in turn had brought
'substantial benefits to Defence and the national and state economies'. The
Victorian Government noted the need for a commitment to a continuous investment
program and continuity of projects in order for Victoria's shipbuilding
industry to remain viable. It stated:
For several years the naval shipbuilding industry has been
warning the Commonwealth Government (both the current and the previous government)
of the pending 'valley of death' in which there is a substantial gap between
completion of current naval shipbuilding projects and commencement of major new
projects. One impact of this scenario, should it come to fruition, will be
substantial job losses. In Victoria the impact on our major naval shipbuilder,
BAE Systems, would be the loss of up to 1,000 jobs at the company's
The Future Submarine Industry Skills Plan referred to
international examples of where the erosion of skills between projects resulted
in 'some very significant cost overruns on subsequent naval projects'. It then
cited the recent Australian experience with the AWD and LHD programs and the detriment
to the AWD project from having
a 'cold start'.
The problems seen with the current shipbuilding projects in
the last few years are the most direct result of having to rebuild Australian
shipbuilding given its decline after the ANZAC and Collins projects...shipbuilding
projects that start up after any such decline cost more: facilities have to be
built or upgraded, and workers have to be recruited and trained. This also
leads to schedule delays, cost over-runs, low productivity and issues with
production that would have been avoided by an experienced workforce.
The Plan suggested that the best way to maintain experience levels was to
employ people in a continuing shipbuilding project. It noted especially the
importance of retaining a good number of genuinely experienced shipbuilders at
the core of a project.
Maintaining the skills
Mr Burns highlighted that management was the critical element and
maintaining these skills through shipbuilding was a 'very, very important
component that Australia would lose if not building ships'.
...it is more about the management skills above the blue collar
skills. If you are building ships of any kind, to any level, you are practising
those skills and you are keeping that workforce constantly improving and being
more and more productive. At the moment, we are looking at a gap in that
workforce and so those skills and management capabilities are going to be lost.
That is the principle behind continuity of shipbuilding. It is not focused on
Mr Hamilton-Smith argued that Commonwealth governments, as the single
customer, need to realise that if they provide continuity of shipbuilding, then
industry would respond. He stated:
But if we build the factory, hire the workforce, do a run of
ships, close the factory down, sack the workforce and then come back 10 years
later to do it over again it simply will not work. It is wrong to blame
industry for what is essentially an organisational problem where government and
industry need to work more closely together to build a capability that is
Mr Thompson, AMWU, recognised that since its inception, the industry has
been subjected to peaks and troughs. He explained that people who work on
design through to production take time to develop their expertise—'you cannot
turn the tap on and off in finding the skills to be able to acquit this work'. 
He took the committee back to before the AWDs when a 'greenfield industry' rose
from the ashes.
In his words, 'you have to work to build capacity':
The South Australian government built a shipyard for these
three ships. We had no workforce when this project was won. We have built a
capacity, and I think it says in the submarines Defence Capability Plan that it
has cost government and industry in excess of $100 million to reskill the
workforce. I am aware that BAE in Melbourne has built a new welding centre for
the purposes of training apprentices and upskilling existing welders in the
industry. A really important point in Mr King's submission to this inquiry was
that, up until ship No. 6, the ANZAC frigate project was in the same position.
What we are saying here is that the government should have allowed the local
builders to tender for the supply ships to address the interims and the
fall-offs, particularly in Newcastle in Victoria, to address and maintain their
workforce to be in a position to deal with all the other naval requirements
that are needed.
According to Mr Thompson, Australia cannot afford to lose those skills
and repeated the warning that navy shipbuilding was 'facing serious gaps in
work', and that 'if we do not have continuity of work, we do not have capacity'.
He informed the committee there were around 7,000 jobs in the industry and as a
result of the AWD project the workforce had built up to 3,800 on that
He noted that work on the destroyer comes to an end in Newcastle and in
Melbourne in 2015 and finishes in 2016 with the capacity of a number of
shipbuilding yards already in decline. In his opinion there was capacity in the
BAE Victorian facility and in block construction at Forgacs at Tomago.
