The Australian National Audit Office has just released its latest report on Australia’s $80 billion future submarine capability. It set itself the task of examining ‘the effectiveness of Defence’s administration of the Future Submarine Program to date’. The program’s supporters and detractors will both find some validation in this report.
We all are now calling an $80 billion spade an $80 billion spade, not a ‘greater than’ $50 billion spade or a $50 billion in-constant-dollars spade. Defence finally gave an $80 billion ‘out-turned’ number that takes real-world factors such as inflation into account at Senate estimates in November last year. That $80 billion figure is repeated in this report.
Defence says that this isn’t a cost increase but just a different way of expressing the same number. But once you add the future submarine’s $80 billion to the $35 billion future frigate and the $4 billion offshore patrol vessel, that increases the government’s $89 billion local shipbuilding program by $30 billion to $119 billion. $30 billion here, $30 billion there; pretty soon we’re talking real money.
One of the program’s key achievements in the past year has been the signing of the strategic partnering agreement between Defence and Naval Group to govern the design and construction of the submarine. It was originally meant to be signed in October 2017, but negotiations didn’t begin until the next month, and the government agreed to the negotiated outcome only in February 2019. The good news is that the ANAO reports that the government and Defence got everything they wanted, including intellectual property rights; transparency on costing; remedial measures and protections; and acceptable levels of Australian industry participation.
But there’s another narrative here. Many observers suggested that the lengthiness of the negotiations indicated fundamental cultural and commercial differences between the parties. The ANAO report notes that the Naval Shipbuilding Advisory Board, a panel of experts established to give the government independent advice on the shipbuilding program, had serious concerns.
Not only did the board recommend in September 2018 that Defence examine alternatives should the negotiations not succeed, but it also advised a year later that Defence should ‘consider if proceeding is in the national interest’ even if negotiations were successful. That’s serious stuff. The ANAO report doesn’t say what the advisory board’s concerns were. We can only hope that the final rounds of negotiations addressed them, particularly since the ANAO rightly assesses that the ‘success of the program is dependent on Defence establishing an effective long term partnership with Naval Group’. Since the government agreed to sign, it must have been confident that the issues were addressed.
The report also looks at aspects of the program’s schedule, which it’s been difficult to get a clear view of. There’s a high-level diagram in the 2017 Naval Shipbuilding Plan, and information trickles out, such as through Defence’s 9 May 2018 response to the estimates committee on foreign affairs, defence and trade. Moreover, terminology for key milestones has changed, which confuses things. I’d been hoping this report would provide the complete master schedule at different points in time so we could see which milestones had been delayed and where delays could be made up. That didn’t happen, but the report does provide some useful data points.
The report confirms, as foreshadowed at heated estimates hearings in October, that some key design milestones have slipped. The systems requirements review was originally meant to be completed by March 2019. After the design contract was signed, that milestone moved to October, and the review started only in December (and it’s not clear whether it’s been completed). Similarly, completion of the preliminary design review has moved from March 2020 to January 2021.
The report also reveals that Defence advised the government in February 2019 that Naval Group had proposed to extend the completion of the design phase by 15 months from July 2022 to September 2023. Ultimately, Defence agreed to a nine-month extension (to around March 2023). Construction is scheduled to start in 2022–23 (according to the high-level schedule provided to the Senate in May 2018 at least), so things are getting pretty tight if Defence wants to complete the design before starting construction. The ANAO hasn’t assessed the impact of the extension on the start of construction and the submarine’s entry into service, although at Senate estimates in November, Defence officials said that the 2022–23 construction date actually meant 2024 for the start of construction of the vessel itself.
Defence’s position is that getting the design right will save time and money in the long run by reducing rework. With construction scheduled to start in 2022–23 and sea trials scheduled to begin in 2031–32 (according to the high-level schedule provided to the Senate in May 2018), there’s potentially nine years to make up any lost ground. But, if the critical design review scheduled for June 2022 slips by the same amount as the earlier design reviews, we’re already eating into construction time.
The report also notes that Defence has advised that ‘a delay in the Future Submarine Program of more than three years will create a gap in Navy’s submarine capability’. What that means isn’t entirely clear. Based on my own analysis, I suspect that it’s saying that a three-year delay would result in the submarine force falling to fewer than six vessels, even if all six Collins boats go through a 10-year life-of-type extension to mitigate the risk of a capability gap. But what schedule baseline are those three years measured against? Have we already eaten into them? And with Defence now saying that the life-of-type extension program is seeking to replace virtually the entire Collins propulsion system (diesel generators, main motor and DC switchboard), that looks like a high-risk risk-mitigation proposition.
Overall, the report gives the impression that the program is being run according to solid project management principles and is putting integrity above expediency. It concludes encouragingly: ‘Defence has established the formal arrangements for the effective administration of the Future Submarine Program.’ But it also confirms that, under those arrangements, the first new submarine won’t be in service before 2034. That’s still a long way off.
Marcus Hellyer is ASPI’s senior analyst for defence economics and capability.
Credit Image: Naval Group.
This article was published by ASPI on January 15, 2020.