Additional Comments by Senator Nick Xenophon
I welcome the Senate Economics References Committee's report,
Part II, into the Future of Australia's naval shipbuilding industry and the
Future Submarine project.
This inquiry was brought about due to serious concerns about the
Government's record on Australian naval shipbuilding since coming to office in
Naval shipbuilding in Australia in the past three decades has been a
story of overall success, with the construction and delivery of several classes
of heavy warships and submarines in Australia to a high standard and within
reasonable budget and productivity expectations.
Much has been learned and much progress has been made in supporting
an industry that has become an important strategic and economic asset to the
When the Government launched a limited tender in June in relation to the
$1.5 billion supply ships procurement it was considered very out of the
ordinary and this committee examined that decision in its first phase.
Before and since the committee reported on the limited supply
ships tender debacle on 27 August, it emerged in the media that the Government
was apparently starting on a course to consider acquiring the Japanese Soryu
The committee rightly resolved to focus on this issue and prepare
a second interim report and has since conducted four further public hearings,
on 30 September
in Canberra, 8 October in Newcastle, 13 October in Melbourne, and 14 October in Adelaide, hearings largely focused on
the SEA1000 project to acquire Australia's future fleet of submarines.
The Chair's majority report captures well the breadth and depth of
evidence gathered by the committee on key aspects of SEA1000.
I strongly support all of the Chair's recommendations.
Additionally, I wish to amplify on some key points that will be crucial
if the Government's wish is to properly deliver the Future Submarines.
A process that appears all at sea
Examining the SEA1000 project and establishing recommendations upon
which the Government might proceed has been carried out against a backdrop of
often contradictory and speculative backgrounding of reporters, apparently by
well-placed Government and/or Defence sources.
Based on media reporting in recent months, a number of contradictory positions
have emerged from within Government, the bureaucracy and the ADF about how
SEA1000 was proceeding. These statements were not only contradictory against
one another but contradicted the stated public position of the Government.
As a result SEA1000 has taken on the appearance of a fraught and
mismanaged acquisition and this represents a significant risk to the future of
one of Australia's most important military acquisitions in the next
For example, on 8 September a news article appeared in some News Ltd
publications and reported:
The next generation of Australian submariners will be put to
sea in boats made in Japan ... [the Government] will select the Japanese-built
Soryu Class submarine to replace locally built Collins Class boats.
On 2 November the Defence Minister gave a speech to the Submarine
Institute of Australia conference in Fremantle and ruled out all current
Military Off The Shelf (MOTS) options for SEA1000 and again asserted that no
final decisions had been made.
But such stories have emerged regularly, raising questions about the
level of reliability Australians can place in the stated position of the
Government and the internal processes of Government in relation to SEA1000.
On 28 October a story appeared in the Australian Financial Review
reporting that an 'international competition' would be staged to select the design
of the Future Submarines,
the source for the story declined to identify themselves and no-one in
the Government has since confirmed this on the record.
Last week at the Submarine Institute of Australia conference the Defence
Minister talked about speculation about a competition, but did not commit to
So again, Australian and international industry and thousands of naval
ship building workers were left with confusion and anxiety in relation to
The Australian head of German submarine designer TKMS, Philip Stanford,
admitted to ABC AM in a story broadcast on 24 October that he wasn't
aware of the process being followed.
Mr Stanford said that he 'believed' a competition was going to be held,
however this has not been confirmed by the Government publically and was
contradicted in the same story by the reporter, who said she had received
background information to that effect from a Government source who declined to
Defence Teaming Centre of South Australia chief executive Chris Burns
told ABC Online, in a story published on 5 November, that industry remained
confused about the SEA1000 process.
The regular appearance of conflicting and unsourced reports, often with
damning 'blind quotes' unfairly critical of Australian industry, purporting to
reveal facts about SEA1000 only to be later disputed or ruled out by Government
or Defence, has made the work of this committee more difficult than it
otherwise might have been.
But for outside observers among Australian and international defence
industry firms, the unions and organisations that represent expertise in the
the conduct of the Government in this process so far appears highly
questionable and most disappointing.
