However you size it, whomever retains national government past 2016 will inherit the task of managing a severe downturn in Australian naval shipbuilding from 2017 to 2020. The lack of any interim initiatives in the federal budget to stem accumulating job losses in the industry means the loss of skills will only accelerate, as will the costs of having to regenerate them when the government’s enterprise Naval Shipbuilding Plan finally sees the light of day.
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, military capability planners envisage the acquisition of upwards of 50 vessels, including 13-15 large surface ships and 27-35 smaller vessels, along with commencement of the build program for up to 12 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.
Defence Minister Andrews has led off this debate by calling for a different type of industry to build this next generation of ships – one that contributes to wider aspirations for stimulating innovation and the need to place local enterprises in a position to grasp the rise of new industries. So instead of preserving ‘Allen Town’ skills in forging iron and steel, Andrews is looking to a new cadre of techno workers that instead of constructing hulls, can master the challenges of endeavours such as combat system integration, design assurance and land-based testing.
This means the jobs of close to 8,000 workers currently employed in the naval shipbuilding and sustainment sectors, and particularly, some 4,000 employed to date by ASC, BAE Systems and Forgacs building the AWDs and LHDs are under threat. If there is going to be any likelihood substantive elements of this workforce will remain intact over the medium term, the Abbott government must elect later in the year to start building naval ships entirely in-country.
If not, a post-2016 government will inherit a severely rationalised industry of perhaps fewer than 2,000 focused mainly on the maintenance and support areas, and children currently studying in high school will need to be courted for entry into a revitalised naval ship systems integration industry that comprehensively rewards intellectual investment and academic achievement in science, technology, engineering and mathematics – otherwise known as STEM.
The majority of these issues were addressed in the recent RAND Corporation report on ‘Australia’s Naval Shipbuilding Enterprise – Preparing for the 21st Century’, including the comparative economic advantages (expressed as opportunity costs) to Australia of having new vessels built either partially in-country and partially overseas, or an even politically bolder decision to have the majority of them constructed entirely at shipyards overseas.
RAND’s analysis essentially focused on the Future Frigate project (SEA 5000) as the driver of a price-competitive and productivity-enhanced Australian naval shipbuilding industry that would mobilise resources on a new frigate construction program starting in 2020. To ensure the relevant workforce is in place to take on this task after the wind-down of Air Warfare Destroyer and LHD construction, RAND suggested the construction of 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 under fifty years of age.
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 concluded it would “be difficult to sustain more than a single shipbuilder in Australia. Lessening the gap with OPVs would likely help in sustaining more than one shipbuilder if each shipbuilder was given an OPV to build every year (a total of six to eight OPVs). In turn, the Future Frigate project was thought to have sufficient demand to sustain two shipbuilders – one that builds blocks and one that builds both 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.
As evidenced by the lack of any shipbuilding initiatives on budget night, it appears the government is comfortable with letting a major shipbuilding industry rationalisation run its course through to 2020, on the strength of RAND’s suggestion that 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 (while) subsequent vessels (are built) 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 class FFGs, Huon class MHC and LHD programs.”
While describing such a scenario as “attractive”, RAND noted such a course “could 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 also 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, RAND saw there may be advantages to indigenous production that could offset such increased taxation costs. An analysis of shipbuilding activities in the US, however, “did not find favourable spillovers” in the fashion of those often claimed for the aerospace industry – which have similarly been cited in local debate for resources to be poured into Australian ship builds. Where shipbuilding was found to have had a favourable impact, it was in terms of increased workforce utilisation. Real benefits to the economy were nevertheless questioned, 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 commit to local build programs for the future submarines and frigates. If the motivation for naval shipbuilding in Australia is simply to reward a history of poor economic management in South Australia and woeful performance on the Air Warfare Destroyer build schedule and cost overruns, then the result will be continuing premiums of billions of dollars unless there are real changes in attitudes that naval shipbuilding in Australia must constantly be underpinned by massive cross-subsidies from taxpayers.
Recent developments in evolving attitudes in Japan in terms of its preparedness to share sensitive information regarding the Soryu class boat has underpinned the wisdom of the government’s decision to foster a Competitive Evaluation Process. Further, it has confirmed a real competition will unfold over the balance of the year with the government being afforded the best possible information base upon which to make the Future Submarine design and international partner selection. Old attitudes, prejudices and cultural ignorance have no place in such an evaluation.
Defence Minister Andrews has stated that the naval shipbuilding industry in Australia “must be prepared to work constructively with the government.” He adds 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 all of 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 program. RAND has provided effective guidance that construction schedules (or ‘drumbeats’) that deliver ships every 24 months or longer “will probably not sustain a desired future force structure for a fleet whose average life is 30 years.”
The government is now considering shorter ship lives that would require more-frequent construction starts (ie drumbeats of less than two) on the basis of RAND’s analysis that Australian domestic naval shipbuilders could sustain an 18 to 24-month pace of large ship construction starts if the Department of Defence was agreeable to new ships being operational for 25-30 years. On this basis, the premium required to sustain local shipbuilding would not be eliminated, but roughly halved from current levels by mid-way through the Future Frigate build.
Australian shipbuilders have been invited by Defence Minister Andrews to review the RAND report and the assumptions underpinning its model for a continuous build program, and provide feedback to the team currently drafting the new Defence White Paper. The initial response has been more layoffs and pleas for accelerated build programs to stem a ‘Valley of Death’ whose shadow is already passing over us. Opposition Leader Bill Shorten, in his budget-in-reply address had some very useful suggestions regarding initiatives that might be taken to encourage a larger proportion of Australian students to take up STEM disciplines.
It would be useful if some of that thinking also flowed down to the government’s deliberations on continuous platform builds, in order to ensure the new techno workforce is there when we really do need to build our new ships.
This editorial first appeared in the May-June 2015 issue of Australian Defence Business Review.