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Race to the polls complicating naval shipbuilding decisions

The sudden shift in national political events towards a likely July 2 double dissolution federal election has complicated the hitherto orderly roll-out of decisions relating to new naval shipbuilding projects, as well as final publication of the government’s Naval Shipbuilding Enterprise Plan (NSEP). It has further complicated the Coalition’s determination of what is to be served up to South Australian voters in order to hold on to critical seats in that state, including that of the Minister for Industry, Christopher Pyne.

The three lead elements of the NSEP comprise: SEA 1180 – the construction from 2018 of 12 Offshore Patrol Vessels (OPVs) to replace the current Armidale class; SEA 5000 – the construction from 2020 of nine anti-submarine warfare (ASW) frigates to replace the current Anzac class; and project SEA 1000 – the completion of a Competitive Evaluation Process (CEP) to select a preferred partner to advance the design and build of 12 Future Submarines to eventually replace the existing Collins class.

Public solicitations for all three projects were progressing well through to February, with plenty of time for their consideration and the framing of public announcements based on the original September/October 2016 timing for a federal election. The prospect of an early double dissolution election now compresses all these decision cycles if the Government wants to use them for political purposes running up to the next federal budget, or alternatively, as proposed policy outcomes through the Caretaker period that will come into play immediately after the election is called.

Taking the largest project first, the Department of Defence has completed post-CEP lodgement bidder interactions, and interviews with government-appointed probity auditors were scheduled to conclude in April. There are some reports the submission is already on Defence Minister Senator Marise Payne’s desk. So theoretically, the National Security Committee of Cabinet could have the Minister’s recommendations in front of it in time to inform some sort of announcement prior to a double dissolution election.

Government has previously declared that a continuous build of Future Frigates will be undertaken in Adelaide, but this may change depending on how substantive the announcement on Future Submarines is. The task of whittling down over a dozen potential contenders into a more workable shortlist was outsourced to the RAND Corporation, in parallel with a proposal to use the hull form used in the Hobart class Air Warfare Destroyers (AWDs). It is proposed the new frigates will also carry CEA Technologies’ innovative phased array radar system – meaning modifications to the superstructures of all competing Future Frigate designs will need to be undertaken to accommodate the new radar system.

European respondents are understood to have been uncomfortable with sharing their most intricate frigate design specifications with a corporation reportedly close to the US Government, however, a report has necessarily been completed and the Navy’s consideration has formed up around the UK’s Type 26 frigate, one or other of the French or Italian ASW versions of the FREMM frigate, and one other if Navantia’s F-100 hull form ends up not accepted as being optimally suited to the ASW mission.

Construction of the OPVs was pitched initially as forming the transition step (from AWD to OPV) to the Future Frigates, but unlike SEA 5000, not necessarily promised to Adelaide. Western Australia-based Austal – Australia’s only shipbuilding entity involved in the design and manufacture of naval vessels internationally – has made a strong bid for this work. BAE Systems is also looking for work for its yard once the Anzac frigate upgrade is completed. Further, there is sympathy within Cabinet that job losses in the West from mining and energy projects could partly be ameliorated by putting OPV and Future Frigate construction into the Henderson yard.

Defence commissioned UK-based BMT last year to draw up a shortlist of preferred designs, with Minister Payne hinting to a recent ASPI Defence White Paper conference that she would be having something substantive to say on naval shipbuilding in the next couple of weeks. Industry was expecting an OPV designer/builder down-select by the middle of the year, so additional guidance on all three projects seems likely within the cycle of the budget and double dissolution election timing. Project LAND 400 (armoured vehicle) contenders have also been told that Defence requires extra time to check Australian Industry Participation (AIP) elements put up for this acquisition remain consistent with the new Defence Industry Policy Statement issued in parallel with release of the 2016 Defence White Paper.

So what is the Turnbull Government to do? South Australia has fully digested the initial commitment of SEA 5000 to Adelaide, but is now wondering about the longevity of the build commitment. The Federal Government’s next promise to the state, location of the headquarters of the new Centre for Defence Industry Capability (CDIC), did not even hit the sides going down for digestion before there was renewed clamour for a direction from Canberra on when is the government going to confirm that all 12 submarines will be built in Adelaide?

Defence apparently canvassed the SEA 1000 bidders to refresh their AIP submissions one last time prior to closure of the CEP, and following that, official statements were made that all three had confirmed they could build all of the new submarines onshore. This is even though some privately admitted a hybrid-build offered Australia considerable benefits in terms of the overall lowering of project risks, as well as potential whole-of-Defence cost savings due to reducing the time span the existing Collins fleet would need to remain in service.

Since that time, all three CEP bidders have come out publicly with proposals for enhanced industry benefits associated with the Future Submarine build, and including expansive global industrial partnerships with home-country corporations extending from systems derived from nuclear-powered submarines to non-defence industries such as renewable energy, software and information technology, biotechnology and transport systems.

