Executive summary and recommendations
This report is the committee's third on the future of
Australia's naval shipbuilding industry. Although the committee's first and
second reports dealt with the tender process for the navy's new supply ships
and the pre-tender process for the future submarines respectively, the
committee also made findings applicable to the broader topic of Australia's
future shipbuilding industry. In this report, the committee builds on its
earlier findings and recommendations.
New supply ships
The committee accepts that in many cases a limited tender
may be the most sensible, strategically prudent and cost-effective means of
acquiring capabilities for the Australian Defence Force. It is firmly of the
view, however, that, wherever possible, options under consideration should
include Australian defence industry participation as well as thorough
assessments of the economic and strategic benefits of domestic involvement.
In this regard, the committee believes that the limited
tender process for the new supply ships failed to adequately account for the
potential for Australian industry involvement. Indeed, the committee remains
concerned that the process neither adequately nor holistically assessed the
economic and strategic imperatives of such an acquisition. The committee is
also concerned that Australian industry was given no formal opportunity to
engage with the process. This limited the depth of understanding in relation to
contributions that the Australian defence industry could make to such a
In the committee's view, the process the government adopted has
damaged industry confidence and harmed the Australian Defence Organisation's
(Defence) relationship with Australia's defence industry.
Recommendation 1 paragraph
The committee reaffirms recommendation 1 from its initial
report that the tender process for the two replacement replenishment ships:
be opened up to allow all companies, including Australian
companies, to compete in the process; and
make clear that a high value will be placed on Australian
content in the project.
Despite the announcement that Defence would conduct a
competitive evaluation process, the committee remains deeply concerned that
this process falls short of a truly rigorous procurement process for the
largest and most complex defence program in Australia's history—the future
Evidence given during Budget Estimates in June confirmed
that the competitive evaluation process was not designed to deliver three
competitive contract options; would not produce accurate costs and build
schedules; nor would the resulting designs be of a 'mature' nature.
Evidence was also presented during Budget Estimates that
Japan's involvement in the process to acquire the future submarines is based on
political imperatives rather than merit. This is concerning given that the government
has restricted the potential involvement of Australian industry, and other
international bidders, on the basis that the competitive evaluation process was
a merit-based process. Evidence clearly indicates that this is simply not the
While the committee agrees that timeliness is an important
consideration, it remains strongly of the view that the government's decision
not to undertake a competitive tender is poorly-considered and highly risky.
Noting the strategic importance of the future submarines, the complexity of the
undertaking and the costs involved, the committee believes that further caution
in conducting the tender is warranted.
The committee is also concerned by recent reports that the
government is considering the acquisition of eight submarines instead of 12.
The 2009 and 2013 Defence White Papers outlined the strategic rationale for the
quantum of vessels. Navy confirmed recently at Budget Estimates that the
threats underpinning this strategic assessment had not diminished.
In a speech to the Australian Submarine Institute in March
this year, the Minister for Defence said that '[b]y 2030, half of the world's submarines
will be in Australia's broader strategic region'. Evidence given to this
inquiry by submarine experts reaffirmed the need for 12 submarines to provide
an effective submarine force. The committee is particularly concerned that a
potential reduction in the number of future submarines from 12 to eight does
not reflect the strategic realities that the Defence Minister has recently
acknowledged, nor would it result in an effective force to meet both current
and future challenges.
It is also the view of the committee that eight submarines
will not provide the certainty that industry requires to ensure that the
economic value of this project is optimised.
Based on evidence given by expert submariners and industry,
the committee is of the view that an acquisition process that is competitive,
allows for maximum participation from prominent submarine builders and is
complete by the end of 2016 would ensure that the first of 12 future submarines
would be in the water by the middle of the next decade.
Noting this, the committee makes the following recommendations:
Recommendation 2 paragraphs
The committee recommends that the government adopt the
following procurement process to acquire 12 future submarines:
a twelve to eighteen month procurement process, involving a
Request for Proposal, followed by a Request for Tender;
invite the most prominent and relevant submarine designers to
participate in the process, encompassing Germany, France, Japan and Sweden;
conduct a Funded Project Definition Study; and
down-select two submarine builders to provide full design
definition and fixed priced contract bids.
The committee also reaffirms recommendation three from its
report on future submarines that:
Given the weight of evidence about strategic, military,
national security and economic benefits, the committee recommends that the
government require tenderers for the future submarine project to build,
maintain and sustain Australia's future submarines in Australia.
