Part One: Australia’s big spending on war machines
Speaking last week, the new Defence minister, Peter Dutton, made a joke.
“The real joy of this job is that I get to deliver program decisions that were made one and two and three predecessors ago – six predecessors ago,” Dutton told the Australian Strategic Policy Institute’s annual conference.
“And the joy is that I can bequeath the same sort of decision-making process to my successors in years to come, when I’m sitting on a beach somewhere, and look on with amusement.”
Dutton’s point was that the people making the decisions at the beginning of a defence procurement project are not those who see it through its middle stages, nor those who have to bring it home, decades on.
As he suggested, turnover among Defence ministers has been high. He is the sixth since the Coalition won office in 2013. Experts argue that this affects accountability for slippage in cost and schedule, and for the gaps in capability that can result.
As former submariner and now independent senator Rex Patrick puts it, “You have a whole bunch of people … who simply say, ‘I’m not responsible.’ ”
Given the scale and time lines in such massive projects, slippage is common and occurs worldwide. There is no equivalent to these projects across either the government or private sector.
The question is, how much of it is inevitable and how much is avoidable with better decisions and oversight or more qualified managers?
The immediate focus is Australia’s new Attack-class submarines. The contract with the majority-French-government-owned Naval Group, to design and build 12 submarines at Adelaide’s Osborne Naval Shipyard, is the largest single infrastructure project Australia has undertaken.
New submarines were first added to Defence’s capability plan in 2009, to replace the ageing six-strong Collins-class submarine fleet.
Designing and building what will be known as the Attack class was originally costed at around $50 billion, with the first boat due by 2026. That is now at $90 billion, also covering an American combat system and a new purpose-built shipyard in the Osborne precinct, where the submarines will be constructed as part of the sovereign naval shipbuilding capability the government wants to develop.
The problems began with delayed threshold decisions about new submarines, beyond the need to have them. For four years, the then Labor government declined to make any decision, leaving it to the Coalition, which took office in 2013.
With the first boat’s due date now pushed back from 2026 to 2035, the last is due in the early 2050s. Current scheduling has one due every two years. The project is still only at the design stage.
Unlike with some other contracts, Defence chose not to have a competitive tender process for the design. Instead, Naval Group is designing alone, leaving the government with little leverage.
Australian National University strategic studies professor and former senior Defence official Hugh White says the contract was signed with too much unknown and too little capacity to apply pressure.
“It’s like buying a house, not just without ever having seen the house, but having no idea what kind of house it was or where it was or how many rooms it had,” White says.
“The incompetence with which the submarine project has been developed is scandalous.”
The project was controversial from the start. Before being dumped as prime minister in 2015, Tony Abbott promised the Japanese government he would buy Japanese submarines.
In the uproar that ensued, a tender process was established pitting the Japanese against French and German alternatives. The French won. The Japanese were not happy.
Now, relations with the French contractor are strained following robust negotiations that preceded a key strategic partnership agreement signed in 2019.
The company recently overhauled its board, adding new faces with strong Australian government ties, something Dutton has welcomed. It also hired lobbyist David Gazard, a close friend of Prime Minister Scott Morrison.
Nevertheless, recent media speculation suggests the frustrated government might be prepared to buy other submarines to cover the gap, or even cancel the contract.
Defence secretary Greg Moriarty told a senate estimates committee hearing two weeks ago his department was exploring “contingencies”.
The company is assuring the government it will make up time during production. In October last year, Defence’s submarines manager Greg Sammut confirmed there was room to increase the production rate.
A Defence spokesperson said the government remained committed to building “a regionally superior future submarine capability”.
In response to questions, they said: “It is entirely reasonable in complex programs such as the Attack Class Submarine Program for Defence to undertake prudent contingency planning.”
After meeting French president Emmanuel Macron in Paris this week, Morrison talked up the importance of relations with France, given its interests in the western Pacific. Macron and Morrison both suggested their regional engagement would increase – comments being read as making a cancellation less likely.
But Morrison also emphasised a September deadline for Naval Group’s design.