We have just recently had 110 skilled jobs come out of the
Newcastle Tomago yard. Work on the destroyer will end in Adelaide in around
2019-2020 but will taper off dramatically in the years before. Work on the
amphibious ship comes to an end in Melbourne in 2016 and production work on the
future submarines will not seriously start until the mid-2020s. But we do not
have any details yet about that scheduling. Also we have not seen the new
scheduling in relation to the ANZAC frigate replacement. We obviously welcome
comments from Mr King in relation to the need for a rolling build on that
project. If this were to be brought forward, it would not seriously start production
until the 2020s.
All of that leaves a gap for several years, especially for
the production workers who operate in this industry. The gap in Melbourne and
Newcastle is from 2016 to 2022 and possibly longer. In Adelaide it will be from
2018 to 2022.
In his view, this void could prove 'fatal' and, while acknowledging that
the project to replace the supply ships was very late, the replenishment
vessels could be built in Australia.
He argued that if Australia does not build its naval vessels then it does not
build the capacity and the country 'will not be able to retain the capacity
to build all our other naval requirements'.
He again highlighted the potential loss of jobs and skills:
We have got 3,800 jobs at risk as a result of a 'valley of death',
an issue around some long-term thinking so that we do not have the peaks and
Mr Thompson referred to the decision to have an open tender process in
Australia for the patrol boats, which the AMWU welcomed. He argued, however,
that the skills and capacity that would be maintained by those patrol boats would
diminish the industry's capacity, because 'they do not have the technology and
skills that are required to keep a highly skilled workforce'.
He believed that an open tender for the supply ships would test the union's
Our whole argument here is that our members and the companies
that they work for—and the tender is not drawn yet—have not had the opportunity
to tender for this work.
Mr Hamilton-Smith suggested that the decision about the supply ships 'sends
the wrong message'. He indicated that the South Australian government
appreciated the pressure the Commonwealth was under, but that the current
productivity issues were 'a symptom of previous short-sighted decision-making
from successive governments going back decades'. He argued:
We must avoid the same cycle recurring. Advanced
manufacturing depends on naval shipbuilding and defence as a technology leader.
Mr King acknowledged that since Federation, shipbuilding in Australia
had been a stop-start proposition: that there had never been a proper strategic
approach to military shipbuilding.
He referred back to a period when Australia had not built a ship more than
around 2½ thousand to 3,000 tonne destroyer escort for at least ten years. He
We were buying ships FMS [foreign military sales] from
America, from anywhere, and we were doing the odd ship in Australia very
unsuccessfully in government owned yards. We then privatised the yard in
Williamstown and it, through having a continuous build program, could
demonstrate that even with our labour rates and everything else, we could have
world-competitive shipbuilding industry. If we go all over the shop,
higgledy-piggledy picking it because it has got the word 'ship' in it, it is
likely to be deleterious compared to focusing on what is a real strategic
He explained that more recently and without thinking ahead, Australia
got into a situation where Defence needed to get LHDs and replace AWDs at the
same time. He then explained:
So the peak workforce that we created by having those
concurrencies in Australia was probably...larger, as far as I am aware, than we
have ever seen in shipbuilding since the Second World War. So we created this
peak for that period. 
In his opinion, there was always going to be a reduction in
a valley of death. He argued the need for a strategic approach to Australia's
shipbuilding industry and believed there was now the opportunity to have such
an approach, although Defence and industry would have to lift their
He explained that currently there were three prospects:
rebaselining the AWD and re-establishing it so that we have a
deliverable three ships;
a feasibility study hopefully convincing the government—industry
and Defence—that we can produce viable surface combatant shipbuilding; and
the Pacific patrol boat build for Australia.
