Referral to the committee
1.1
On 19 September 2019, the Senate referred an inquiry into Australia’s sovereign naval shipbuilding capability to the committee for inquiry and report by 25 June 2020. On 24 February 2020, the Senate granted the committee an extension to report by 3 December 2020. A further series of extensions were then granted with the final reporting date being 1 June 2022.
1.2
The Terms of Reference for the inquiry were:
That the following matter be referred to the Economics References Committee for inquiry and report by the last sitting day in June 2020:
Developing and delivering Australia’s sovereign naval shipbuilding capability, with particular reference to:
(a)
oversight and scrutiny of the national shipbuilding plan, to support a continuous build of vessels in Australia;
(b)
progress of the design, management and implementation of naval shipbuilding and submarine defence procurement projects in Australia;
(c)
progress of the Naval Shipbuilding College in building workforce capability, and developing the required skills and infrastructure to design, build, maintain, sustain and upgrade current and future naval fleet;
(d)
ongoing examination of contracts and scrutiny of expenditure;
(e)
the implementation of Australian Industry Capability Plans;
(f)
the utilisation of local content and supply chains;
(g)
the transfer of intellectual property and skills to Australian firms and workers;
(h)
the prospect of imminent job losses and redundancies;
(i)
opportunities and multiplier effects to local jobs and the economy; and
Conduct of the inquiry
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Details of the inquiry were placed on the committee's website. The committee also contacted a number of relevant individuals and organisations to notify them of the inquiry and invite submissions. All submissions received are listed at Appendix 1.
1.4
The committee has received a total of 38 submissions and has conducted seven public hearings in Canberra:
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Participants at those public hearings are listed at Appendix 2.
1.6
References to Hansard in footnotes and other places refer to the Proof versions and may be different to the final Official versions.
Acknowledgements
1.7
The committee thanks all individuals and organisations who assisted with the inquiry, especially those who made written submissions and participated in the public hearing.
Background
Previous inquiries into and reporting on Australian Naval Shipbuilding
General
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Interest in Australia’s naval shipbuilding industry has been long and ongoing. In the past 20 years, there have been numerous studies and reviews completed by:
Australian National Audit Office;
Price Waterhouse Coopers;
Senate Standing Committee on Foreign Affairs Defence and Trade;
Joint Committee on Public Accounts and Audit;
Carnegie, Wylie & Company;
Department of Defence/Defence Materiel Organisation;
Mr John Prescott and Mr Malcolm McIntosh;
Defence SA Advisory Board; and
Economic Development Board of South Australia.
Senate Economics References Committee
1.9
Since 2014, the Senate Economics References Committee has published four reports into the Future of Australia’s naval shipbuilding industry. These are:
Part 1 – Future of Australia’s naval shipbuilding industry: tender process for the navy’s new supply ships, 27 August 2014
1.10
The committee resolved to inquire into the tender process for the Royal Australian Navy's (RAN) new supply ships as its first order of business. This decision was prompted by the government's announcement on 6 June 2014 that it had given approval for Defence to conduct a limited competitive tender between Navantia of Spain and Daewoo Shipbuilding and Marine Engineering of South Korea for the construction of ships.
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The committee considered the strategic importance of the replenishment of supply ships to the Australian Navy; the capacity of Australian industry to build the ships; and the contribution that such construction could make to sustaining Australia's naval shipbuilding industry.
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The committee recommended that the tender process for the two supply ships be opened up to allow all companies, including Australian companies, to compete in the tender. It further recommended that tender documents should clearly note that a high value would be placed on Australian content.
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The government disagreed with three of the four recommendations, and agreed in principle with the recommendation that Defence should become actively involved in encouraging and supporting Australian industry to explore opportunities to become involved in the replenishment ship project.
Part 2 –Future of Australia’s naval shipbuilding industry: Future Submarines, 17 November 2014
1.14
In the second report, the committee recognised the national importance of the future submarine project and of the decision-making relating to the project. The committee highlighted the vital importance of having ideas and proposals thoroughly tested and assumptions about the future submarines objectively and critically assessed by competent personnel in order to provide government with the best possible advice. In the committee's view, open and informed debate would confer much needed transparency; it would allow genuine scrutiny of government decisions; and provoke robust and informed analysis.
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Such a process, the committee reasoned, would also enable public, industry and multi-partisan political support for the proposed acquisition to be obtained. The committee asserted that the decision to acquire future submarines was a decision in the national interest and should be owned by Australians.
Part 3 –Future of Australia’s naval shipbuilding industry: long-term planning 1 July 2015
1.17
The committee's third report developed and expanded on the findings of the first two reports noting concern with the limited tender process used for the acquisition of the new supply ships. In particular, the committee expressed concern that to select just one contender at this early juncture may be premature and that the Australian Government should consider proceeding with two tenderers who could then further refine their proposals and develop their design to a more mature stage. As part of the report's six recommendations, the committee recommended that the government adopt a specific procurement process to acquire the twelve future submarines.