He thanked President Macron for a “very, very open and very transparent and very friendly relationship”.
Later, he said: “I appreciate the direct role that he has played in ensuring that we’ve seen a much-improved position come forward from Naval over the last six months. But there is still a long way to go.”
Asked if the government might dump the contract if the September deadline was missed, Morrison neither confirmed nor denied.
“The scope-to-works, the master schedule, total costs, these are all the next steps,” he said. “Contracts have gates and that’s the next gate.”
The submarine project is part of a sizeable military acquisition program and the biggest investment in the local defence industry since the 1930s. The figures are eye-watering.
Faced with a serious potential threat from China, the government is spending $270 billion over the next decade boosting Australia’s defence capability. There are 206 major and minor equipment projects on the books, currently totalling $130.5 billion.
The sums are so large that tiny currency exchange movements can impact those figures by tens of millions of dollars.
Likewise, small slippages are costly in more than monetary terms.
Dutton announced last week that Australia would spend at least $10 billion completely refurbishing the existing Collins-class submarines – known as a life-of-type extension – to avoid Australia being caught short by the delayed French subs.
Defence officials told the senate committee that by 2035 there will be approximately 300 submarines around the region, 60-70 of which will belong to China. Australia will have six Collins and, hopefully, one of the new ones.
Within this huge expansion of defence hardware, there are other projects that also have issues. The $35 billion future frigates program has already struck delays. Defence is also facing questioning over the ship’s weight margin – the capacity inbuilt into the design, to allow for new weapons or other equipment to be added as needs change.
The Hunter class of nine new frigates is being designed to last 25 years, replacing the Anzac frigate, which had a weight margin of 10 per cent. Australia’s required modifications mean the Hunters will have just 3.3 per cent.
“The Hunter class frigates will be better equipped and far more capable than the Anzac class frigates were when they were initially built,” the Defence spokesperson told The Saturday Paper. “The margins for the Hunter class frigate are sufficient.”
Others disagree. “It is absolutely too small,” Rex Patrick says. “The point of a weight margin is to allow you to change things over the life of a ship which you cannot foresee.”
Other projects have suffered more immediate setbacks.
In January, Defence cancelled a $279 million contract for a submarine rescue system that was to be used with both the new and old submarines, citing irreconcilable differences with the contractor.
The cancellation cost the government $100 million. Legal proceedings are under way.
Defence revealed it is spending $37 million to hire private replacements while the new Taipan MRH90 helicopters are repaired. The Taipan’s doors were too narrow to allow its gun to fire while troops descend, leaving personnel unacceptably vulnerable.
In another embarrassment, Defence has “paused” its Israeli-designed digital battle management system because of security concerns, both with the existing 10-year-old software and the upgraded version which had been due to replace it. It too was refused accreditation by the Australian Signals Directorate. An interim solution has had to be sought.
“Are we back to pen and paper?” shadow Foreign minister Penny Wong asked the chief of army, Lieutenant General Rick Burr, at the recent estimates hearing.
“We are not,” Burr replied.
But he acknowledged the system was crucial to Australia’s defence.
Officials confirmed various Navy vessels are spending extended periods in drydock because there aren’t enough crew available to put them into service.
They also revealed a humanitarian relief vessel promised to the Pacific when Morrison announced the Pacific step-up in 2018 had not yet materialised. It was due to have been delivered this month.
Foreign Minister Marise Payne confirmed no decision had been made on buying a vessel since the announcement.
During a testy senate estimates hearing on June 1, Wong grilled Defence secretary Greg Moriarty about the problems.
“You’re the secretary of Defence,” Wong said. “You’re presiding over, with due respect, a whole range of big capability issues: a lot of ships not being available for the number of days they’re supposed to be available for, helicopters having a problem, submarines 10 years late with X billion dollars blowout. There are a lot of issues.”
At the Australian Strategic Policy Institute conference, Peter Dutton said he was “dealing with” the problems he had inherited, including with the submarines. “We want long-term relationships but we want value for the Australian taxpayer,” he said. “But above anything else, I want capacity for the Australian Defence Force to be able to deploy at a time of need. So where there is a gap that exists for whatever reason, we need to be able to retrofit that as best we can.”
