In its second report, the committee recommended that the government strengthen
and build a more collaborative relationship with Australia's defence industry.
It urged the government to engender a co-operative environment in which
industry is encouraged to marshal its resources in support of a broader
Australian shipbuilding industry capable of acquiring and building a highly
capable fleet of submarines.
The committee made this recommendation because it could see great potential for
Australian industry to become involved as subcontractors in the replenishment
As part of the 2015 May budget, the Minister for Defence announced that:
The Government is prepared to invest in the skills and
knowledge base of the Australian naval ship building industry, and is prepared
to commit to a long-term investment to make sure this important industry enjoys
a future in Australia and these critical skills are maintained.
The First Principles Review, released 1 April 2015, acknowledged that the
outputs of Defence industry should be viewed as a Fundamental Input to
Capability and be integrated into the acquisition life cycle. It stated that
this approach could:
...well mean a more imaginative use of a small number of
potential contractors early in the process or the extension and use of already
existing collaborative mechanisms (such as rapid prototyping, development and
evaluation) at the very early stages of requirements development.
Both statements should give hope to defence industry that the government
and Defence are fully committed to ensuring that Australia has a vibrant,
productive and engaged industry into the future. The committee's firm
conclusion, however, in both its first and second reports was that the
government and Defence, contrary to their stated position, were not
enthusiastic or even active in promoting and supporting defence industry: that
the government was not a strong advocate for the domestic shipbuilding
Indeed, in part 1 of its report, the committee expressed its concern
about the relationship between the Defence procurement element in Defence and defence
industry. This concern remains. As Mr Saltzer, BAE, explained:
You have got to have cooperation. When it comes to major
defence projects, especially things like submarines and warships, you have got
to have a real cooperation between the government and the industry that is
going to support it. Because they have to take those ships not only from design
through to construction but throughout their entire life when they will be
upgraded, refit, modified et cetera.
In the previous chapters, the committee highlighted the importance of defence
industry as a vital partner in developing and building Defence's capability.
The committee, however, also noted industry's disappointment and frustration
with what it perceives as a lack of support for, and recognition of, its
contribution to naval shipbuilding. It has referred to industry's concerns
about the downturn in production, and the absence of a strategic naval
shipbuilding plan that would provide industry with some hope for the future.
Economic benefits of local builds
In its first and second reports the committee outlined the benefits of
having a domestic naval shipbuilding and repair industry including the broader
economic gains, innovation, and importantly, the strategic imperative of
self-sufficiency in maintaining and upgrading its fleet. The committee does not
seek to repeat or duplicate the evidence that unequivocally demonstrated these
advantages. It does, however, want to respond briefly to the uncritical attention
that was given to the finding in the recent RAND report that:
...relative to U.S. shipbuilding costs, the premium for ships
entirely built in Australia ranges from 30 percent to 45 percent. For ships
built partially in Australia, this premium is lower. Combatants (frigates and
destroyers) seem to have a consistent premium of around 30 percent to 40
percent. The premium for amphibious ships is lower, but it is still some 12
percent more than a U.S. basis.
Firstly, the RAND report made absolutely clear that this premium could
be reduced significantly with a continuous build and the gains in productivity
that flow from such a policy approach.
It also recognised, as the committee has done in its previous reports, the
benefits from a local build—employment, innovation, incentives and
opportunities for SMEs to grow and, importantly, strategic self-sufficiency by
minimising dependence on foreign sources.
The committee is not convinced by assessments that dismiss the economic
benefit from a vibrant domestic shipbuilding industry. Mr McClymont explained
some of the flow-on benefits for the economy from just one SME in the supply
I have employed quite a lot of electricians and I have done
an estimate of wages over a two-year period, and we paid $26.5 million in
wages. That is money you are going to take out of the general community, so
that is going to effect the general community. One hundred and eighty people were
employed on that project. What is going to happen to those 180 people? Are they
going to go back onto the dole and drag more money out of the general
community? I think the effect is more on the general community than on an
individual organisation. Yes, we will survive, but people will obviously lose
their jobs and have to go onto other benefits. There is not enough work in
Victoria to keep them all employed.
