However you size it, whoever is government past 2016 will be stuck with the task of managing a severe down-turn in Australian shipbuilding demand from 2017 to 2020. Depending on your political colours, it’s all the fault of the previous Labor Government, which in six years of power did not order even one naval ship. Alternatively, the crisis has been exacerbated by the Abbott Government in not moving early enough during its first term to alter construction schedules and have new support ships, replacement patrol vessels and additional destroyers built in Australia.
Over the next 20 years, the current Defence Capability Plan envisages the acquisition of upwards of 50 naval surface ships and submarines, including 13-15 large surface ships and 27-35 smaller ships, along with commencement of the build programme for up to 12 future submarines. Realising these ambitions within a ‘value-for-money’ construct will require a fundamental economy-changing industrial policy decision concomitant with release of the 2015 Defence White Paper, especially if the majority of vessels are going to be built locally.
At stake is the jobs of close to 8,000 workers currently employed in the naval shipbuilding and sustainment sectors, and particularly, some 4,000 currently employed by ASC, BAE Systems and Forgacs building new ships and fitting them out with their combat and habitability systems. If there is going to be any likelihood the majority of this workforce will remain intact over the medium-term, the Abbott Government must elect later in the year to build the principal surface ships on Defence’s acquisition schedule entirely in-country.
If not, a post-2016 Government will have to manage a progressive rationalisation of the industry down to perhaps less than 2,000 in the maintenance and support areas, subsequent directions in the Defence White Paper that new vessels will be built either partially in-country and partially overseas, or a bold decision will be taken to have them built entirely at shipyards overseas. All of these questions have been addressed within a new RAND Corporation report just published on ‘Australia’s naval shipbuilding enterprise – preparing for the 21st century’.
RAND’s analysis essentially focuses on the Future Frigate project (SEA 5000) as the driver of a price-competitive and productivity-enhanced Australian naval shipbuilding industry that will mobilise resources on a new frigate construction program starting in 2020. To ensure there is a relevant workforce in place to take on this task after the wind-down of air warfare destroyer (AWD) construction, RAND also suggests the construction of four offshore patrol vessels (OPVs) be advanced to 2017. Even better, if SEA 5000 could be brought forward to start in 2018, additional relief could be provided for current shipbuilding employees.
If nothing is done in the gap between the end of the AWD construction program and the start of Future Frigate construction in 2020, RAND says “it will be difficult to sustain more than a single shipbuilder in Australia. Lessening the gap with OPVs will help in sustaining more than one shipbuilder if each shipbuilder is given an OPV to build every year (a total of six to eight OPVs). The Future Frigate program should have sufficient demand to sustain two shipbuilders – one that builds blocks and one that both builds blocks and assembles them into a completed ship.” Nevertheless, another gap in Australian naval shipbuilding demand is forecast for 2035 when the future frigate program will have concluded.
Assuming the government is comfortable with letting a major shipbuilding industry rationalisation run its course over 2017-2020, RAND considers an alternative path for reassembling Australia’s naval shipbuilding industry in the years past 2020 would be “by building and outfitting first-of-class vessels in overseas shipyards and subsequent vessels in Australia. This path seeks to mitigate design and production problems that first-of-class vessels encounter … and has (previously) been used to some extent with Australia’s Adelaide and Huon programs.”
Whilst describing such a scenario as “attractive”, RAND noted such a course “would increase gaps in demand for certain shipbuilding industry workforce skills compared to the earlier mentioned scaled OPV/FF approach – especially if there were any delays in the overseas build, but “would entail additional costs for Australia to customise the original design used overseas into production instructions that can be used in Australian shipyards.”
That all assumes a future Australian naval shipbuilding industry would be cost-competitive with overseas yards and – even if some form of premium (over and above overseas costs) were to be paid for a local build – then substantive spinoff benefits would accrue to local regions and the national economy. RAND found in the negative on both accounts, saying that current Australian build premiums relative to US build scenarios range “between 20 per cent and 45 per cent … combatants seem to have a consistent premium of around 30 per cent to 40 per cent.” As a result, such price premiums “imply a greater tax burden associated with indigenous production.”
From an economic perspective, however, there may be advantages to indigenous production that could offset such increased taxation costs. RAND’s analysis of shipbuilding activities in the US, however, “did not find favourable spillovers” in the fashion of those often claimed for the aerospace industry. Where shipbuilding was found to have had a favourable impact, it was in increased workforce utilisation. Real benefits were nevertheless questions, with RAND finding “individuals employed at shipbuilders in the US in many cases would otherwise be in much lower-paying, lower-skilled jobs, or might not be in the paid labour force at all absent of the shipbuilder.”
In short, if the motivation for supporting local naval shipbuilding programs was simply to absorb workers in regions where there were no alternative job opportunities or high unemployment, RAND considered “there may likewise be increased workforce utilisation advantages associated with indigenous shipbuilding in Australia. … The economic benefits of a domestic shipbuilding industry are unclear and largely dependent on broader economic conditions in Australia. However, a domestic shipbuilding industry will add more than 2,000 jobs to the local economies.”
Suffice to say, the thrust of the RAND report does not provide much assistance to local interest groups seeking the Government to provide a commitment to local build programs for the future submarines and frigates. As reported in this month’s Australian Defence Business Review, recent statements by the Minister for Defence indicate there is little motivation within the Government to bring forward programmes to address the current employment downturn anticipated over 2017-2020. Yet, there remains confidence that local build activities do in fact add value to the quantum of capabilities and skills that can be brought to the task of national defence.
To this end, upon releasing the RAND report, Defence Minister Andrews stated “the naval shipbuilding industry must be prepared to work constructively with the Government. The sustainability and viability of naval shipbuilding in Australia must be predicated on major reform of the industry and significant productivity improvements, as well as improvements to Defence’s acquisition and sustainment processes.” The incentive for this to occur is the prospect of the Government structuring a compact with Defence and industry that future naval vessel construction demand will be ‘level loaded’ over the longer-term – otherwise known as a continuous build.
In that respect, RAND considers that schedules (or ‘drumbeats’) that deliver ships every 24 months or longer “will probably not sustain a desired future force structure of a fleet whose average life is 30 years. Deliveries every 30 months can work if Australia were to adopt lives of 35 or 40 years. Shorter ship lives would require more-frequent construction starts (ie: drumbeats of less than two). Our analysis suggests that Australian domestic naval shipbuilders can sustain an 18- to 24-month pace of large ship construction starts if the Australian Department of Defence manages Future Frigate deliveries, and keeps those ships operational for 25-30 years.” On this basis, RAND sees the premium required to sustain local shipbuilding not being eliminated, but roughly halving from current levels mid-way through the Future Frigate build.
With the offer of such a compact now on the table, Australian shipbuilders have been invited by Defence Minister Andrews to review the RAND report and the assumptions underpinning its model for a continuous build programme, and provide feedback to the team currently drafting the new Defence White Paper.