Rex Patrick and others argue problems can arise when those overseeing projects lack specialised qualifications. “Just as you would not take a project manager and make them a submarine captain,” he says, “neither should you take a submarine captain and make them a project manager.”
Former defence force chief and retired admiral Chris Barrie says such highly specialised qualifications are hard to find. “You can’t just go and buy one of these project managers,” he says. “They don’t exist much.”
Barrie says once decisions are made, government must “get the best deal it can”.
“The navy shipbuilding program is the most arduous, complicated and probably significant program we’ve ever undertaken,” Barrie says. “… We’re really biting off a big chunk. Is it possible to do it? Of course it is. We’ve done these things before.”
A Defence spokesperson told The Saturday Paper that improving qualifications was a core focus. It used nationally recognised organisations to certify managers.
“Capability management, and specifically complex project management, requires competent and well-trained teams. Project managers … are trained and build experience over many years.”
Labor’s shadow minister assisting for Defence, Pat Conroy, says qualifications are an issue. “We need greater commercial and industrial acumen within Defence, from capability development through to project delivery,” he says.
Conroy is scathing about the overall management of defence acquisitions.
“Obviously defence acquisition is always challenging, but this government is clearly underperforming and that is hurting the ADF and it’s costing taxpayers big time,” he says.
Based on Defence and Australian National Audit Office reports, Labor calculates there are 28 major projects running a total of 74 years late. Conroy says 19 projects are cumulatively $6.4 billion over budget.
Former Defence industry minister Christopher Pyne, now a defence industry consultant, says the projects’ complexities are not well understood.
“They’re not as simple as heading to Bunnings on the weekend and buying a watering system for the garden,” Pyne told The Saturday Paper.
“People need to understand they’re the most complex, expensive and long-term infrastructure projects that the country’s ever attempted. It’s easy for armchair critics to commentate. It’s much harder to actually do the job that’s expected of our defence forces.”
Many factors contribute to what is regular slippage. The initial decisions also reflect a range of considerations – military, economic and political.
They include the capability need and the cost of designing, building and sustaining assets. They also include timeliness of delivery, and a desire to support Australian industry, boost sovereign capability and maximise electoral and economic benefits. Governments also want to exploit other diplomatic or trade spinoffs.
All of this affects what is built, how, where, when and by whom.
The sequence of considerations goes like this. What threats does Australia face, now and going forward? What equipment will it need to combat those threats? What is the most appropriate version of that equipment to meet those needs? How much will production cost and how long will it take? Can we maintain the assets in future and get the personnel to crew them? How do we avoid a capability gap between old and new? And what is the contingency if things don’t go to plan?
Once the kind of asset is chosen, the next choice is between something already in use – tried and tested – and something completely new. Defence tends to argue for the newest and most advanced capabilities available.
But the less real-world experience any given version of a ship, boat, aircraft or vehicle has had, the greater the risk. When you’re the first to try it, the risk is at its peak.
It is harder and more expensive to service rare models and to access spare parts than if you buy something modest in wider use.
The more bespoke, the longer the production time and higher the price.
And the more unusual the modification, the less ability there is to learn from other countries’ experience when something goes wrong.
This all feeds into the level of risk a government is prepared to take.
Rex Patrick argues this is where the most fundamental problem with defence procurement lies.
“It’s a mess of our own decision-making,” Patrick says. “We think we’re special when we could generally get away with what others are using and when we do need to be special, we do that here in Australia or with others in a measured way. We simply don’t learn the lessons … If you pick an off-the-shelf option, then you know what the capability is, you know what the price is, you know what the product is.”
Chris Barrie describes the challenge for military planners. “A country like ours is always going to be short on numbers, so this is a real conundrum for the decision-makers,” the former defence chief says. “Do we buy higher quality ... high-tech stuff or do we buy lower-quality and more of them?”
