Will the Submarines Sink the Economy?
On Tuesday he said that the twelve submarines being built for the navy by the French firm DCNS will cost one quarter of a trillion dollars.
This conclusion was based on testimony by the head of the submarine project, Rear Admiral Gregory Sammut, who said that the $50 billion quoted price for the French submarines was in “constant dollars” which takes no account of inflation.
This means that the base price of the submarines will be at least $79 billion. However this price does not include the combat systems. This is expected to raise the price to at least $90 billion.
Admiral Sammut told the parliamentary committee that the $90 billion was for the construction cost only and did not include the maintenance.
The Australian Strategic Policy Institute (ASPI) estimates that the maintenance costs will be approximately $124 billion overall.
Rear Admiral Sammut says that these are preliminary estimates because the submarines have not yet been designed.
At the present time the first submarine will not be launched until 2032 and the last one will go into the water in 2080. During this period the ship building will be a constant and expensive drain on the budget.
As Robert Gottliebsen points out, at the same time, we will also be building nine frigates at a total cost of $70 billion which will add to the budget risk.
Gottliebsen argues that the construction risk is considerable because the submarines are to be powered by an entirely new propulsion system.
This is a variant on the pump-jet propulsion system used in French nuclear submarines and there are questions over whether such a system can be employed in a conventional sub which, in turn, raises the question of whether we would be better off simply acquiring nuclear submarines.
This issue was examined by Marcus Hellyar in ASPI’s house magazine, ‘The Strategist’. In the article, entitled ‘Going Nuclear: Would US Submarines be a Cheaper Option?’, Hellyar compares the cost of buying and operating twelve US Virginia class submarines, which would be built in the US, with the French build-it-in-Australia option.
He says that “while the Shortfin Barracuda is likely to be the most expensive conventional submarine ever built, there are some good reasons to think that the Virginia option would not be cheaper.”
Hellyar argues that: “The Virginia weighs in at around 8,000 tonnes. The Shortfin Barracuda looks like it will be between 4,500-5,000 tonnes. So with everything else being equal, the Shortfin Barracuda would need to cost around 60% more per tonne to be more expensive.
RAND Corporation’s 2015 study of the Australian shipbuilding industry suggested that building in Australia historically incurred a 30-40% premium compared to the United States, although that study was based solely on surface ships.
The intent of the government’s continuous shipbuilding policy is to bring those premiums down, but even if that doesn’t occur, Shortfin Barracudas still look like they’ll be cheaper.”
Hellyar says that the unit cost of a Virginia class submarine is $3.25 billion so twelve subs would cost $53.7 billion.
This is more than the estimated $50 billion cost for the French submarines but, when the add-ons Gottliebsen identifies are included, the US submarines look relatively cheap.
However the French quote includes all the infrastructure needed to service the submarines. When these are added into the cost of the American vessels then they become a much more expensive proposition.
Moreover the American subs are twice as big as the Shortfin Barracudas and require nearly twice the crew and so would be a much more expensive proposition to maintain and operate.
Senator Rex Patrick of the Centre Alliance, a former submariner, has forecast that the cost of the submarine project is likely to blow out by billions of dollars because it is already failing to meet key deadlines.
He is critical of Rear Admiral Sammut who he argues is not qualified to run the project.
“Rear Admiral Sammut is a highly respected and highly capable naval officer, however he’s never run a major project, he’s never run a minor project,” Senator Patrick told the ABC in January.
“There are a number of highly qualified, highly experienced project managers in the mining industry, in the chemicals industry, in the IT industry that can be brought in to offer assistance for this extremely important program.”
All of these issues constitute a threat to the Australian budget for the next fifty years. There’s no guarantee that all future governments will be fiscally prudent.
A Greens - Labor Government may decide to implement policies like a living wage while, at the same time, increasing expenditure on essential services.
In those circumstances defence contracts would have to be abrogated or the budget would be plunged into deficit and debt.
However the short term question is whether the government can get a handle on the project.
The current Minister for Defence Industry, Steve Ciobo, is a diligent minister but has no industry experience. The obvious person to hold the ministry is David Fawcett, who has defence industry experience and is a South Australian but, even if he was the minister now, the odds are that he would only be in the job until May next year.
The Shadow Defence Minister, Richard Marles, has a good grasp of the portfolio and a developed plan for the defence industry.
In a speech to the Press Club in April he outlined Labor’s approach: “Defence industry is high tech industry. For a first world nation like Australia to maintain an industrial manufacturing base then we have to be at the top of the technological ladder. Making low value products at the cheapest prices is not the business we should be in. From Israel to Sweden, the value to the broader economy in the industrial capability developed through defence industry is priceless,” he said.
“A Labor government will have a coordinated approach between broader industry and Defence towards building future capabilities, ensuring that Defence develops strong links with our civil science and research sectors and relevant education institutions.”
However at no stage did Mr Marles comment on the fiscal implications of adopting this approach or of the defence industry programme that is currently in place.
Sooner or later someone will have to bell the cat.