• The Australian
• 12:00AM May 24, 2018

The naval ship and submarine-building program is the biggest ­industrial venture undertaken by an Australian government and ­already there are troubling signs, with Defence admitting to a ­potential $6.9 billion blowout in the submarine program before the detailed design of the vessels has begun. Planners are still trying to refine the general concept.

The admission, contained in the body of the Australian Nat­ional Audit Office’s report last week, is buried in jargon — ­Defence advised the ANAO that it “was aware there may be a need to adjust the funding profile” etc. It contained no explanation and it is not clear whether the cost of the submarine program is now $57bn rather than the originally stated $50bn or whether it is bringing forward spending ahead of 2032, when the first submarine is due for completion. Nor is there any indication of what pocket the funds might be plucked from.

There has been no annual breakdown of the costs of the submarine project or for the rest of the $89bn shipbuilding program.

The ANAO report disturbingly suggests that this is because the costing hasn’t been done. It says the Department of Defence has not revisited the costing for the shipbuilding plan since the 2016 white paper, although that was completed before the critical decisions were made to build all three vessels — the submarines, frigates and patrol vessels — in Australia and bring forward the schedules for building the frigates and the patrol vessels to ensure continued work for Adelaide’s shipyards.

Both decisions add to costs and complexity. Defence advised the government in 2015 that building in Australia, as opposed to buying from established suppliers, added 30 to 40 per cent to the cost. The government responded that this was unacceptable and instructed the department to find further efficiencies. However Defence told the ANAO it had not ­updated estimates of the premium for building locally since the decisions were made to do so.

The schedules for the design and construction of the patrol vessels and frigates were brought forward by two to three years to provide a continuous shipbuilding program once work was completed this year on the construction of ­destroyers. With a decision about to be made on which European frigate design will be adopted, ­analysts say the time is tight to have construction starting in 2020. The ANAO says there was no cost-benefit analysis of the ­dec­ision to bring forward construction deadlines, which ultim­ately was taken for political reasons.

Big projects are vulnerable to cost blowouts, whether in the private or the public sector; witness the almost 50 per cent increase in the cost of the Gorgon liquefied natural gas project to $54bn. That is partly ­because they are complex and ­interconnected, so a delay in one component or element of the ­project has cascading effects across the total endeavour. Scheduling is paramount.

But public sector projects have an extra level of risk, with the superimposition of political imperatives on decisions that should be driven primarily by business and economic calculations. The shipbuilding venture is the third mega public sector start-up in the past decade, following the National Broadband Network and National Disability Insurance Scheme, both of which have suffered from impractical deadlines imposed for political reasons.

The decision to build all 12 submarines in Australia along with the frigates and patrol boats was a political decision driven by the vulnerability of government seats in Adelaide. The claim there will be spin-off benefits for Australia’s industrial base, with the ­invest­ment fomenting the development of heavy engineering ­capacity and of a military export industry, has not been the subject of any economic modelling by ­Defence. Australia’s only shipbuilder with an export track ­record, Austal, has won none of the work.

Australia’s long experience of subsidising industries shows they take productive resources of land, labour and capital away from more efficient uses and become a drag on economic growth. The other contributing factor to cost blowouts in mega projects is the demand they make on human and material resources. Again, the NBN and NDIS have suffered ­because they over-estimated the ease of assembling ­required skill­ed staff (as did Gorgon). The shipbuilding venture has made a pre­liminary assessment of its needs and is establishing a naval shipbuilding college to train staff, but the ANAO worries that ­Defence is preparing to enter into contracts with suppliers for the patrol boats and frigates ­before workforce plans have been finalised.

In response to ANAO concerns about governance of the project, Defence provided an ­organisational chart showing that a new position of deputy secretary-naval shipbuilding had been created to deliver the leadership required and said it had ­appointed a senior responsible officer to the post.

This has not yet been announced but is expected to be the head of the submarine program, Stephen Johnson. The appointment is not straightforward as he is a retired rear admiral from the US Navy, but he has been leading the submarine project since 2015. He has a thorough knowledge of naval ship and submarine building, having been in charge of submarine technology and warfare in the US Navy. Some in Defence question his ability to juggle the delicate stakeholder interests in the project ­before him. In the US Navy, he was in charge and the boats were US ­designed, with US technology and US builders. “My way or the highway”, his preferred approach, worked.

Here, there are three European designers and prime contractors, working with separate Australian builders across shipyards in different states and trying to integrate US combat systems into boats not designed for them. And then there’s the Australian Manufacturing Workers Union.

Australia has successfully built naval ships and submarines, and learned from the process, but the scale of the project and the political pressures shaping it raise the risks. There is almost no public transparency over the budgets for this project, although the Australian Strategic Policy Institute is making its best estimates available in a report to be ­released today. While it is the earliest stages of a venture ­intended to carry into the second half of the century, the ANAO is right to be worried.