Both the submarine and the frigate designs are being modified considerably to Australian specifications. The selected British frigate is an on-paper ship – brand new and not yet in service.
It was chosen over Italian and Spanish bids involving versions of existing ships. The original Australian guidelines for the bid stipulated that companies had to have an in-service ship, but that requirement was jettisoned along the way.
It has long been speculated the British leveraged other issues to win the bid – possibly including dangling the future free-trade agreement that was finally reached this week.
Barrie says he advised navy officers ahead of awarding the frigate contract to “make sure you can build lots of them in Australia”.
“Don’t buy a ship that we wouldn’t be able to replace if we lost three of them,” he recounts. “If you asked them, ‘Are we able to build those ships in Australia by ourselves?’ I don’t think the answer is ‘Yes.’ ”
Rex Patrick has been warning about the dangers of over-modifying submarines for more than a decade. Defence officials insist the French submarine, adapted from a nuclear version, was the best for what could be long-range activity requirements.
For governments, other factors include maximising operability with major allies, especially the United States, and involving Australian industry wherever possible.
The Attack-class submarines will have an Australian-designed radar and an American combat system.
Both government and industry argue that involving Australian manufacturers is vital to supporting the local economy and developing sovereign capability.
The Australian Industry Group’s head of defence and national security, Kate Louis, says the government’s 2016 defence industry policy statement signalled a shift away from “off-the-shelf” purchasing, to build a local industrial base in defence.
“Since then, the government and Defence have undertaken a range of initiatives to help develop Australia’s defence industry base, promote defence exports, encourage innovation, invest in research and increase Australian industry capability and content,” Louis says.
She says while “significant challenges remain”, a recent Australian Strategic Policy Institute report put local defence industry growth at 35 per cent last year.
The government’s strategic update and force structure plan, released in July last year, foreshadows a large sovereign Australian defence industry and skilled workforce to ensure Australia can support its own military needs in an “uncertain” strategic future.
Louis says Defence needs to improve its procurement and application processes, as well as its security requirements. It also needs to help local industry meet them.
She says the government should engage industry in informal consultations earlier – before making initial acquisition decisions – so opportunities can be identified and local skills harnessed.
From a government perspective, insisting on using local manufacturers and suppliers, building onshore and upskilling the local workforce, delivers economic and political benefits along with sovereign capability.
South Australia is favoured for ship-building because it is already home to the Osborne shipyard. Aside from wine, the state has little other industry to speak of and its economy would suffer without the ships. South Australia has also provided a number of influential political advocates in the security domain, present and past.
There is some rivalry from Western Australia, which also has cabinet clout. For example, the government is yet to announce a decision on whether the new submarines will undergo regular maintenance under full-cycle docking in SA or WA.
SA is widely expected, but there probably won’t be confirmation until after the federal election, to avoid upsetting WA voters.
Hugh White says broader political considerations are influential, too. He says Australia should focus more on being able to fight a future war independently, not assuming it can always rely on the US. To do that, he argues, it needs a war-fighting plan.
“Australia doesn’t have a military strategy,” White says. “There’s no document written down anywhere about how Australia expects to fight a major war. You need to really think about your military strategy if you might have to fight independently.”
He says too little consideration is given to hard-headed assessments of what kinds of military assets Australia really needs.
“We don’t work out exactly – even remotely – what we need and why we need it,” he says. “And that means we keep going for much more complicated and elaborate systems than we needed to.”
With the submarines, the government must accelerate a slow process to urgent. Other issues will continue to arise across Australia’s ambitious military procurement program.
But speaking at last week’s conference, Dutton offered one assurance. “I think that longevity is good if you want to implement the plan or the vision that you’ve got for the organisation,” he said. “And for that reason, I intend to stick around for a while yet.”
Next week: part two of this series, on how Australia plans to become a global leader in arms export.
To read Part Two: Selling Arms, on Australia’s desire to become a top-10 weapons exporter, go to Part Two: Selling arms
This article was first published in the print edition of The Saturday Paper on Jun 19, 2021 as "Part One: Australia’s big spending on war machines".
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