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Wednesday 23 Aug 2017 | 12:36 | SYDNEY
Wednesday 23 Aug 2017 | 12:36 | SYDNEY

Subs and ships: The merits of domestic builds



19 April 2016 14:36

Yesterday the government announced the commissioning of dozens of naval vessels. In an effort to stave off the industry 'valley of death' between major projects, planned construction of 12 offshore patrol vessels (OPVs) in South Australia will begin in 2018. In 2020, previously scheduled construction of nine frigates will begin in South Australia and the OPV build will shift to Western Australia, where, in addition, 'up to' 21 Pacific Patrol Boats will be constructed for use in the Pacific Security Maritime Program.

This schedule will secure '2500 jobs for decades to come' and generate 'thousands of additional jobs with suppliers', according to the Prime Minister. At the same press conference, Chief of Navy Vice Admiral Tim Barrett also emphasised the strategic benefits of the announcement:

This is not a series of projects, this is about the programmatic effects of building a ship building industry within Australia that will enable the future of navy to be given great certainty. It is a requirement to build an industry that will allow us to look at future projects that can be designed and developed within Australia, to be able to continuously build, evolve our ships and to permanently provide that capability to Government. So this is more than just a series of projects, this is a programmatic view on a capability that is indeed a national endeavour.

In light of the announcement, it's worth revisiting a short debate The Interpreter hosted last year between Peter Briggs and Stephen Grenville on the merits of building submarines in Australia. While submarine construction is a far more complex endeavour, this debate has some useful parallels for considering the merits (or otherwise) of the surface vessel announcement.  First, Briggs:

Collins sustainment, much improved since ASC began managing the entire supply chain, demonstrates the breadth of Australian industries' capability – over 90% of every dollar ASC spends on Collins sustainment is spent in Australia.

Professor Goran Roos has argued eloquently for the overwhelming economic justification for building the submarine in Australia: 'Sending $20 billion overseas for an off-shore build would remove $20 billion from the economy. In contrast, investing the same amount on-shore would deliver a multi-billion dollar return in terms of innovation, exports and employment.' When the multiplier and spillover effects Professor Roos cites are taken into account, it will cost Australia more to build overseas.

Grenville's response:

The proper way to analyse how the submarines might affect GDP is to think in terms of opportunity cost: if these resources – capital, managerial talent and labour – were not building submarines, they would be doing something else which society also values. The productivity challenge is not to attempt to conjure productive capacity out of thin air, but to shift the economy's given resource endowment into uses which have a higher social value ...

Will [domestic submarine construction] foster a viable industry which suits our comparative advantage? Will it form the nucleus of a cluster of highly productive firms with a self-sustaining future when the submarine work is finished? Will it link into international supply chains, thus compensating for our lack of manufacturing scale? Will it be disciplined by international competition, or link us more firmly into the rising demands of East Asia?

The Collins-class experience suggests that constructing bespoke submarines is a dead end, a mendicant industry whose survival depends on government subsidies.

And finally Briggs' reply:

Stephen Grenville is happy to leave strategic considerations to the experts. I would argue that you can't reach a sensible decision on the matter of where and how many submarines to build unless you consider the strategic, economic and industrial arguments in concert ...

The financial risk and strategic benefit are best managed by maximising Australia's capacity to sustain the submarines through the 50-year life of the class. This is reinforced by the strategic benefit of Australia controlling the building line should our needs require additional submarines at short notice ...

Recent arguments by Professor Goran Roos on the benefits of leveraging off a local build to boost Australia's economic complexity support this approach. The Collins build program has fostered a viable sustainment industry that has given Australia an economic, strategic and industrial advantage in this specialised area.

Photo of HMAS Darwin (constructed in the United States) courtesy of Flickr user Royal Australian Navy.

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