Notably, the supply ships did not figure in these proposals.
While some argued strongly in favour of a hybrid build in Australia for
the supply ships to bridge the potential trough in activity, Mr King rejected
the notion that such a proposal would provide the continuity that industry was seeking.
In his assessment, continuity was not at issue because you are welding a metre
of weld—continuity applies by building the same ship many times.
...building remotely and a totally different ship does not give
you continuity. Where you get continuity is building the same type of module
over and over again.
Mr King noted the difference between building an AOR and an air warfare
destroyer or a frigate, suggesting that although the latter are smaller ships,
they are 'very, very complex and they bring into play all the skills that you
need in a complex industry'. He explained:
They bring into play engineering, communications, combat
systems, radars. So what you find is, on an air warfare destroyer, for example,
more than half of the value can be in electronics, engineering, project
management and all those really skilled things. So, if you really want a
balanced, skilled industry, frigates, surface combatants, is where you bring in
all the skills and the continuity.
In Mr King's mind, although the AORs are very large ships and relatively
complex in terms of what they carry, they are not complex in terms of weapons
systems, missile systems and things like that'.
In this context, Defence explained that AORs were 'to be based on existing
designs with minimal modifications to meet the Navy's requirements,
environmental obligations and statutory requirements'.
The primary interoperability considerations are the
compatibility of the replenishment equipment (ie the ability of the new ship to
replenish existing and future warships) and the ability of the new ships to integrate
with RAN and Allied ships on exercises and operations. DMO noted that the
'replenishment equipment is governed by NATO standards, which Australia uses,
that will stipulate requirements for the new Auxiliary Oiler Replenishment
It should be noted that Mr Burns looked at the acquisition of the supply
ships from a different perspective. He noted that the replenishment ships
undertake complex operations as they carry a lot of fuel which they deliver at
sea to up to three ships, requiring a number of systems to do it in all-weather
A replenishment ship operates two helicopters—it is a mini
airport by day and by night. It has to operate in a hostile environment, so it
needs all the command and control capacity to protect itself and have
communications including not just unencrypted but encrypted communications.
There is a lot of opportunity for what we are good at in the industry, to put
those sorts of systems on board a hull.
In addition, the Victorian Government pointed out the particular
requirements of the new replenishments ships, which will require:
adaption to Australia's specific operational, strategic, and
geographical environments; and
some unique Australia systems (such as combat and communication
systems) that will need to be integrated with the new replenishment ship
platform and be compatible with the rest of the Royal Australian Navy Fleet.
In both these areas, the Victorian Government noted BAE's significant
experience due to their role as the prime contractor for the construction of
the LHDs; their lead role in overseeing the Class Frigate Anti-Ship Missile
Defence Upgrade program; and in systems integration activities. Also, according
to the Victorian Government, BAE's intimate knowledge of other in-service
Australian platforms gives the company a distinct advantage in achieving necessary
The Victorian Government suggested that, even if the ships were constructed in
Spain or South Korea, it would 'be vital to their future support and upgrade to
have companies like BAE involved in the project from the beginning, installing
and testing sensitive systems here in Australia'.
Avoiding the valley of death and the future frigates
At the time the government announced the limited tender for the supply
ships, the Minister also referred to the future frigate program, which, he
described as 'a very vital program strategically for the Navy and for
Australia'. He stated that the government had committed $78.2 million to
undertake the design and engineering research 'necessary to bring forward the
program'. According to the Minister, part of the work on the future frigate
program would be to examine 'whether the government could commit to the
construction of some early blocks to ensure that there is no break in
production overall'. He referred to this project as 'a potential follow-on
program with probably at least eight ships based on the F105 Navantia hull that
is currently being constructed in South Australia'.
The Minister informed defence and industry representatives in July 2014 that he
wanted a continuous build but needed their help
to fix the AWD and also design a Future Frigate program that follows on from the
AWD with minimal industry disruption.
