Australian defence procurement must avoid the creep of industry policy, which only leads to cost blowouts and delays, writes Erik M. Jacobs.
Security challenges in the Asia-Pacific region have expanded the Australian defence budget. In 2017-18 alone the Commonwealth is spending almost $40 billion on defence. Australia has one of the world’s most modernised military forces, but it relies heavily on outside designs and production for its capabilities. In the past few decades, several Australian defence projects have gone astray and led to billions of dollars of cost blowouts and lengthy delivery delays. These past procurement mistakes should inform future decisions in how Australia’s defence spending can best achieve its aims. In particular, Australians must remain wary of the creep of industry policy, where defence objectives are replaced with political favours.
Australia’s 2016 Defence White Paper notes that defence spending will be decoupled from GDP growth in an effort to deal with the ‘uncertainty and tension’ in the Asia-Pacific region. While this change may bring stability and certainty to the defence industry, it will also lead to an expansion in taxpayer funding. And, as with all areas of public spending, an expanding budget comes with the risk of waste and inefficiencies.
Several recent Australian defence programs have unnecessarily cost Australian taxpayers billions of dollars. Indeed, a recent McKinsey report found that Australian defence spending has been some of the least efficient in the world.
Take the failed Seasprite helicopter program as an example, which cost more than $1.4 billion when it was cancelled in 2006 after falling years behind schedule and failing industry crashworthiness standards.
Although the first Air Warfare Destroyer will be launched this year, the ship program has faced several procurement issues which will lead to each ship being launched more than two years after its initial deadline. Furthermore, the cost of the program has blown out to $9 billion, which is 15 per cent higher than the original estimate of $7.9 billion, made in 2007 when the first orders were issued.
The $1.5 billion Tiger helicopter program is now in jeopardy after the entire fleet was grounded after numerous crashes in Africa. Airbus Helicopters cannot identify the problem. Australia currently has 22 of these helicopters in its fleet, and was considering a $500 million upgrade for the Tiger helicopters, which also came into service seven years late.
The first Collins-class submarine was removed from the water weeks before its launch, and was eventually launched 18 months late. Following its commission in 1996, it took until 2000 for the Collins to be approved for operational deployments.
Understanding these procurement missteps is key to ensuring they are not repeated in future projects. Without this, Australia will fail to achieve the fundamental goal of defence policy—producing the highest quality defensive capabilities at a low cost for Australian taxpayers.
One threat to achieving this objective is when spending becomes captured as a form of industry policy, where funds are used to support domestic industries for political gain. Australia’s future defence spending projects show the problems of this occurring.
The project to replace the ageing Collins-class submarines is one example. The choice to essentially create a new submarine by converting French-made nuclear-powered submarines into conventionally-powered subs requires a significant redesign and comes with the potential of cost blowouts. This redesign will not be completed until September 2018, and design problems could push the final cost to much more than the original $50 billion estimate.
The plagued project has been marred by the rhetoric of injecting funds into Australia’s economy, particularly in South Australia. At the same time, DCNS, the French builders, have stated that the actual number of Australian jobs created in this project will be much less than pitched during the design competition.
For decades, Australian taxpayers have paid for defence programs that have gone billions of dollars over budget while arriving years late.
Throughout the procurement process, shipbuilders and buyers must be flexible in the ship design and production process. Some of this flexibility must come from deregulating the procurement process itself. Indeed, the Department of Defence’s 2016 Defence Industry Policy Statement lists cutting red tape as one of the key ways to streamline tendering and contracting procedures. These initiatives include tailoring administrative processes to enable greater investment in innovation.
Major overhauls in ship design, or flaws in the build, will inevitably lead to cost blowouts. To avoid this, the government must remain flexible when making decades-long defence purchases to avoid repeating the same mistakes with the Collins-class program, Hobart destroyers, and others. This includes considering what could go wrong in procurement procedures and having alternate designs available.
Should Australia develop its own research and development capabilities? On the one hand, developing these capabilities at home could take place as part of a greater effort to fix its procurement challenges. However, there are also economic limitations and inefficiencies in building such an industry in Australia, and it may continue to be more efficient to procure certain designs from overseas.
Despite these challenges, there is hope that the shipbuilding and defence industry can emerge as a prosperous export industry for Australia. West Australian shipbuilder Austal is a world leader in ship design and production and is currently the only foreign company to produce ships for the United States Navy. Austal’s success shows that there is a worldwide market for Australian-made aluminium ships.
The Australian defence industry has made several costly mistakes in its last rounds of procurement that have risked national security and also caused taxpayers to pay for billions of dollars of waste. As Australia enters its largest and most expensive shipbuilding projects since World War II, it is important that the government is mindful of where projects could go awry and is prepared to deal with cost blowouts or design problems.
In the long-term, Australia could become a viable exporter of aluminium ships to support its defence industry, but Canberra must consider the dangers of allowing future procurements to replicate the mistakes of the past. Such a mistake now means that Australian national security will
