Dissenting Report by Government Senators
The draft report into the Economics References Committee's inquiry into
the Future of Australia's Naval Shipbuilding Industry strikes a discordant
On the one hand, the report recommends that the Australian Government should
conduct a competitive tender process. It makes this recommendation largely
based on evidence that an open tender process is required to get the best value
and fitness for purpose, for the Australian taxpayer. Yet, on the other hand,
the report seeks to limit this tender process to ignore the potential of some
options (such as the Japanese Soryu class) and restrict it in favour of
Australian shipbuilders regardless of the impact on Australia’s defence
capability. It is as if the committee has boldly declared that a limited tender
process would be the defence of equivalent of having our left hand tied behind
our back; only then to declare that we should instead tie our right hand behind
Coalition Senators support the government conducting a competitive
evaluation process but do not support putting arbitrary restrictions on such a
process. The restrictions that the committee has recommended are naïve and fail
to consider the evidence that the committee received on the complexities of
defence contracting in general, and the realities of the Future Submarine
contracting process in particular.
First, defence contracts involve a high level of complexity and are
beset by the problems of asymmetric information. In theory a competitive tender
process can lead to the lowest price for government and potentially value for
money. In practice, the contractor almost always has more information than the
government about the costs and risks of a project. In addition, the contractor
a strong bargaining position, once the contract is signed. In such an
environment, a contractor can bid for a low price ex ante, but then
claim that there have been cost overruns ex post.
The government has limited ability but to agree to the overruns given that the
government can hardly switch contractors mid-contract. The long history of cost
blowouts in defence contracts, both here and overseas, is testament to this
With that in mind before a contract is signed, the government can
instead enter into contracts that allow for more of a partnership between
the Defence Department. Sometimes such contracts are known as an alliance
contract. These contracts create more incentives for the contractor to share
the Government and help reduce the problem of asymmetric information.
As a result, having a competitive tender process before a
contract is signed
is not sufficient to ensure a competitive outcome after a contract is
The committee's focus on the tendering process exclusively is an incomplete
consideration of the issues that beset defence contracting.
Third, Coalition Senators support the Government's position that defence
procurement decisions should not compromise Australia's defence capabilities so
to meet economic development objectives. Decisions about this next generation
of submarines need to be made on the basis of what is best for our national
security, our Armed Forces and for the personnel who will serve in them in the
future—not what is best for a particular region or what might be best for a
particular company in Australia. Of significant concerns is that the committee
has not made a clear statement on this crucial principle.
Fourth, the delays in establishing the Future Submarine project have put
time constraints on when decisions must be made without creating a dangerous
security and capability gap for Australia's defence forces. It is a matter of
record that under
the former government, while some work was done on the Future Submarine
project, the level of achieved progress was very limited. Over the last six
years, Defence spending dropped to levels not seen since 1938 – a cut or
deferral of some $16 billion.
The delays were clearly a matter of concern. Mr King noted, for example:
I was worried about our lack of progress on Future Submarine
over many years. I was worried about how we were going to break the deadlock of
progress. I was very worried about how we were going to come up with solutions
to meet Australia's needs.
Finally, as a general point, it is notable that the Executive Summary of
the report, while containing extensive quotes from various participants to the
inquiry, neither quotes nor mentions Mr Warren King the Chief Executive Officer
of the Defence Materiel Organisation. To ignore the evidence of so impressive
and authoritative a witness in this key section of the report is a serious
error and the entire report is weaker for it.
Response to recommendation 1. The draft report calls for a
competitive tender limited to between two and four participants.
A tender process that arbitrarily limits participation on the
a quota rather than merit is not consistent with achieving best outcomes for
Navy and for the taxpayer.
A broader examination of the global market is a more reliable method
of ensuring decision makers have visibility of the full array of options
available and will thereby ensure the best outcomes for Navy and the taxpayer.
Response to recommendation 2. The draft report calls for a
competitive tender process for the Future Submarine program to be initiated
immediately. It claims that there is enough time to facilitate this process
without the threat of a capability gap arising if that tender goes to market
immediately. Furthermore, it claims the timeframe only offers the flexibility
to do this on account of the work undertaken by the previous government in
respect to the Future Submarine program.
The assertion concerning the work undertaken by Labor is not
supported by testimony at the inquiry.
This is a disingenuous claim for credit in circumstances where
the opposite is true. Labor delayed the Future Submarine program
by two full White Paper cycles. This leaves the Future Submarine program in a
position of heightened urgency than would otherwise
be the case.
Response to recommendation 3. The draft report calls for an
Australian build at all costs. This could give rise to national security
outcomes being compromised by a prioritisation of industry policy over defence
policy and it could force the taxpayer to underwrite an economically
While we want to see the Future Submarine contract awarded to
Australian shipbuilders, it must also be the result of a competitive tender
process and it must be awarded on merit. This will ensure that Navy receives a
fit for purpose product of the highest standard while Australian tax payers
receive the best possible value for money.
The committee heard evidence from Dr John White that an open
tender was the best way to stress test claims by manufacturers that they are able
to meet Navy's requirements while constituting the responsible expenditure of
It is therefore both unwise and entirely unnecessary to compel
that special consideration be given to Australian-based tenderers.
Recommendation 3 effectively relegates national security policy
to second place behind industry policy.
Recommendation 3 also compels government to commit to an
Australian based sustainment programme even though the Prime Minister is
already on the record doing exactly that.
Response to recommendation 4. The draft report calls on
government to formally and publicly rule out a MOTS option for the future
submarine and for government to limit its energies to a new design or a
son-of-Collins option and
to suspend any investigations elsewhere.
Being unnecessarily prescriptive by publicly discounting certain
options might send signals to the market that reduce price competition in a
Response to recommendation 5. The draft report calls for
to take responsibility for cultural reform in the Australian Defence industry
so as to 'engender a co-operative environment in which industry is encouraged
to marshal its resources in support of Australia acquiring and building a highly
capable fleet of submarines'.
It is my view that Australian shipbuilders must be competitive in
their own right. To impose upon Government a responsibility to oversee
a program of cultural reform within private sector shipbuilders represents a
quasi-nationalisation of the industry.
Industry representatives, unionists and interested parties assured
the committee that Australian shipbuilders are globally competitive, meet
productivity standards and have the capacity to offer world's best practice in
the submarine building space. Imposing direct managerial oversight by
government would be counter-productive to maintaining these competitive
Senator Sean Edwards Senator
Deputy Chair Senator
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