12 March 2016
Early 2016, it was announced Australia was placing a major naval ship contract offshore. This article debates the relative merits of local build versus buying from overseas.
South Australia was stunned by an announcement last week; the Spanish town of Cadiz is celebrating the creation of 3,000 jobs on the back of the news Spanish Government owned shipbuilder Navantia will likely be awarded the contract to build two new supply ships for the Australian Navy; a contract estimated to be worth somewhere in the region of AUD$1.2 billion.
Immediately, talkback radio was awash with enraged South Australian’s incredulous ASC wouldn’t be building the ships. Actually, the news got worse.
In fact, no Australian shipbuilder had ever been invited to tender for the building contract; it wasn’t just South Australia that had been shunned by our Defence Procurement Department; every shipyard in the country had been shut out.
The news hit the media the day after Prime Minister Malcolm Turnbull had just toured the state on a publicity mission, prior to announcing taking us to the polls mid-year. The announcement of the decision came just days after Payne and Prime Minister Malcolm Turnbull proclaimed South Australia as being at the forefront of the government’s plan to create a "world-class," sustainable naval shipbuilding industry.
Never let the facts get in the way of a good story
Like most people I was flabbergasted, we would even contemplate sending valuable work offshore at a time when Australian industry is suffering and also believing "surely, if we are serious about having a sovereign defence capability doesn't that mean we should be building our own warships?" However, like most things, it's not that simple.
In reality this decision is old news. The decision to seek an offshore builder was reported in the media almost 2 years ago.
But Why? Why can't the ships be built in Australia?
As I write this no one in Government has provided a detailed explanation (and opposition political parties are making the most of it). However, it doesn't take much trawling of the internet to observe...
- The supply ships are needed now; the decision has already been delayed too long
- Australian shipyards are not capable of building ships this large
- Australian shipbuilding is way too expensive to deliver value for money to defence procurement who already operate on a tight budget
- The procurement process is too far down the track to start again.
Let me expand on these points
The supply ships are needed now
The supply ships are well overdue for replacement. One is more than 30 years old and the other is not exactly suited to the task being a cost-saving compromise from the beginning. The Australian Navy has two supply ships in operation...
The HMAS Sirius (pictured):
Built at Hyundai Mipo Dockyard in South Korea in 2004 she was purchased by the Commonwealth Government in June 2004 and underwent modifications to suit the RAN's requirements. Sirius has the underway-replenishment capability, including a flight deck for helicopter operations. The 46,755 tonnes (full load) ship was commissioned in September 2006.
Sirius has a far larger capacity than her sister ship (HMAS Success), and is able to perform liquid transfers at sea, but other supplies must be transferred by helicopter from her retrofitted flight deck. This is less than ideal. Being a newer vessel HMAS Sirius is expected to remain in service until the early 2020s at least.
The HMAS Success:
Built-in Australia at the Cockatoo Dockyards in Sydney, New South Wales; at 18,221 tonnes fully loaded, she is the largest ship ever built in Australia for the Royal Australian Navy and was commissioned in April 1986.
The ship has spent 30 years in service (as of April 2016) and is well overdue for replacement. Old ships cost huge amounts to keep operational and suffer reliability issues; not something to be tolerated in a military asset.
In summary, one supply ship is too old and the newer one isn't quite suitable and without adequate resupply capability our Naval fleet can't operate too far or too long from the port without running out of fuel, ammunition, rum and salted beef.
Gearing-up for war. What war?
Supply ships are critical to keeping Navy ships operational while at sea. Critics say "what's the hurry; we are not at war".
"Not being at war" is too simplistic; we are not really worried about outright war; we are more worried about (for example) some foreign power (or terrorist group) getting the shits with Australia and (for example) blocking fuel tankers travelling here. This would be devastating (and a highly effective tactic) because we don't refine fuel and only have enough petrol, diesel and aviation gas stocks to last a few weeks if that.
We need the military muscle to make potential transgressors "see the error of their ways"; we can't always rely on talking them to death. In any case, diplomatic conversations seem to progress more smoothly when you have firepower.
Australia is highly vulnerable to interruption to sea freight. But there are hundreds of scenarios that aren't outright war but can only be mitigated or addressed by having some military capability. Such events can't be accurately forecast and when they occur you don't have time to ramp up military capability.
If the Straits of Hormuz (supplying Middle East oil to refineries in Singapore where most of our fuel comes from) and the narrow Straits of Malacca were blocked by an extremist group (shutting down half of our petroleum supplies), we would need to dispatch the Navy in days.
If you need further convincing take a look at this ABC report from November 2014 (Leigh Sales)
Australian shipyards can’t build vessels this big
It has been widely reported Australia doesn’t have the capability to build ships above 20,000 tonnes. The new supply vessels will be 25,800 tonnes each.
Why?
It comes down to several factors…
Lack of capacity: Current Australian shipyards don’t have the room or lifting capacity to handle larger ships. Critics say this problem can be easily fixed (at a cost). The problem then comes down to future demand and build numbers.
Upgrading a shipyard to build two ships doesn’t make economic sense.
A new higher capacity shipyard isn’t required for future Australian Navy requirements and an Australian shipyard will not win contracts from global customers against overseas competition due to high cost and lack of track record. The currently under construction Hobart Class Air Warfare Destroyers being completed at Osborne in Adelaide by the ASC are a mere 6,250 tonnes - a quarter of the size of the two proposed supply ships.
