Mark Bishop (WA, Australian Labor Party, Shadow Minister for Defence Industry, Procurement and Personnel) Share this | Hansard source

I rise to make a few remarks about the report that has just been tabled by the Chair of the Senate Standing Committee on Foreign Affairs, Defence and Trade, Senator Johnston. Since this inquiry’s inception, it has been hoped that it would better inform the parliament on a potentially significant part of Australia’s manufacturing industry. The stimulus for the inquiry was the government’s decision to build three air warfare destroyers in Australia. These are to be followed by two amphibious ships which, at this stage, are of unknown construction, design and location. These are very large ships, the likes of which have not been built in Australia for decades, so naturally there are questions about industry capacity and cost relativities. The purpose of the inquiry, however, was not to delve into the strategic decisions to build these types of vessels. Those were government decisions, and they were a given; hence the committee’s strict concentration on its limited terms of reference, which were essentially economic in nature.

I have appended to the report my own views on the subject. Whilst my views are certainly not inconsistent with the broader report, there are some matters of emphasis that are worth considering. I will therefore make the following points for the record. We on this side believe that, just as we have a vibrant small shipbuilding industry, we should also be able to develop more at the heavy or larger end. We have the skills, the workforce and a very capable heavy engineering sector. We also need to boost our manufacturing sector and, in that respect, the defence industry is potentially a key. The nature of shipbuilding has changed. We no longer have big yards, but flexible fabricators of many tasks—some offshore, some small ship fabricators, some involved in ship repair and fabrication, and some that manufacture mining equipment and the like. The old model of large yards doing all work on site is dead all around the world, and few can hope to compete with China, India and South Korea at the large end of the commercial shipbuilding market.

It is also clear that, if we are to have a capacity, it must be limited to one central assembly yard—and modular sections from a competitive supply market. We note that this trend is already emerging, and South Australia, in a de facto sense, appears to be the location chosen by government for this central assembly point—although there are very useful developments in terms of a joint user facility in Western Australia.

One of the most difficult issues in naval shipbuilding is that it is surrounded by a range of assertions and shibboleths, including: that self-sufficiency is needed, that naval ships are somehow different from commercial ships, that defence security justifies all sorts of expense, that all governments protect their naval industry and that there are large ongoing economic spin-offs. These considerations, in my view, are only relevant to a degree. In making a decision to have a local build, several matters need to be considered. Steel fabrication is only 20 per cent of the value of naval ships these days. The biggest portion, by value, is weaponry systems, systems integration and fit-out.

Competitive costs are fundamental, but what is the exact premium if we are going to have a local build? What is the state of the economy? Can it sustain large ad hoc investments? What is the state of the international shipbuilding market? What is the status of our alliances with respect to intellectual property and security? What is the state of our heavy engineering industry? Is it capable? Is it stretched? Is there spare capacity? What is the status of the labour market? Do we have the manpower and do we have the right skills mix, particularly at a technical and engineering level? Putting nationalism aside, these are rational questions that need sensible, calculated and verifiable answers.

The biggest single problem with Defence procurement is that Defence is a monopsony—that is, a single or sole purchaser. The history of Defence procurement is one of industry capture, inefficiency, poor specification, overspending and serious time delays. On top of that, purchases are often ad hoc and of a limited time span. Our past naval shipbuilding is just another example of that, and the responsibility for that poor state of affairs really needs to be sheeted home to government.

In my view, there are three critical factors for a viable industry on a long-term basis: firstly, continuity of Defence demand; secondly, long product runs, which give you economies of scale; and, thirdly, long-term planning. I believe the government has failed all of these critical needs. The decision on new ships should have been made five or even seven years ago. The mix of ships should have been more numerous for economies of scale purchases. Plans should already be on the drawing board for the next generation of ships.

It does seem clear that, with the frigates project at least, a sound level of cost effectiveness might have been achieved, but only because we produced 10 units—that is, we got the savings on the production run through economies of scale because of the volume of production. That again is the experience all around the world with commercial shipping. It applies equally to naval shipping. What we have here is a decision for just three AWDs and two LHDs.

Through sheer experience we know these projects, in isolation, cannot be viable. We would certainly like to see the economic analysis and the benchmarking which has been done, if any has been done. We do not decry the decision to build in Australia. But it is simply tragic that a serious effort has not been made to ensure the re-establishment of a long-term industry as part of that plan. To be blunt, responsibility stops there with the government.

The risk is that these enormous investment decisions, totalling billions of dollars, have been made solely on the ground of local political advantage. If the government is concerned about the excessive premium for local building, that is the direct result of its short-term decision making and limited vision in this area. This inquiry, despite its limitations, has shown that given certain conditions a competitive naval shipbuilding industry might be viable in Australia, and that is assuming that the economic modelling has been done. If it has not, it should be. Taxpayers deserve better than to have billions of dollars thrown at projects of dubious value and excessive cost.

We believe that model should be designed now and applied rigorously to both these projects and future projects. Further, we believe that that model should be totally transparent and subject to full audit and public scrutiny. If we do not knuckle down on this issue now and do that type of analysis, we will continue to be plagued by the same problem for another generation. In that context, the opposition was pleased to sign up to the report and make it unanimous.

My final comments go to the considerable assistance provided by the committee secretary, Dr Dermody, and the two research officers, Dr Richard Grant and Ms Lisa Fenn. They had extensive work to do in preparation, research, analysis and organisation. Their input has been valuable. It should be noted on the public record that they have provided fine support to the chair of the committee and to members of the committee who were, by and large, actively involved in nearly all deliberations. Finally, I wish to also support the comments of the chair and acknowledge the support of the Minister for Defence, the Prime Minister and the head of the DMO, Dr Gumley, who were sufficiently prepared to recommend funding for the committee to visit the United States and South Korea to examine local shipyards on the ground.