Clearly, the acquisition of the supply ships was not seen as integral to
With regard to the proposed future frigates, Mr King argued strongly in
support of an Australian build. He suggested that if Australia did it well and
structure well, 'we would actually be building them in this country at the same
price that we could buy them anywhere else'. In his view, it would be a
legitimate business, with
a real strategic value that needs no additional budget investment to do it: no
subsidies or similar assistance. According to Mr King, for the first time since
Federation, Australia had 'an opportunity for a truly strategic shipbuilding
capability'. He referred to the past 50 years of off and on
constructions—Australia built the ANZACS but stopped; built Success but
stopped; built two FFGs.
He stated further that should the government decide to build the future
frigates based on the air warfare destroyer hull, incorporating an
Australian-made radar, then potentially the program could start at the point of
learning efficiency achieved by the AWDs.
Figure 8.1: Indicative Ship Construction Productivity
To retain the option of building these warships in
Australia, the Government has approved a limited feasibility study into using
the AWD hull for the Future Frigates. This work will focus on continued
production of the current AWD hull, suitably adapted and using capabilities
from Australian companies CEA Technologies Australia and SAAB Combat Systems.
Mr King explained this transition from the AWD to the future frigate.
He noted that the AWD did not deliver when expected, so the last AWD
construction is estimated to be sitting in the area of 2019–20. He explained
that therefore, it was possible, depending on present and future governments,
that the future frigate, if authorised and based on the air warfare destroyer
hull, could pick up and be 'the basis of a proper strategic shipbuilding
In his view, if the future frigate is based on the same hull as the AWD, 'we should
be able to get to world's best practice around about ship 3, and with
Australian radars and Australian technology in it'. He informed the committee
that he had never seen a better opportunity to have
'a real strategic capability that is cost efficient, that no-one has to
apologise for' and that is of value to the taxpayer.
In highlighting the importance of continuity in shipbuilding, he again
stressed his view that the government's initial decision to look at the
feasibility of reusing the air warfare destroyer's hull with Australian radars
and other equipment represented the 'best opportunity to deal with continuity'.
If decisions are made as it is proposed they will be, we
could very much be in that place where we keep the continuity of work and keep
From Mr King's perspective, it was important to remember that the
government's decision to bring forward the frigate program was part of a
package of decisions, which also included the AOR, and involved how best to
allocate work to Australia to ensure continuity and to achieve 'real strategic
Mr King contrasted the prospects of the frigates with that of embarking on a supply
ship that has three times the displacement, with facilities Australia does not
have, with a design that no-one in Australia owns plus a 40 per cent premium.
Mr Thompson welcomed DMO's indications that it was looking at the
feasibility of utilising the AWD platform for the replacement frigates. He
added, however, that the union would want government to reiterate its position
Even so, according to Mr Thompson, the AMWU had concerns about being able to
maintain the workforce built up over the life of the AWD project—some 3,800
skilled workers—until such time as a frigate project comes online.
Mr Dunk also noted that conceptually the frigate proposal was 'a good idea':
It is something we needed to have done years ago—actually
commit to a long-term, ongoing rolling build of naval vessels of a similar type
so that we can get good at it and do it at a globally competitive price.
Mr Dunk observed, however, that at this stage, there was 'only a
to study the early stages of the frigate design'.
Mr Burns likewise thought that the future frigate proposal was a 'great
solution' at this time and strongly supported it.
But he made the point that shipbuilders 'cannot go to the bank with a
prospect', noting also that industry had only heard about 'the prospect of a
future frigate build'. He indicated that work was already being lost and in the meantime:
There was no indication of when that future frigate program
might commence and when we might see the cutting of steel. The problem for
industry is that it has been very hard to go to the bank for the last six
years, and time is running out for a lot of the SMEs out there.