Also, given the national significance and complexity of
the project to acquire the future submarine, the committee recommends that the
government establish a Naval/Submarine Construction Authority as a 'non
corporate Commonwealth entity with appropriate industry and defence expertise
and authoritative leadership to deliver the future submarine'.
The committee recommends further that Defence heed and
apply the lessons learnt from the AWD regarding the transfer of knowledge and
those of the Collins Class submarine about the consequences of being a parent
navy to the future submarines.
Air Warfare Destroyers (AWDs)
It is clear from the evidence presented to the committee
that the source of the AWD project's problems can be attributed to a poor
understanding and inadequate analysis of cost and schedule, and poor or
inadequate management at the Alliance and Commonwealth level. From the
beginning, decision-makers failed to appreciate the difficulties in
transferring the design work to Australia, where industry was trying to meet
demands created by fitting out the Landing Helicopter Dock ship (LHD) and
starting on a 'first of class' vessel. There are clear lessons to be learned
from the AWD project. It is important to note that a number of factors that
affected productivity were outside the control of the people working on the
ships. Two systemic issues identified by experts such as Dr John White are
that the project was starting from scratch, and the lack of long-term strategic
The committee is deeply concerned that the government has
not released either the Winter Report, or the more recently conducted
comprehensive cost audit of the AWD, even in an abridged form. The committee
calls on the government to release these documents as a matter of urgency to
assist industry and subject matter experts to understand and learn from their findings.
Recommendation 3 paragraph
The committee recommends that the Australian Government
provide the committee with a copy of the 'forensic audit' of the AWD program.
The committee also repeats its recommendation contained
in its first report that the government release the report of the independent
review of the AWD program (also known as the Winter Report).
The committee understands that it may be appropriate for
a public version of both documents to be released with classified material removed.
One of the most important observations presented to the
committee is that industry can only produce when the government purchases—that
the industry 'cannot be competitive if it has no work'. The committee
understands that Australia's defence industry cannot survive a 'stop-start'
order book: that it needs a consistent and reasonably predictable local
workload to be sustainable and competitive. In the committee's view, it is
unacceptable for the government, as sole customer, to criticise the industry
for poor performance when many of the problems originate from a lack of
government foresight, and the 'feast and famine' cycles inflicted on industry.
While the predicted gap in shipbuilding activity, sometimes
referred to as the 'Valley of Death', is now closer than it was at the time the
committee tabled its first report, the committee remains of the view that the
government could and should be doing more to maintain a viable naval shipbuilding
industry in Australia. Witnesses have suggested maximising Australian content
in the construction of the new replenishment ships, as well as bringing forward
the construction of the Pacific patrol boats and the future frigates.
The committee understands that the 2015 Defence White Paper
will state the government's priorities for major naval acquisitions. The
committee, however, believes that important decisions have already been delayed
for too long and the government should give clear and certain indications of
its intentions to acquire the future frigates, and to maximise Australian
content in the new supply ships.
Recommendation 4 paragraph
The committee recommends that the Australian Government
take measures immediately to reverse the perilous downturn in Australia's naval
shipbuilding industry, reduce the impact of the 'Valley of Death' and enable a
program of continuous build by:
mandating a hybrid build for the first Auxiliary Oil
Replenishment Ship and an onshore build for the second;
mandating that all 12 of the future submarines be built in
fast tracking the build of the Pacific Patrol Boats and the
replacement of the Armidale Class Patrol Boats; and
bringing forward the construction of the Future Frigates.
Strategic naval shipbuilding plan
The committee underscores the importance of the government
keeping the Australian defence industry informed of its future naval
requirements so it can align its planning, investment and research and
development to meet Defence's long-term needs. Without doubt, there is a need
for Defence to take a more coherent and strategic approach to planning its
major naval acquisition programs and to consult with industry when planning.
The committee strongly supports the call for a long-term strategic plan, which
should be developed within the context of Australia's broad national strategic
framework and take account of how best to:
optimise the use of Australian small and medium enterprises (SMEs)
and overseas subsidiaries established in Australia;
build on existing infrastructure and encourage future investment
in people, facilities and research and development to ensure that Australian
shipyards and their complementary supply chains are prepared to participate in
and support Australia's naval shipbuilding industry;
provide the Australian defence industry with a clearer sense of
Defence's future plans, priorities and intentions, providing industry with the
confidence to invest in Australia's naval ship building industry for the long
term and to make informed and better targeted investment decisions;
smooth the 'peaks and troughs' that have characterised Australian
naval shipbuilding; and
maintain a constant base load of work that would sustain a viable
naval shipbuilding industry in Australia.
