The Future Submarine (FSM) project has been the subject of significant commentary over recent months, leading to the statement by Defence Minister Andrews on 20 February on the structure and conduct of the competitive evaluation that will be undertaken. That statement provided some additional clarity for industry but left many key questions unanswered.

Some of those questions should be addressed in the process that’s now underway, but the odds would have to be against the FSM being constructed in Australia. It remains to be seen whether there’s a hybrid build with some of the systems integration and final fit-out and testing being done in Australia—and importantly, who carries the not-insignificant risks of such a strategy. Read more

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An important concept in understanding production efficiency of complex items is the notion of a learning curve. The term has passed into common usage, with ‘steep learning curve’ being synonymous with ‘really hard to master’ (in all sorts of contexts). That badly misrepresents its actual technical meaning; a steep learning curve actually means that something is easy to master. In the case of the production of things like warships, it means that the workforce concerned is getting on top of technical difficulties quickly.

A learning curve can be drawn in a number of complementary ways, but for the purposes of analysing defence projects, the most useful form plots the number of person-hours required to produce each item as production rolls along. Here’s an illustrative example. If the first item takes 1,000 labour-hours to produce, and the learning (in its technical meaning) is 90%, then every time the production numbers double the labour required for each item reduces by 10%. I.e. the second one takes 900 hours, the fourth takes 810 hours, the eighth 729 hours etc. By the time the 25th is produced, it’s taking a little over 600 hours. (See the blue curve in Figure 1, click graph to enlarge) As production times come down, unit labour costs fall as well, though the more productive workforce often shares some of the gains in the form of higher wages.

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It’s a truism that without industry capability, there can be no defence capability. Getting acquisition/industry policy right is therefore essential to getting defence policy right. As the Australian Government prepares to deliver a new Defence White Paper—and the associated Defence Capability Plan and Defence Industry Policy Statement—a simple, clear framework is needed to guide its thinking about acquisition and industry policy.

Three core considerations underpin that policy:

1. The need to obtain the ‘best bang for buck’, i.e. maximising cost effectiveness not just in relation to initial major system acquisition cost but also whole-of-life, whole-of-capability costs.
2. The need to ensure industry capabilities needed for defence self-reliance are available in-country.
3. To achieve, where possible, a net benefit for the Australian economy, perhaps by spending a little more to develop/acquire/sustain a capability in-country to provide a net positive outcome for the economy, taking into account the multiplier effect such an investment may provide but also the opportunity cost of any premium paid on the defence budget and overall Australian economy.

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Everyone seemed to miss it—a statement in public (at ASPI’s Submarine Choice conference) from the chairman of the Western world’s largest and most successful builder of conventional submarines: a fleet of 12 large state-of-the-art boats would cost around $20 billion. That’s $16 billion less than ASPI’s own estimate and was given by Dr Hans Christoph Atzpodien, the head of ThyssenKrupp Marine Systems. Since his company has built over 180 submarines since 1960, he should know about submarine costs.

Bizarrely, his estimate appears to have been totally ignored. I saw that my friend and colleague Stewart Cameron has written in The Australian that 12 submarines will now cost around $40 billion. That estimate was repeated by Alan Dupont in the same newspaper and subsequently also appeared in the Fairfax media.

So the estimate of someone who knows well is ignored, while the comparative ‘guesstimate‘ of $40 billion is well on its way to being entrenched as ‘fact’. Read more

I noted with interest Kym Bergmann’s question in the context of defence industry policy ‘why is “offsets” such a dirty word here’? The answer is actually straightforward: Australia tried offsets—and the results were hardly encouraging. All they did was result in poorly targeted outlays that imposed additional costs on taxpayers and made the procurement process even more inefficient than it would otherwise have been. Yes, they were simple, at least in theory: but it was a classic case of every complex question having an answer that’s simple—and wrong.

The problem with offsets is obvious. Essentially, they required offsetting defence acquisition expenditure in Australia to ‘balance’ the expenditure on the program. Naturally, the costs of that expenditure are built into the bids for the program; so the expenditure itself increases, rather than reduces, the burden on taxpayers. As raising taxes involves an efficiency loss (because people change their behavior in response to the taxes), every dollar of added outlay costs more than a dollar in income loss to taxpayers—typically around $1.30.  So increasing the cost of a $1 billion project to $1.1 billion, costs at least $130 million in reduced taxpayer income.

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