Underlining the need for clarity and certainty from Defence, Mr Burns reinforced
the argument that industry can only make investments based on a sound strategic
Defence capability and acquisition plan. He told the committee that, from an
industry viewpoint, the DCP had not been reliable for a number of years.
in his view, since 2009 industry had not been able to rely on the DCP because
it has 'not been delivered, budgeted or funded'. He stated that industry still
does not have a funded Defence capability plan at this time.
Put bluntly, if 'you do not know and you cannot rely on the plan, you cannot go
to the bank and make your plans'.
He repeated his concern:
Industry cannot invest based on the Defence capability plan
because it is not reliable and it is not funded and so a company cannot go to
its bank and say, 'I need money to sustain myself in order to secure that
Along similar lines, Mr Dunk referred to the Defence White Paper and the
Defence industry policy statement, which, in his view, had never made a
...between the strategic requirement to build ships and the
strategic requirement to maintain them and the crossover in skills necessary to
ensure that we can achieve the maintenance through shipbuilding. It may well be
that shipbuilding in itself is a strategic requirement, but it is not listed as
one as far as the government policy is concerned.
As noted earlier, Mr King put great store on the future frigates
providing continuity but that industry was sceptical having only heard the word
The comments about the lack of clarity and certainty in, and consistency
between, the Defence White Paper, the DCP and Defence's industry policy
statement have been of long-standing concern to industry. Many people,
including Mr King, recognised the need for a strategic approach to Australia's
shipbuilding industry. Indeed, governments of both persuasions have recognised
Australia's shipbuilding industry as a strategic asset. In this regard, a
number of witnesses questioned the appropriateness of locating industry in the DMO.
For example, Mr Burns noted that Defence Industry encompasses 'the whole
defence and has to deal with infrastructure and with information group'. He
At the moment the industry division resides within the
Defence Materiel Organisation. That is the conduit between industry and
Defence. It would be our preference that the industry division be elevated out
of the DMO and up to a more strategic level so that it can look across the
whole of Defence and give industry one conduit into Defence.
Mr Dunk also noted that Defence has an industry division; which should
be demonstrating the link between the ability to build and the ability to
maintain but which 'has not really been demonstrably presented'.
When asked about the government-wide industry policy decision to try to reshape
the Australian naval shipping industry towards being a specialised industry, Mr
Burns responded that:
Again, such a plan would have to be based on a national
strategic plan for acquiring naval ships. The government has to decide what
ships it is going to buy, where and when and through what process, and then the
shipbuilding industry can adjust to that.
In its broader inquiry, the committee intends to examine thoroughly
Defence's industry policy, including where it should reside in Defence. Having
and implementing a national strategic plan for acquiring naval ships and
Defence industry's place in this plan will also be explored.
Australian participation in the construction of the supply ships
Although, the Australian Business Defence Industry did not believe that
it was either feasible or possible to build the entire ship in Australia, it
was of the view that there were options for building some of the ship in
Australia—the fit-out of a hull built elsewhere or the construction and
shipping of the superstructure for offshore integration if the decision had
been taken earlier.
Indeed, Mr Hamilton-Smith, informed the committee that anything was better than
nothing—the more the better. He indicated defence companies, SAGE Automation as
one example, had told him that even with only 20 per cent of the LHD work being
performed in Australia,
they were fully engaged supporting that project in Melbourne from Adelaide. 
While the Victorian Government accepted that the Federal Government had
taken the decision to source the replenishment ships overseas, it strongly called
for opportunities to be maximised for local participation in the project. It recommended
that the government include a requirement for local industry participation in
the Request for Tender that is provided to the Spanish and South Korean
companies on these two ships.
The committee has referred to the suggestions of having a hybrid build.
Mr King explained that some of the unsolicited proposals, of which there
were more than two, had come from companies that submitted multiple
propositions, some teamed and some not. Drawing on that information, Mr King
concluded that the cost to have Australian content in the structural elements
of the ship was 'totally disproportionate to the amount of benefit or work we
would get out of it'.