Just what decisions have been made, by whom, upon what basis and what
process is the Government following in relation to SEA1000, remains confused
and clouded in needless speculation.
The Government process appears to be all at sea. Spreading confusion in
relation to SEA1000 is not in the national interest and certainly not in the
interests of Australian naval shipbuilding or the thousands of people who rely
upon it for employment, directly and indirectly.
This selective leaking in other circumstances may well have triggered an
AFP investigation – however this seems most unlikely given the apparent sources
The then Opposition Defence Spokesman David Johnston held that role for
about four years and by the time he entered Government was widely considered to
be well across the Defence portfolio, particularly on matters to do Australia's
current and future submarine capability.
On a trip to Adelaide on 8 May 2013 he made the position of the
Opposition crystal clear to the people of South Australia in relation to the
After beginning a press conference, the then Opposition Defence Spokesman said,
The Coalition today is committed to building 12 new
submarines here in Adelaide, we will get that task done, and it is a really
important task, not just for the Navy but for the nation. And we are going to
see the project through, and put it very close after force protection, as our
number [word omitted from transcript] priority if we win the next Federal
The Defence Minister has since 'nuanced' this statement during Senate
Estimates and Senate Question Time and denies he is bound by it.
However, it is clear that the Coalition did promise to build Australia's
next fleet of submarines in Adelaide and are bound by it.
The people of South Australia and Australia know that the Government
promised to build the Future Submarines in South Australia and will judge the
Government's level of sincerity accordingly.
That the Government deliver on its election promise to have the Future
Submarines built in South Australia.
It is becoming clear that China is concerned about any moves by
to acquire submarines from Japan.
According to a recent report by the Centre for China in the World at
Australian National University, 'A New Australia China Agenda', Chinese
military officers had already expressed a concern that Australia's quest for
twelve submarines can't easily be reconciled with Australia's Defence White
Paper's defence of the homeland security posturing.
ANU's report, Edited by Geremie R Barmé and Ryan Manuel, states in
As Australia has strengthened its alliance with the US, and
as frictions and clashes have complicated the external environment for
countries in the region, the Australia–China relationship itself is being
These concerns from China will be escalating since the Government opened
the door to military technology cooperation in relation to submarines with
According to a report released this month (November 2014) by Professor
Nick Bisley of La Trobe University and Brendan Taylor of the Strategic and Defence
Policy Centre of ANU:
...a further intensification of this relationship in future
will only heighten Tokyo’s expectations of Australian support and potentially
deepen Canberra’s East China Sea entrapment dilemmas. This would be
particularly so were Tokyo to acquire the means for exerting leverage over
Canberra, as some commentators have argued could potentially occur were
Australia to develop any form of technological dependency as a result of
acquiring its future submarines from Japan.
These concerns from China are unsurprising. China has always taken a
keen interest in the military acquisitions of countries nearby and especially
by Taiwan, which it asserts to be a part of China.
However, as former Foreign Minister Bob Carr has recently said publicly,
Australia should be observing a policy of neutrality when it comes to the
escalating disputes between Japan and China.
By moving closer to the Japanese Defence Ministry and Military, seeking
further cooperation and technology sharing in relation to submarines in the
absence of a genuine competitive tender process, Australia is inflaming China
These strategic considerations are a potentially damaging distraction from
normal factors that impact the selection of the Future Submarines.
China is Australia's number one trading partner. Much of the future
prosperity of Australians is directly linked to trade with China. The
Government should not
be risking this by complicating our submarine acquisition with a move closer to
the Japanese military in the absence of a genuinely competitive tender process.
Competitive design tender
A multi-pass competitive procurement process is considered best practice
in defence procurement for large, expensive and complex naval assets.
The committee heard this advice repeatedly from some of the nation's most
eminent operational naval, naval shipbuilding and submarine construction
A competitive acquisition process for a Future Submarine design would
produce the best offers from potential design partners. It creates a process in
the Government defines its needs, design partners produce plans to meet those
needs and estimates what it would likely cost.