In the past Australia has built large ships. The tanker Amanda Miller, 66,800 tons 780' x 109' x 43', was the largest ship built by Whyalla (1971) (or was it the Iron Curtis - not everyone agrees). The shipyard closed in 1978 after years of industrial turmoil delayed delivery of ships, increased costs, and ultimately made building ships not viable.
Another large facility existed in Brisbane; Evans Deakin and Company; Kangaroo Point (Brisbane), Queensland. Opened 1939, closed 1976. The largest ship built there were the Robert Miller 37,675 gross tons.
Lack of experience: Overseas shipyards are manufacturing multiple ships every year. Mitsubishi Heavy Industries (Japan) has 63,000 employees and builds USD$41 billion worth of ships annually. Hyundai Heavy Industries in Korea is the world’s largest shipbuilder with 15% of the world’s shipbuilding market share. In 30 years Hyundai has built more than 1,840 ships (average 61 per year). The list of competing shipyards is endless with the world’s largest located in Japan, Korea, and China.
An Australian shipyard building two large ships every 10 years or so (as an expensive gift from the Defence budget) can’t deliver as efficiently as a shipyard that builds 20 to 100 every year.
Without even taking into account the higher cost of labour this inefficiency alone would make us uncompetitive.
Too expensive: Shipbuilding is highly labour intensive. The key feature of Asian shipyards is low labour cost.
Rightly or wrongly, Australian workers in heavy industries are among the highest paid in the world. Good work if you can get it; but increasingly, we can’t. We’ve priced ourselves out of this market.
The high wage cost is one thing. Industrial action and all of the extra costs of managing and negotiating with Unions makes things worse.
Benefit to the local economy
The counterargument to cost is the benefit to the local economy. The theory being additional employment and flow-on economic benefit to support industries and services more than makes up for the downside. All true.
However, at the same time, political reality prevents governments from simply increasing spending to favour local content. As a nation, we are loathed to see Governments exceeding their budgets. Increases to military spending are also difficult to sell to a social conscious population who would rather see the money diverted to education, welfare, health and disability services.
So that leaves Defence Procurement being told “here, this is all you’re getting. Make sure you get the best value for money you can” meaning not building in Australia.
For completeness, it should be noted the Spanish Ship Building Industry is heavily Government-subsidized in order to make it competitive. The cost of labour in Spain is only slightly cheaper than in Australia. But still, the cost is also greatly influenced by efficiency.
The procurement process is too far down the track
So lastly let’s assume the Turnbull Government “came to its senses” and announced, “the new supply ships will be built in Australia; to hell with the cost.”
This would then mean Defence Procurement would have to start the design and tendering process all over again. Let’s assume they fast-tracked and were able to let the tender within 3 Years (a bit naive, because the political battles between states “the ships should be built here” and the protracted deal-making and vote-buying process would further hold things-up) the Navy would be further delayed in receiving their supply ships.
In addition, instead of costing $1.2 billion, the cost is likely to increase to $2 billion (adding the cost and time required to upgrade the shipyard and, let’s face it, we are slower at building ships particularly when doing so for the first time).
Extra time to procure, extra time to build, and a huge increase in cost.
The order to build the ships should have been approved by Labor.
As widely reported, the need for two new supply ships was on the table during the previous Government’s first term under the Rudd Government, they deferred the decision and reduced the defence budget; they certainly weren’t interested in looking after Australian workers through defence spending.
The need to build the ships overseas (for all of the reasons listed above) was clearly articulated during the Labor Government’s last term in office.
So now the opposition political parties are making the most of this situation painting Turnbull in the worst possible light and blaming him for the ships being built overseas.
The good news might be this will add to the need for the Turnbull Government to announce the building of frigates and submarine’s in Australia. When will this be announced? No doubt just before we go to the polls.
But, surely there must be a way forward?
I can accept it is too late to keep the supply ship contract in Australia; the RAN needs the ships as soon as possible and further time spent trying to solve the design, quality, cost, time, and political problems would be (in this particular case) counter-productive.
This is absolutely the right decision; the only ones opposing it are opposition political parties (who know better but can't let a smearing opportunity go by), Unions and those who don't know what they are talking about.
But, thought must be given to the future.
Like so many of Australia's problems, solving big issues requires bold innovative thinking and commitment to long term (30 to 50 year) planning. The structure of our political system is oriented toward the short term "politically safe" decisions and requires keeping everyone happy - compromise.
Australian politics is the art of negotiating with 20 kids when you only have 14 ice-creams and still being invited to run the next birthday party.
So the best we can hope for is ongoing fine-tuning rather than bold visionary steps. The good news is this makes Australia a very stable country; the bad news is we don't get much done.
Sometimes it takes a national crisis to bring our priorities into focus. Everybody will be grateful if our military capability saves us from a nasty situation. If.
Further references
Ship Building - Australian Style (10 Jun 2014 | Mark Thomson)
Australia's next supply ships: serious about success (Jun 08, 2014, 19:39 UTC by Defense Industry Daily staff)
Part I - Inquiry into the Future of Australia’s Naval Shipbuilding Industry Tender Process for the Navy’s New Supply Ships (April 2015 | Australian Government)