BUDGET 2017 – Full speed ahead on naval shipbuilding enterprise plan

AIR WARFARE DESTROYER - OFFICIAL HOBART LAUNCHThe inability of the government to publish its celebrated Naval Shipbuilding Enterprise Plan has not prevented it from implementing key initiatives to restructure the naval shipbuilding industry, involving literally hundreds of millions of dollars that are so sensitive they have been deemed “not for publication”.

The government announced last October that, rather than looking to boost the historical position of the former Australian Submarine Corporation (now ASC Pty Ltd) at the helm of Australia’s naval shipbuilding industry in overseeing the $89 billion of new surface ship and submarine construction over the next 30 years, it had decided instead to break up the company into three individual government-owned companies.

As a result, the new policy direction is seeing ASC split into: a separate submarine sustainment entity focused on the Collins class submarines through to their retirement; a separate shipbuilding entity, to complete AWD construction by 2018, but not necessarily sustain them; and a separate infrastructure entity to create a fully integrated facility at Osborne (including absorption of the SA Government-owned Common User Facility) to support the continuous build of future naval vessels utilising multiple partners.

Documents released with the 2017/18 Budget Papers indicate the government will now provide $55.0 million of staged equity injections to ASC over the next five years (beginning with $44.0 million over the forward estimates to 2020/21), to strengthen the company’s balance sheet following the transfer of the majority of its physical shipbuilding assets to a newly created entity – Australian Naval Infrastructure Pty Ltd.

The amounts being invested by the Departments of Defence and Finance in capitalising Australian Naval Infrastructure Pty Ltd are not, however, being declared to the public due to commercial-in-confidence considerations. Budget papers indicated the unspecified equity injections will allow Australian Naval Infrastructure Pty Ltd to facilitate the development and construction of infrastructure at the Osborne shipbuilding facility to support the Government’s continuous shipbuilding program.

ASC’s 2015/16 Annual Report declared that revenues were expected to rapidly decline following their breaking $1 billion per annum at the peak of the Air Warfare Destroyer construction program. To mediate job losses at the Osbourne site, the government plans to build the first two Offshore Patrol Vessels in Adelaide, as a precursor to commencing the cutting of steel on the Future Frigates in 2020.

ASC has paid dividends to the government of $19.5 million over the last two financial years, with the $16.1m paid in 2015/16 having to be funded out of retained earnings, which stood at $144.3 million as at 30 June 2016. Total shareholder equity at that time stood at $280.0 million, with total assets topping $700.0m thanks to ongoing major revaluations of buildings.

While the equity swaps between ASC and Australian Naval Infrastructure Pty Ltd affect the composition of the Commonwealth’s financial assets, the Budget papers indicate they will not have a direct impact on the Commonwealth’s underlying cash or fiscal balances. There will nevertheless be an impact on Public Debt Interest (PDI) costs – estimated at $2.5 million over the forward estimates – as a consequence of increased borrowing needed to establish Australian Naval Infrastructure Pty Ltd. Such costs are to be absorbed internally (i.e. offset) by the Department of Defence.