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Australia's Future Submarine Project: The urgent need for economic scrutiny

Australia's Future Submarine Project: The urgent need for economic scrutiny

The pace of decision-making on Australian submarines is quickening, with the core of the current debate driven exclusively by South Australian politics. But the insistent voices of regional and industry lobbyist need to be balanced by reminders of the price the rest of Australia will pay for make-work projects creating permanent mendicant industries.

The proponents should be obliged to make the economic case, not just threaten to pull the political plug. In a world where the nation is trying to become more productive and internationally competitive, economics should enter this key decision in a more substantial way. For example, ASPI's most recent examination of the project is feather-light on economics.

Where economic arguments are put forward, they are often fallacious: see this demolition of the South Australian lobbyists' advocacy. 

As a small nation in an uncertain world, our best chance is to be highly efficient and productive in what we do, and this means avoiding frittering away our resources on white-elephant projects. We need to correct the false economics in the current arguments over the future of the project and introduce the concept of opportunity cost.

There is a widespread sentimental view about the importance of manufacturing: because manufacturing provided many well-paid jobs in the past, the argument goes that we need to get back to 'making things'. But manufacturing provided well-paid jobs thanks to huge subsidies, mainly in the form of tariff protection, which raised prices for consumers and lowered national living standards. After many decades of tariffs and direct subsidies for automobile production (with South Australia a large beneficiary), we are finally wrenching ourselves free. Consumers now have the benefit of cheaper cars, and the burden on the budget is being lifted. [fold]

Manufacturing is now 6.5% of GDP, less than half of what it was four decades ago. The economy has adjusted successfully to the reality that Australia does not have the scale or cost-base to be a major integrated manufacturer. Manufacturing will find its place as part of a global supply chain, in specialised niches, and in offset projects working with foreigner producers. The Government should be ready to help fund the adjustment process, but we don't want to adjust from one unviable manufacturing model to another.

Part of this sentimental attachment to manufacturing has been a nebulous security argument: in the event of war, we need to be self-sufficient. But self-sufficiency in modern defence technology for a small country like Australia is a pipe-dream. Even if the submarines are built here, large key components are going to have to come from overseas. In the event of hostilities, we'll inevitably be dependent on overseas suppliers to keep our submarines operational (same for our military aircraft). 

Those who put forward the canard of defence self-sufficiency should recall the World War II experience of sending home-made Boomerangs up against Japanese Zeros. This did not turn out well. We need state-of-the-art subs, not compromises to boost domestic content.

The current proposals involve reconstituting the domestic submarine industry, which cost us so dearly and produced an imperfect product with the Collins class. It is more than a decade since the last of these was built, so the specialised skills brought together have dispersed. There is no hope that anyone else will buy our bespoke subs, leaving the construction component as a dead-end industry.

Australia is a federation, and the need to support South Australia (and others) is part of the federation deal. But the question is: how much? Federation shouldn't be a license for political blackmail.

Tony Abbott offered South Australia a substantial medium-term economic future building surface ships, and the prospect of doing the ongoing maintenance of the new submarine fleet. Now, with the South Australian defence lobby feeling the wind in its sails, the stakes (and the subsidies) are rising. One of their arguments rejects the idea of partial (hybrid) construction on technical grounds: modern sub-building has to be done in one place. This argument is put forward in the confident belief that this place has to be Australia. A variant is Senator Nick Xenophon's specification that 70% of the total value of the submarines should be Australian-made. Is there no technical limit to the make-work arguments?

Here are some considerations:

  • The competitive evaluation process should be rigorously enforced to limit the intrinsic 'open cheque-book' nature of the project. Construction promises should wait until this process takes place.
  • Let's not preempt the competitive evaluation process by specifying the local content in advance. Let's see what the bidders offer, each of them knowing that domestic content has a favourable weight in the assessment.
  • Out of this evaluation process should come a well-based figure of the extra cost the nation will have to pay for home-made subs. This can be weighed against our obligations as a federation.
  • The number of subs to be built shouldn't be set by the need to provide continuous work in South Australia, but by a realistic evaluation of our security needs and capacity.
  • Past performance (in this case the lamentable Collins experience) can't predict the future but, as usual, it's a good place to start. Objective assessment, not industry assertion, is needed to evaluate domestic capability.
  • The Department of Defence should articulate the reality of opportunity cost. If submarines cost more to make here, that should mean less defence spending elsewhere: fewer subs or fewer guns. It shouldn't mean upping the demands on the general budget ('more guns, less butter').
  • Given the political reality that some manufacturing subsidies are inevitable and that adjustment support is desirable, is this the best option? What alternative manufacturing industries might offer a realistic prospect of creating a viable internationally competitive industry? 

The cost of the subs puts the project on a par with the National Broadband Network, which was endlessly debated in public. In contrast, home-made subs might become a fait accompli without ever passing any serious economic scrutiny.

Photo courtesy of Australian Defence Image Library.

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