It was the best of times, it was the worst of times
13 Nov 2012|

I gave a talk today on the subject of ‘the defence maritime budget and industry opportunities and impacts’ at the Maritime Environment Working Group here in Canberra. In this case, it was hard to know what to say. On paper, the prospects for maritime industry in Australia are very bright. The Defence Capability Plan contains tens of billions of dollars’ worth of shipbuilding projects, including:

  • twelve future submarines, at an “acquisition cost of > $10 billion”(in reality the cost will likely be at least twice that), with a decision to be made somewhere between 2016 and 2018
  • eight future frigates, at over $10 billion (2021–2024)
  • ‘around 20 offshore combatant vessels’ at over $5 billion (2017–2020).

As well, studies are underway for a possible life of type extension for the Collins class submarines to bridge the gap before a replacement is likely to be available—in all likelihood it will be another multi-billion dollar program. And the current fleet of Armidale class patrol boats is being worked very hard—possibly harder than they are able to sustain—which could see their replacement moved forward, perhaps by the offshore combatants or, more likely, by a less costly interim fix. 

There’s also plenty of political support for local work on shipbuilding projects. Both sides of politics have committed to building the next generation of Australian submarines in Adelaide, and the photo opportunities in shipyards continue to entice pollies into those fetching fluoro vests. There’s a growing realisation that keeping the workforce in place to build those submarines is going to be next to impossible unless some additional work can be found as the air warfare destroyer project winds down in ASC’s South Australian shipyard. The Minister for Defence Materiel is on the record saying that prospective solutions for the ‘valley of death’ facing the shipbuilding industry are being investigated and will inform the 2013 Defence White Paper (though we are yet to see anything approaching a business case that quantifies the supposed benefits of continuity beyond that likely to accrue to commercial interests)

That’s the good news. The bad news is that the good news is all out in the ‘never never’ that lies beyond the forward estimates period of the federal budget. There doesn’t seem to be much chance of anything happening on a timescale that actually helps Australian industry weather the drought that has befallen it in recent years.

There are several factors at work. First and foremost is that the next four years of spending on major capital equipment in Defence has been raided to the tune of around $4 billion—about 20% of the total. And the recent announcement of acquisition of the EF-18G Growler electronic warfare aircraft contained another whammy for the DCP—the $1.5 billion price tag is going to be funded from within Defence’s allocation, which is effectively an opportunity cost for anything else competing for resources.

The prospects for a reversal aren’t great. The government’s revenues are down significantly from the halcyon days (for Defence) of 2000–2008. That will make it harder to find a few spare billion for shipbuilding projects—although it doesn’t make it impossible. In The Strategist recently, Henry Ergas pointed out that governments can choose to set their priorities and provide extra money for defence should they judge it necessary. Both sides of politics have some expensive and currently unfunded policies that they will take to the next election, and it remains to be seen how defence will rate in comparison.

In the absence of some strategic shock, the politics of the defence budget isn’t likely to shift towards additional spending. Public opinion isn’t likely to help; as Mark Thomson pointed out in his budget brief this year (PDF, pp 6–7), Australian public support for additional defence funding has fallen from a high of 60% immediately after the September 2001 terrorist attacks to a level of around 45%—and has been trending downwards for a decade.

Finally, the Australian dollar is showing no signs of falling back to anything like the value it had when the last round of major in-country shipbuilding projects was launched. The buying power of the dollar is therefore likely to make it harder for local builds to be able to claim cost-effectiveness versus imports. (Although that hasn’t proved to be fatal in the past.)

So, overall, it wasn’t a happy message I delivered to the gathered industry and defence audience. As far as I can see, absent a dramatic and unexpected decision in the very near future, there’s no escaping a very significant downturn in the quantity of work. The options available for remediation—such as building a fourth air warfare destroyer (which, at this stage, is likely to incur a substantial cost penalty because parts of the design and build process are already winding down) or using the air warfare destroyer hull as a basis for the future frigate—look a bit more like make work exercises than solid ‘bang for the buck’ prospects.

So even if the current or next government (of either stripe) decides to elevate defence spending to a higher priority than it is now, there isn’t likely to be a neat solution for the timing issues that industry faces today. My best guess is that there’s a significant downsizing of the forward work program coming.

Andrew Davies is senior analyst for defence capability at ASPI and executive editor of The Strategist. Image courtesy of Department of Defence.