Industry advocate Chris Burns, of the Defence Teaming Centre South
Australia, summed up the consensus of many expert witnesses, telling the committee:
You will never know the true potential cost of a project
until you get multiple companies to put their names to dollar figures on firm
According to the Defence Capability Development Manual a multi-pass
decision making process would be followed for a project such as SEA1000:
The need arises (for more than two decision pass points)
particularly in the case of capability proposals of major strategic
significance, that have very high costs or that are politically sensitive.
Proposals for new combat aircraft or for major surface or subsurface combatants
are examples of capability development projects likely to involve additional
Typically Multi-pass decision points would be reached by the Government
to narrow the field and arrive at a final decision of design partner.
However, the Defence Minister says the Government is following a two pass
process for Future Submarines.
A non-competitive process would likely produce a sizeable 'premium'
to the cost of SEA1000, because the Government would not be able to apply
a competitive tension to its sole-source supplier.
Despite the Government deeming SEA1000 a very urgent project and
asserting that a risk of a 'capability gap' was emerging, the Government is yet
to commit to a competitive tender process or competitive project definition
Speculation has emerged that suggests Japan may not agree to a
competitive process. While this may explain the delay in the Government setting
one up, it is
an unacceptable requirement for any potential supplier of Australian
Further, due to the intense speculation around a Japanese submarine
acquisition, any competitive tender process set up in the future may now be
suspected of being a token process by other potential suppliers.
That the Government launch a competitive tender process, including
a funded competitive project definition study and take adequate measures
to ensure transparency and confidence that the process is a real and fair
competition for potential suppliers.
Australian submarine build
This committee has heard no evidence that suggests Australian industry
lacks the capability, productivity, track record or know-how that wold prevent
it from competently building Australia's next fleet of submarines.
To the contrary, the committee has heard expert after expert describe in
detail how Australia is well placed to deliver these submarines in a timely and
Moreover, the wider economic and technological benefits for the country
were quantified by experts such as Professor Goran Roos of the Advance
Manufacturing Council and Professor
at UTS Business School (Adelaide) and Dr Peter Brain, Executive Director
of the National Institute of Economic and Industry Research.
The conclusions on these very conservative assumptions is
that Australia as a country is at least $21bn better off to build in Australia
than to purchase overseas in addition to creating 120,000 man years of
additional jobs in the economy over the life of the project as compared to building
The committee heard evidence from a range of experts that the
through-life benefits of engaging local navy shipbuilding industry, including
but not limited to:
- The strategic advantage of building and maintaining Australia's
essential naval assets in Australia, including and especially during periods of
conflict and tension overseas when Australia should not be reliant upon
The multiplier effects for the economy of spending defence funds in
Australia rather than overseas
Reductions in through-life maintenance and sustainment costs due to
investment in infrastructure and skills during the construction phase
The development of a highly skilled workforce and increased innovation
that comes through research and development and knowledge transfer for the
The project's contribution to national economic growth and employment.
These benefits have been recognised by the Canadian Government in its National
Shipbuilding Procurement Strategy (NSPS)
The tax revenue advantages to Government of engaging local industry,
estimated to be up to a third of the cost of the project, as outlined in
a 2012 paper published by the Royal United Services Institute of the UK.
The importance to South Australia of building Future Submarines in
Adelaide has increased due to the impending closure of Australia's car making
the flow-on effects in South Australia and Victoria of the expected loss of
more than 30,000 manufacturing jobs and many thousands of others in supply and
service jobs that support the car-making sector.
By the Government delivering on its election promise to build Future
Submarines in Adelaide it has the opportunity to offset the serious job losses
South Australia will suffer in coming years.
Indeed, the oft-cited 'Valley of Death', which will see navy
shipbuilding jobs lost due to lack of engagement from the Federal Government in
coming years, is a risk to the nation as a whole, with the potential loss of
approximately 7000 naval ship building jobs
and thousands more in supply industries.
The Valley of Death is already upon us. The Committee has heard that
Forgacs laid-off 110 skilled navy maritime jobs from its Newcastle Tomago yard
due to a lock of continuity in naval ship building work.
