David Johnston (WA, Liberal Party) Share this | Link to this | Hansard source

I present the report of the Foreign Affairs, Defence and Trade Committee, Blue water ships: consolidating past achievements, together with the Hansard record of proceedings and documents presented to the committee.

Ordered that the report be printed.

I seek leave to move a motion in relation to the report.

Leave granted.

I move:

That the Senate take note of the report.

This is a very comprehensive report looking into Australia’s capability and capacity to construct bluewater ships for the Royal Australian Navy. Before speaking to the report, may I firstly say a special thank you to the committee secretariat, led by Dr Kathleen Dermody, and also to Ms Lisa Fenn and Dr Richard Grant, who, during the past 12 months, have put an enormous amount of time—into what is a very complex and difficult subject—into preparing what I think is probably the most comprehensive evaluation of Australia’s heavy industrial capability and its capacity to construct large ships that has ever been done.

This comprehensive report looks at the background to naval shipbuilding in Australia, Australia’s capacity to produce large vessels for the Navy, the productivity of Australian naval shipbuilding and repair industry, and the role of state governments and the Commonwealth in assisting that industry. Since the end of the Cold War, the shipbuilding industry right across the world has had to confront many significant challenges, with dwindling demand for naval ships but with increased pressure for more highly sophisticated and expensive systems. Advances in technology are accelerating these changes.

As a nation with an established naval shipbuilding industry, Australia confronts similar problems in sustaining its naval shipbuilding industry. It has been required to address issues created by the fall in demand for ships, the escalating cost of construction and the need to keep pace with advances in technology, as well as the need to develop and retain skilled workers. In a region where there is significant expansion of naval capacity and capability, Australia is looking for an up-to-date naval shipping capability at an affordable price.

The report considers whether Australia’s naval shipbuilding and repair industry can cost-effectively provide the required improved capability at low rates of production. A number of themes dominated the evidence. Over recent decades Australia’s record of the construction of naval vessels has improved quite dramatically. The Anzac class frigate, of which we produced 10, with two for New Zealand, the minehunters and the Collins class submarine, of which we constructed six, are testament to the ability of Australia’s naval shipbuilding industry to produce world-class naval vessels. For example, despite the well-publicised problems with the Collins class submarine, it is now acclaimed and acknowledged as world-class and provides Australia with a technologically, strategically and, may I say, superior asset and deterrent. The recent successes of the Anzacs, the minehunters and the Collins class submarines have established a very solid platform of naval shipbuilding capability comprising, firstly, the prime contractors capable and willing to invest in complex builds and repair projects.

It also includes an extensive and widespread supply network of local industries that have the skills, knowledge, experience and motivation to support the prime contractors. Some are at the cutting edge of world-class developments and are contributing to innovation and driving advances in technology, such as the development of the anechoic tiles for the Collins class submarine, which are substantially unique in reducing noise. All the work is being done by a local Australian firm called CEA, with its high-powered active phased array missile system.

In some cases a defence contract was the stepping stone that set the company on its successful path in opening up export opportunities for further development. A number of naval shipyards located around the Australian coastline have established significant infrastructure. Over many years governments and private enterprise have invested in infrastructure for the naval shipbuilding industry. More recently, there have been substantial investments in infrastructure at Osborne in South Australia and at the Australian Marine Complex at Henderson in my home state of Western Australia. The development of centres of excellence with a common user facility, surrounded by a heavy engineering precinct, point the way forward for the industry.

Australia also has a highly skilled, highly specialised workforce, as required by naval shipbuilding. This base has taken some significant time to develop and is now, more than ever, ready to embark on current and planned projects. Rather than an impediment, forecast labour shortages should be an incentive for innovation and industry investment in training and skills development to ensure that Australia retains and builds on its current knowledge and skills base to support our burgeoning industry.

Built up over time, Australia now has a highly capable naval industrial base that should be preserved and not eroded by short-sightedness or lack of planning. Without doubt, the Australian industry faces challenges, particularly given that overseas countries are unlikely to remove the various forms of assistance, subsidisation and protection that they give to their local naval shipbuilding industries. Put simply, Australia is competing on an unlevel playing field. Even so, the committee found that substantial benefits accrue to an in-country build of future naval ships. Not only does Australia’s naval industrial base have the capacity and potential to contribute to the maintenance of a self-sufficient, self-reliant naval shipbuilding industry but it also contributes in many other ways to Australia’s industrial manufacturing base, the broader economy and Australia’s national defence interest.

To mention just a few of the benefits that accrue from constructing large naval vessels in Australia, I point to the strategic self-reliance for the repair and maintenance of the Navy fleet and commercial shipping. Other benefits include: increased gross domestic product from the capital investment that flows from such projects; enhancement of the labour market; expanded Indigenous research and development, design, production and management capabilities; the acquisition and development of valuable new skills, manufacturing techniques and processes; extensive technology transfers across a broad spectrum of activities; a strengthening belief in Australia’s own capabilities and confidence in its own ability to exploit opportunities as they present themselves; and, finally, an enhanced potential for export.

When taking account of the broad range of factors that are to be considered when acquiring a naval vessel, the committee believes that it is in Australia’s national interest to maintain a viable naval shipbuilding and repair industry here in Australia. This requires a commitment by the government to have Australia’s naval vessels constructed in Australia and for the government and Defence to adopt measures that would ensure that the industry remains efficient, innovative and competitive. The committee, however, was concerned about the lack of data that Defence makes available on its major acquisition projects; thus, it believes that accurate costings on all aspects of a ship’s construction and its through-life support must be done which are measurable, transparent and based on detailed analysis on the best benchmarks available.

The committee suggested that, because of Defence’s dominance in the marketplace, it should recognise and use its influence to assist industry to gain greater efficiencies and perform better. Based on substantial evidence, the committee was of the view that Defence would achieve greater efficiencies through a more coherent and strategic approach to planning. With this in mind, the committee supported the call for a strategic plan that would, in particular, address the peaks and troughs in demand for Australian vessels. The committee rejected the notion that measures cannot be taken to more effectively moderate the fluctuations in demand without adversely affecting Defence capability. Clearly, long-term strategic planning is required to address this problem. The committee also recommended that Defence provide more detail in the Defence Capability Plan and include information that provides a much clearer indication of its future acquisition program and timetable. The committee accepts that the document can only be as good as the quality of the strategic planning it represents, which reinforces the importance of Defence placing the highest priority on strategic planning.

I thank the Prime Minister, the Minister for Defence and the DMO—in particular, Dr Gumley—for supporting the committee in its investigations. We undertook a substantial investigation into commercial shipbuilding in South Korea and naval shipbuilding across the United States, which was greatly edifying in terms of looking at the capacity and capability of our near neighbours. I thank the members of the committee—in particular, Senator Mark Bishop, Senator Hutchins, Senator Trood and Senator Payne—who participated in a very time-consuming and deep investigation into Australia’s capacity to construct and commission large bluewater naval ships.

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