In respect of money returned to the government through taxation and
other mechanisms, Mr Burns explained that the 2012 study in the UK for the
Royal United Services Institute showed that '36 per cent was returned to the
government for defence work undertaken in Britain'. He reasoned:
While tax structures may be different in Australia, a similar
figure could realistically be expected. With these considerations in mind,
there is no premium if it is stated as being 30 to 40 per cent. And finally,
such comments only serve to reinforce in people's minds both in Australia and
offshore the self-defeating idea that Australian industry is inefficient and
essentially not up to the job.
Mr Dunk also referred to the 2012 UK study that found 36 per cent of
Defence money contracted into the UK was returned to the government. He did
not think that Australia had conducted a comparable study noting that:
If you look at the money from a Defence budget point of view,
then $1 billion spent in Australia is the same as $1 billion spent
offshore. It is money that comes out of the Defence budget. So, in the Defence
budgetary sense, there may well be some additional money that comes out of the
Defence budget to do this work. What is not factored in is the amount of that
Defence budgetary spend which flows back into the government coffers. In that
sense, what we are talking about here is an accounting mechanism to ensure that
the Defence budget can take into account the money that flows back into
government coffers from doing the activity in Australia. If that accounting
mechanism can be put into place, then the problem goes away.
Referring to the dividends to government through taxes, the Hon Mr
Martin Hamilton-Smith, the South Australian Minister for Defence Industries,
...by the time you add in income tax, payroll tax, GST, the
benefits flowing through the economy of having a vibrant shipbuilding industry,
and you then weigh in the cost of having to provide funds to soften the collapse
of the shipbuilding industry and having more people on the dole, when you look
at the entire offering you are infinitely better off...
There are also the opportunities for Australian SMEs to grow and to
innovate through the opportunities opened up by working with overseas companies
with subsidiaries operating in Australia. Mr Wardell provided a practical
Five or six years ago, we were a backyard engineering company
and now we consider ourselves to be a tier 2 engineering-contracting business,
operating in potentially three states of Australia. We are very sophisticated.
We are partnering with BAE in bids for LAN 400 and other projects they have. We
are engaged in their global supply chain. That sort of opportunity for a
company like Shadbolt Engineering would not have happened if you did not have a
BAE doing what it is doing in Australia. There is an enormous drag-on effect
with an industry like the naval shipbuilding industry. It brings technologies
and the need to upskill our industries, and that filters down. We have gone to
our suppliers and made sure they have got QA systems and quality control
It is very hard to place a value on the role of naval shipbuilding in
securing a strong industrial base in Australia supported by a skilled workforce
making a positive contribution to the economy. But, as noted in the first
report, naval shipbuilding is not purely an economic, research and development
or job creation activity, it is above all a defence activity with national
security its foremost concern. In this regard, a healthy, vibrant and
competitive indigenous naval shipbuilding capacity is central to Australia's
national interest. Most countries are more than willing to pay a price premium
for this security.
The committee notes that this inquiry has been conducted in an
environment of significant macro-economic adjustment. The concerted efforts by
the Reserve Bank of Australia to depreciate the Australian dollar have been
largely successful (since the inquiry was initiated in June 2014, the trading
price of the Australian dollar has fallen from US$0.94 to US$0.77 at the time
of writing). It would be remiss of the committee not to acknowledge that any
currency depreciation—deliberate or otherwise—significantly weakens the
economic argument for overseas ship purchases. The committee notes, for
example, that the Chief Executive Office and Managing Director of Austal, Mr
Andrew Bellamy, recently opined that claims of a 40 per cent 'cost premium' for
local Australian builds were a myth. Given the long-term nature of any
shipbuilding contract, a sovereign, domestic shipbuilding industry
significantly reduces the economic risks associated with currency fluctuation
and international market movements.
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 production phase.
The committee is concerned that efforts to denigrate Australia's
shipbuilding capabilities have focused on 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 Australia's domestic
shipbuilding industry efficiency.
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 purchases overseas.
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 cycles.
The committee recommends that given requisite capital investments
have already occurred, and as the industry's only effective client, the
Australian Government adopts 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 spill over and multiplier effect of domestic
shipbuilding, including that expenditure generates a level of economic
expansion beyond its initial value.
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