The enormity of the Valley of Death will become clear from next year
when work for the Air Warfare Destroyer project in Newcastle and Melbourne
comes to an end, and will worsen from 2016 when work in Melbourne on the navy's
Landing Helicopter Deck (LHD) ships comes to an end.
The Government has the opportunity, and Australian industry has the
capability, to build both the Future Frigates and Future Submarine projects in
Australia from the 2020s.
Carrying out this crucial shipbuilding work in Australia is in the
national interest, in the interests of the Navy and of the Defence Force and
the wider national economy.
Defence industry engagement
It has become regrettably clear that the Government is not engaging
Australian industry adequately, nor is it engaging potential international
design partners in a comprehensive and well-understood procurement process.
Further context for the Government's decision on the replenishment ships
is provided by its decision, also revealed in June, to outsource the construction
12 smaller navy vessels to Vietnam via a novel commercial arrangement with
an Australian bank, and the construction of two ice breakers in Europe.
The committee heard, and I have heard separately outside the committee,
that Australian industry is either being kept in the dark or else the Government
and Defence appears to be 'going through the motions' with local and
This goes against the recommendations of the 2012 ANAO report into
the C27J project, which required that DMO keep Australian industry appraised of
the status of a procurement project and of the process being followed.
Besides being confused about the process due to Government backgrounding
of media in relation to unannounced and disputed decision points, industry has
also been confused by the statements of senior DMO executives and the Defence
For example, DMO Chief Executive Warren King was questioned about
the status of the so-called Option 3 and Option 4, an evolved Collins Class
design or an entirely bespoke design for Future Submarines:
Senator KIM CARR: Explain to me what it is. I am particularly
interested, given that the Commonwealth of Australia provided $20 million in
January 2012 for the funding of SEA 1000. Has all of that process been put aside
so that we can now investigate this question of buying boats from Japan?
Mr King: No, we are still looking at options 3 and 4.
Senator CONROY: So work is still being undertaken on options
3 and 4?
Mr King: At this stage, yes.
Senator CONROY: No work has been scaled back?
Mr King: No ...
Yet in the Senate Estimates hearings in October the Defence Minister
described Options 3 and 4 as follows, referring to the doorstop press
conference he gave to media on 8 May 2013:
I said in that interview that we will pursue Options 3 and 4
unless they turn out to be fantasy. Senator you and I both know that those two
options are fantasy.
This begs the question of why is the DMO carrying out work into design
options for SEA1000 that its Minister considers to be fantasy.
And what is defence industry to make of a process that appears so
conflicted at the top of Defence and Government?
That Defence and Government re-engage with Australian and international
defence industry positively and fairly, keeping them informed of the state of
SEA1000 and the process being followed.
The issue of ASC productivity during the AWD project has become a matter
of public interest since the release of the ANAO report in 2012 and the
Winter-White report in June this year.
The Defence Minister has repeatedly asserted in the media, and in Senate
Estimates and the Senate, variations of:
I inherited a project running several years late and several
hundred million dollars over budget; with man hours per tonne running at 150
man hours per tonne when the benchmark internationally is 60 man hours per
tonne and the benchmark was set at 80 man hours per tonne, so we've got a
On 29 July 2014, the Defence Minister said this to the media in
We cannot go forward with 150 man-hours per tonne in the face
of a reasonably fluid benchmark of about 80. We are approximately double what
we should be – that is not acceptable.
On 27 August the Defence Minister told the Senate:
Hundreds of millions of dollars over
budget, it was two years late. With an international benchmark of 60 man-hours
per tonne, we set the benchmark at 80 man-hours per tonne—and what were they
doing? One hundred and fifty man-hours per tonne. Some of these blocks had to
be reworked up to four times. I owe it, we owe it, to the taxpayer to get this
right. There are eight ships for Adelaide if we can get this right. So instead
of bleating, get onto your mates up there and tell them to lift their productivity.
It is that simple.
The Defence Minister has promised that no more major naval ship building
work will be awarded to Australian industry until 'AWD is fixed'.
However, the committee heard evidence from ASC that these comparisons in
relation to benchmarks by the Defence Minister were misleading.