He reiterated his concern that, to do some structural work in Australia to
achieve the 40 per cent level Australian involvement, a lot of that could
be just pure profit which contributes little to engaging the Australian
workforce. Mr King then referred to the 40 per cent premium for the proposed
hybrid build, indicating that the result would be paying nearly 50 per cent
more for a ship to get 40 per cent Australian content.
Referring to the unsolicited offer, he stated:
I think 'hybrid' implies more build than just maximising
Australian content. I do not want to dance around the facts here, but the
hybrid build on the LHD was quite specific. It was two major items of physical
construction on the island and these electronics and so on. I am not certain
that it would lead to physical construction work for Australian content.
Furthermore, experience told him that:
...whatever is put in as unsolicited proposals worsen when they
become a tender, whether it [is] schedule, price, content. For example, in
other areas we have had the issue of companies saying they are going to have
certain content and we have to be very vigilant to make sure that when we sign
the contract we get that content. We have to be very vigilant, because
sometimes that starts to get challenged. So the prospect out of the unsolicited
proposals was longer to contract, longer to build and far more expensive to
Even so, according to Mr King, Australian industry would be offered
opportunities via the prime to be involved in the project. He explained that, while
the intention was to limit the tender to a Spanish and a South Korean company, one
of which would be chosen as the prime, it would not exclude Australian
He stated clearly that the tender would have 'a specific requirement for an
Australian industry capability plan'.
Mr King informed the committee, however, that he did not expect that the opportunities
for Australian industry participation would be as significant as with the LHDs—that
he did not expect it to be 40 per cent:
On the LHD, with those two island modules,
command-and-control and communications were essentially the Australian
elements. What we anticipate in the AOR case will be the command-and-control
and the communication elements. But we will ask them to maximise the Australian
industry content. Of course, beyond construction there will be the support of
the vessels through life.
While uncertain of what would be involved in terms of the total value of
the project being carried out in Australia, Mr King surmised that, possibly, it
could be as low as 10 per cent.
As noted above, he anticipated that Australian involvement would involve
contributing to electronics and command-and-control systems. He stated:
So the bits that we have encouraged or will encourage
tenderers to offer are bids that are inserted in the structure: command and
control, which is combat management systems; and communication systems—things
like that. They are not part of the structural elements of the ship. 
According to Mr King, the DMO did not have the details yet, 'of whether
it was better to be fitted out there'.
Based on history, he imagined that 'the ship would be brought to Australia for
final fitting out and the cable laying would be done in the overseas yard'.
Defence provide additional information on the prospects for Australian
content in the project to replace the supply ships. It informed the committee
that there would be an opportunity for 'modest Australian industry involvement
during the acquisition phase'. It identified the potential for Australian
industry to become involved as sub-contractors for activities such as:
design and installation of the Command, Control, Computers, Communications
combat system (preference is an Australian developed SAAB 9LV);
specialist Integrated Logistic Support Services; and
develop and provide Royal Australian Navy specific support
Furthermore, Defence stated that the sustainment of the AOR, through the
award of an In-Service Support Contract, would provide significant long-term
opportunity for Australian industry over the life of the ships.
Defence has a defence industry policy that recognises the vital
contribution this 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. Even though,
the Australian prime contractors face significant challenges in meeting
Defence's requirements for acquiring the new supply ships, the procurement process
so far 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, despite Defence's strong conviction that the
domestic shipbuilding industry could not match the cost, productivity or
schedule of the selected overseas tenderers, at the very least it should have consulted
with local shipyards and allowed them to present their case.
The committee also looked at problems facing the industry such as the
potential loss of jobs and skills as work generated by naval shipbuilding tapers
off. Without doubt, evidence overwhelmingly identified the need for, and supported
government having, a national strategic plan for Australia's naval shipbuilding
industry so that it is not subject to peaks and troughs in demand.
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