Amidst the deafening screams of protest from vested welfare interests and the blinding pyrotechnics exploded by the ABC on behalf of the health and education sectors, one important section of the report of the National Commission of Audit seems to have been passed by relatively quietly – defence.
In Volume 1, Part B Section 7.8 tackles the subject, gingerly. At $25.3 billion, defence spending constitutes a significant part of the Commonwealth Budget, it says. Yes, around 6% of all expenditure. The starting proposition for Defence funding, the report says, should be to determine the capability required to successfully counter the various strategic risks Australia could face and then match this with appropriate funding for the highest priority ones.
The problems with that simple prescription are that the cost of military equipment is growing; Defence has a mixed record in improving its efficiency in managing resources; the organisation has grown more complex and top-heavy over the years; and there are blurred accountabilities between the Department of Defence and the Australian Defence Force.
As if that weren’t enough, defence procurement and the Defence Materiel Organisation need to be overhauled: “The 2005 decision to create the DMO as a statutory independent organisation outside the Department of Defence, under a purchaser provider arrangement, has not worked.”
The NCA report then approaches with kid gloves one of the biggest reasons for waste and over-runs in military contracts, but its message is clear:
“At times governments will seek to use defence acquisitions to leverage support for industry policy. This obscures transparency of industry assistance and corrupts Defence budget processes. A major driver of defence costs is the preference for unique and Australian-built equipment. In the case of the Air Warfare Destroyer and Landing Helicopter Dock ship projects, the…..effective rate of assistance is estimated to be about 30% for the destroyers and over 100% for some of the helicopter ship options. Choosing to support Australian industry cost billions of dollars.”
It was inevitable that the NCA would zero in on the Navy. The $8 billion project to build three Spanish-designed Air Warfare destroyers is foundering, over budget and two years late. It is based on a complicated system to spread the work to electorates in three states, and partly in Spain, with the final consolidation and launching of the vessels to take place in Adelaide.
Some of the problem appears to be due to conflicts between the partners in the body managing the project, the AWD Alliance. They are the Defence Materiel Organisation, Raytheon Australia and ASC Pty Ltd. But there have also been problems with the Spanish plans, industrial troubles in the Williamstown dockyard, and welding defects. No wonder the Commission of Audit report says Australia could have got an extra ship for this cost, if built overseas.
ASC, originally the Australian Submarine Corporation, was established in 1987 to build the Collins Class submarines for the RAN. It began as a consortium of private enterprise companies led by Kockums, the Swedish designer of the boats, and the government’s Australian Industry Development Corporation, but was nationalised in 2000.
Much is now made of the improvement in the Collins Class boats, but success was a long and expensive time coming. I interviewed a Navy engineer in the 1990s, when he explained that the bow section, fabricated in Sweden was one and a half inches out of line with the Australian-built hull. The choice of the Swedish design was the responsibility of Paul Keating’s government, which rejected both a German boat, and the British Upholder Class submarine.
Australia is about to contemplate its next pork-barrelled and extortionate demand on the taxpayers, the replacement submarine project. Planning to replace the Collins boats began seven years ago, but the design has not yet been finalised. The decision appears to be oscillating between a re-design of the Collins class, French, Spanish or Japanese boats, while Sweden has re-entered the industry and joined the race. The Kockums enterprise was sold to Germany’s Thyssen Krupp fifteen years ago, but Saab has now been head-hunting engineers and is reported to have had private talks with the Australian government, indicating its interest.
The 2009 Defence White Paper included planning for twelve vessels, and the cost has been estimated at $36 billion to $40 billion. Former Labor Senator Stephen Loosley, chairman of the Australian Strategic Policy Institute, says it could get to $50 billion, a bill Australia cannot afford.
The Commission of Audit has now recommended that ASC be privatised and the Defence Materiel Organisation overhauled, but that could not overcome the serious cost disparity between local construction and foreign-built boats. Australia has to decide how much it is willing to pay to artificially support domestic shipbuilding, disguising its high costs, inefficiencies and low productivity in order to deflate unemployment statistics in marginal electorates.
Here is a dramatic demonstration of how uncompetitive Australian shipbuilding is: Last week the U.S. Navy announced a contract to build ten of the latest SSN 774 Viriginia class nuclear-powered attack submarines. The cost? US$17.645 billion (A$20.5B). That’s about half the cost of Australian conventional submarines with considerably less capability. Two shipyards, in New England and Virginia, will co-operate to deliver two boats each year for the next five years.
Rear Admiral Dave Johnson, submarine program officer at Naval Sea Systems Command (NAVSEA), says it’s the biggest shipbuilding contact in dollar terms in U.S. Navy history. Soon Australia will be able to better him: “Call that a spend, Dave? – THIS is a submarine spend!”