Martin Edwards, ASC General Manager for Current Operations for the AWD
Project, explained to the committee at the Adelaide hearing the context of
these productivity figures and what the current benchmark figure was for the
current stage of the AWD project:
There has been much commentary about productivity on the AWD
program and its impact on future programs. This has been driven in part by
annual reports by First Marine International, or FMI. These are conducted for
DMO and are an annual activity benchmarking our productivity. FMI use a
productivity measure known as compensated gross tonnage divided by the labour
hours, to benchmark productivity between types of ships and different shipyards
around the world. Compensated gross tonnage is not a measure of a ship's mass.
It is a measure of a ship's volume and complexity and is used to enable
comparison between different ships and shipyards.
The measurement includes all production trades and
importantly project support staff, such as engineers, planners and other
elements of the program. Sixty to 65 hours for compensated gross tonne is
highlighted as the core productivity benchmark that we should achieved.
However, this is only achieved after a number of ships, usually greater than
four or five, of the same class have been built. Of course, we are only
currently building three air warfare destroyers, so we will not get to this
core level. This learning curve effect means that the first ship in a class
always takes more hours to build than the second and the third less than the
second—and so it goes on. This is the same for any shipyard building a new
class of vessel.
FMI advises this effect can increase the core productivity by
about 50 per cent on the first of class. On this basis, the first of class Air
Warfare Destroyer would be expected to be built or to achieve in the order of
120 to 130 hours per CGT. Currently, shipyard building is in the order of 150
hours of compensated gross tonne. However, if adjusted for abnormal factors
such as issues associated with design and scope transfer from other yards to
ASC, we are currently forecasting to achieve somewhere in the order of 132
hours for compensated gross tonne or approximately five per cent higher than
the international benchmarks—however, we can do better. The actual achievement
will only be known when the first of class is completed and delivered; so, at
this time, it is only a forecast. However, based on this, we expect a third Air
Warfare Destroyer to achieve around the targeted 80 to 85 hours for compensated
This evidence to the committee shows that AWD is not running at almost
half the productivity that it should, as the Defence Minister has asserted, but
that it is only slightly off the productivity expected at this early stage of
such a complex project.
The full explanation of AWD difficulties are many and varied and were
covered in detail in the ANAO report of 2012 and the Winter-White report,
completed in June this year.
However, the Government has refused to release the Winter-White report,
despite the Senate passing two motions that I moved to have it produce the
Government secrecy in relation to the Winter-White report has damaged
the ability of analysts, the media and Parliamentarians to understand the
the AWD problems and necessary remedial work required.
This is unacceptable given the Defence Minister says no further naval shipbuilding
will be awarded to Australian industry until the AWD project is remediated.
The Government has promised a remedial program involving bringing in
a number of experienced naval shipbuilding project managers, reportedly from
but there has been no announcement of this program commencing to date and it
remains unknown when the Government intends to roll this program out.
Missing from the Government's repeated attacks on AWD has been any
recognition—bar a perfunctory one-page précis of the Winter-White report—that
the causes for the AWD project's problems stem from its inception by DMO, which
decided to set up a so-called 'Alliance' structure under the leadership of
Warren King, now the DMO's Chief Executive.
The Government appears keen to point the finger of blame at the
Australian naval shipbuilders on the AWD project, promising to halt all major
naval work awarded to Australian industry as a result, but the truth is much
There's a question as to whether the slippage in the schedule was due in
part to the structure of the Alliance from the outset.
I understand that DMO practices may have contributed significantly to
inefficiencies at Australian shipbuilders, especially with lead shipbuilder
That the Government release the Winter-White report immediately,
if necessary removing commercial-in-confidence information, so that the debate
on the Future Submarines and other naval acquisitions can be properly
That the Government commission an independent wide-ranging inquiry of
the Defence Materiel Organisation as a result of its role in the AWD project
becoming a Project of Concern for the Government. Terms of reference should
also include a root-and-branch analysis of the DMO and any consequential
recommendations for reform.
Senator Nick Xenophon
Independent Senator for South Australia
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