The proposed enterprise-level Naval Shipbuilding Plan should
complement the Defence Investment Plan and provide a certain and reliable
indication of Defence's future acquisition program, with sufficient information
to enable the Australian defence industry to deploy resources with confidence.
Based on previous reports and the evidence before this inquiry, the committee
makes the following recommendation.
Recommendation 5 paragraph
The committee recommends that the 2015 White Paper is
prepared in such a way that all procurement proposals are costed and scheduled
realistically, and informed by the need to have a continuous build program for
The committee understands that, following the release of
its 2015 Defence White Paper, the government will also publish a Defence
Investment Plan and an enterprise-level Naval Shipbuilding Plan.
The committee recommends that both documents take note of
the evidence provided in this report about the importance of having a
continuous build program that will sustain a viable naval shipbuilding and
repair industry. Further that both documents, provide:
a schedule of anticipated timelines for the construction and
delivery of all Defence Capability Plan (DCP) projects, with continuity of
production the paramount feature;
a discussion about the nation's future strategic capability
requirements that identifies the industrial capabilities deemed to be
strategically important and Defence's expectations for Australia's naval
an assessment of the nation's existing shipbuilding and repair
facilities, including the shipbuilding supply chain, and predicted investment
a comprehensive statement providing accurate and reliable
information on Defence's future plans for its naval acquisition program that
goes beyond ten-year projections;
a detailed explanation on the acquisition schedule indicating
the reasoning behind it and the major factors influencing demand flows; and
reliable cost estimates.
The committee recommends the establishment of an ongoing naval
shipbuilding industry advocate to work with the Australian Government and the
shipbuilding industry, including supply chain and SMEs. The shipbuilding
industry advocate should advise Defence and industry during the development of
the Defence Investment Plan and Naval Shipbuilding Plan.
Significant capital investment has already been made in the
Australian shipbuilding industry to develop requisite infrastructure and
skills—this is consistent with the establishment of any industry on such a scale.
Evidence presented to the committee suggests that this capital expenditure has
been considered and efficient. With the infrastructure and skills now
available, the industry is ready to transition from an investment phase to a
The committee is concerned that efforts to denigrate
Australia's shipbuilding capabilities have focused upon the conflation of fixed
capital expenditure investments and marginal production costs. This has
artificially inflated the reported costs of ship unit production, rather than
capitalizing the fixed investments separately. These inflated figures have
subsequently been circulated, forming the basis for arguments against the
efficiency of Australia's domestic shipbuilding industry.
Having reached the threshold of capital investment required
to establish the industry, the committee is firmly of the view that the returns
on investment from future shipbuilding projects will continue to grow. The
committee also notes, however, that the Commonwealth Government is the
industry's only effective client and, consequently, it has total control over
demand factors. The government's failure to ensure sustainable demand through
steady and predictable ship orders significantly undermines the industry's
competitive position and the loss of the substantial capital investments.
Evidence to the committee demonstrates that the current
processes for assessing the economic value of domestic shipbuilding projects
are unsophisticated and flawed. Basic cost-based analysis does not fully
capture the economic value of domestic shipbuilding, as shipbuilding
expenditure has an economic multiplier effect: every dollar spent generates a
level of economic expansion beyond the nominal value of the expenditure. This
is in stark contrast to the loss of economic value when the government
The committee also notes that the risk factors associated
with currency fluctuations (including systematic currency depreciation) are
significantly intensified when making overseas ship purchases. This issue is
particularly pertinent given the Reserve Bank's publicly stated objective to
depreciate the Australian dollar. A strong, sovereign, domestic shipbuilding
industry hedges the government against market instability— particularly when
shipbuilding contracts generally extend across multiple years and economic
Recommendation 6 paragraphs
The committee recommends that, given requisite capital
investments have already occurred, and as the industry's only effective client,
the Australian Government adopt an approach to domestic shipbuilding that
ensures sustainable demand in order to realise returns on these investments.
The committee also recommends that, during the
development of the forthcoming Strategic Naval Shipbuilding Plan, the
Australian Government ensure that the Plan recognises the holistic economic
value of any domestic shipbuilding project. It is the strong view of the
committee that the Plan must also acknowledge the economic multiplier effect of
domestic shipbuilding, including that expenditure generates a level of economic
expansion beyond its initial value.
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