The government has no doubt been tantilised by such offerings as tools that could be usefully applied to helping advance Malcolm Turnbull’s quest to accelerate the transition of the Australian economy away from its minerals/energy dependence. And through a recent background paper to the current review of the Industrial Research and Development Tax Incentive, a new discriminator to proposals from firms seeking government support and/or contracts has been identified called ‘additionality’.

Since the application of offsets to government procurements were abolished in the 1980s, firms making submissions for major new military capability acquisitions have had to prepare substantive AIP or local industry involvement plans. These have successively become more complex as government in turn expanded the range of potential activities they cover, including embedding Australian companies into the global supply chains of major international corporations and accepting R&D collaborations with major universities and research institutes. Outcomes are nevertheless mixed, with one recent acquisition offering eight per cent AIC for a contract worth over $1 billion.

This brings us to the National Innovation and Science Agenda, launched in late-2015 as a major tool for re-setting  national economic development, and significantly, the parallel smothering of that agenda across the new Defence Industry Policy Statement (DIPS). The application of ‘additionality’ to any one of the major naval shipbuilding programmes would see the government ratcheting up its expectations for substantially much more benefit to accrue to the Australian economy from its procurements than in the normal course of AIP business would generally have been thrown up. For example, proposals confined to reinvigorating defence-industry just as a means to building more military hardware, might not pass the ‘additionality’ test.

So before we get into issues of whether the choice of the preferred submarine partner should be skewed to either capability or strategic interest grounds, there remains a way to go before the government comes to a full resolution of its expectations for whole-of-economy benefits accruing from major military acquisitions beyond simple delivery of the platform or integrated system being sought. Confusion also exists over what the government’s elevation of ‘industry’ as a Fundamental Input to Capability means. In short, Defence-industry policy is coming dangerously close to being a proxy for national industry policy, with its first application being execution of the NSEP courtesy of the compression of decision cycles due to the double dissolution election timeframe.

This state of affairs is also impacting on announcements relating to SEA 5000. As part of its approach to resolving problems with the AWD project, the Government (after a limited tender) appointed in March Navantia of Spain to insert an experienced shipbuilding management team into ASC tasked with maximising programme performance through to the end of the three-ship build. Part of Navantia’s solution is to locate a substantive design team within the Osborne (Adelaide) shipyard.

Navantia is the original designer of the F-100 frigate used as the baseline for the new AWDs. It also designed (and part built) the Canberra class LHD amphibious assault ships, and has recently been selected as preferred contractor to construct two new replenishment vessels for the RAN based on its 19,800-tonne Cantabria vessel in-service with the Spanish navy.

Australian industry through ASC Shipbuilding and its AWD subcontractor base has accumulated substantial experience in building vessels of the F-100 design. Although the AWDs have had their difficulties, upwards of $10 billion is being spent building what one might describe as the beginnings of a reinvigorated national shipbuilding enterprise. This industry is now performing with productivity increments being claimed in the order of 35 per cent on successive ship builds.

As discussed above, there are very good reasons why the Turnbull government might not want to make more than a limited announcement regarding Future Submarines within a double dissolution election timeframe. One reason may involve the need for more time to fully assess the preferred design, as well as the ‘additionality’ merits accompanying local industry involvement plans. Yet jobs and skills continue to atrophy on a monthly basis in South Australia, while new twists to the NSEP suggest a sharing of work with other states by way of the OPV going to Western Australia and the Pacific Patrol Boats going to Queensland.

Navantia’s appointment to assume the lead in managing the skilled naval workforce at Osborne may therefore be significant, as it provides a major opportunity for the Turnbull government to quickly bring on implementation of the NSEP. There is already a local workforce and nation-wide subcontractor base that has substantive familiarity with the F-100 design. So why would we not want to capitalise on this for SEA 5000?

Substantial work has been put into adapting the F-100 hull form for the Future Frigate requirement, and accordingly, a breakthrough decision to adopt it for the nine SEA 5000 hulls could be actioned within a relatively short period of time given the existing skills, contracting and production base. Similarly, BAE Systems could draw off its Anzac frigate radar upgrade expertise to ensure a more optimally designed and locally-built superstructure to accommodate CEA’s new radar system requirements, rather than having its radar panels simply pasted onto ship designs driven by the sensor acquisition decisions of foreign navies.

This really is the stuff of pro-active national shipbuilding industry policy, as compared to the likelihood of Navantia being turfed out of Osborne at the end of the AWD program in favour of the SEA 5000 victor, and then having to start the knowledge-building and skill accumulation process all over again by installing a brand new shipbuilding manager to oversee Future Frigate construction. The onset of double dissolution election politics has created a very real difficulty for the Turnbull government which now risks politically charged and rushed (and therefore, potentially poor) decisions being made on critical Australian naval shipbuilding projects.

There is a way forward that involves a bold decision to capitalise on all the investments amassed to date in the AWD project. It involves a unilateral decision to go with the F-100 hull form as the design base for the Future Frigates. And despite all the politics, this is something that can likely be achieved within the timeframe of a double dissolution election.