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The report also examined the competitive evaluation process for Australia's future submarines, the independent audit of the Air Warfare Destroyers project, the continuous build of vessels, the development of an enterprise-level naval shipbuilding plan, and industry investment.
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The government disagreed with recommendation 3, agreed in principle with recommendations 5 and 6 and noted the remainder. The government rejected a recommendation, also contained in the committee's first report, that the tender process for the two replacement replenishment ships be opened up to allow Australian companies to compete and place a high value on Australian content. The Australian Government awarded the contract to Navantia S.A. and the ships were built in Spain.
The RAND Report
1.20
In September 2014, the Department of Defence’s White Paper team commissioned the RAND Corporation to undertake a series of material studies and analysis activities to inform the development of an enterprise-level naval shipbuilding plan for consideration by the Australian Government.
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On 16 April 2015, the Government released the RAND report: Australia's naval shipbuilding enterprise: preparing for the 21st century. RAND Corporation analysed the capability of the shipbuilding and ship repair industrial bases in Australia to meet the demands of Australia’s naval surface ship programs and its report explored the question of whether Australia should support a domestic naval shipbuilding industry or buy ships from foreign shipbuilders. The research questions were:
What are the comparative costs associated with alternative shipbuilding paths?
Is it possible for Australia's naval shipbuilding industrial base to achieve a continuous build strategy, and how would the costs of such a strategy compare with the current and alternative shipbuilding paths?
How do the costs of acquiring vessels domestically compare with the costs of acquiring comparator(s) from shipbuilders overseas?
How much do expenditures connected with warship building, maintenance, and sustainment add to Australia's economy?
Key Findings
1.22
RAND argued that Australian policymakers face a trade-off between paying a price premium and benefiting from broader economic development. The report concluded that:
the Australian Government must choose among three options: build the naval surface ships on Australia's acquisition list entirely in-country, build them partially in-country and partially overseas, or have them built at shipyards overseas. Each strategy carries costs and risks;
domestic production of naval ships in Australia currently carries a price premium — estimated to be between 30 to 40 percent compared with similar ships built abroad; and
the premium to build in Australia could be lower than the 30 to 40 per cent range if Australia adopts a continuous build strategy to avoid rebuilding an industrial and management capability with each new ship program, starts with mature designs at the onset of production, and minimizes changes during production. With such measures (and a cultural shift in industry toward continuous improvement), RAND envisioned the cost premium being cut in half.
1.23
RAND’s examination of shipbuilding's economic effects suggested there may be economic benefits associated with shipbuilding, especially when it occurs in areas that would otherwise have slack in their labour forces. RAND, however, argued the benefits are unclear and are largely dependent on broader economic conditions in Australia.
Australia’s Naval Shipbuilding Plan
1.24
Building on the findings of the RAND Report, the Naval Shipbuilding Plan, (the Plan) was released on 16 May 2017 and outlined the Australian Government’s vision for the Australian naval shipbuilding enterprise and the investment required in coming decades.
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The Plan provided the foundation for implementing the Australian Government’s commitment to the largest regeneration of Australia’s naval capability since the Second World War. It also aimed to create a long-term, sustainable naval shipbuilding and ship sustainment capability that will serve Australia’s strategic and economic interests for the coming decades.
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The Plan’s goal is to ensure that the regeneration of the Australian Navy over the coming decades will ensure both a cost-effective solution for the Australian Government to provide Navy the assured capability to defend Australia and its national interests. The National Naval Shipbuilding Office has been established to implement the Naval Shipbuilding Plan.
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The Plan states that delivering the naval capabilities that the Australian Government announced in the 2016 Defence White Paper is predicated on four key enablers:
a modern, innovative and secure naval shipbuilding and sustainment infrastructure;
a highly capable, productive and skilled naval shipbuilding and sustainment workforce;
a motivated, innovative, cost-competitive and sustainable Australian industrial base, underpinned initially by experienced international ship designers and builders who transfer these attributes to Australian industry; and
a national approach to delivering the Naval Shipbuilding Plan.
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The following figure expands on these four key enablers further:
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With the continuous build program at the heart of the Plan, the following diagram gives a visual representation of expectations at the time of the document's publication:
1.30
Further detail on the continuous build program is provided below:
Senate Economics References Committee – Final Report
1.31
The Senate Economics References Committee Final Report – Future of Australia’s naval shipbuilding industry, was tabled on 28 June 2018 after the release of the Naval Shipbuilding Plan, as such, it examined several of the Plan's premises and policy positions.
1.32
The committee's third report reaffirmed recommendations made in earlier reports, and also made findings applicable to the wider topic of Australia's future shipbuilding industry, including a recommendation that particular matters be included in the government's Naval Shipbuilding Plan. In the final report, the committee built on its earlier findings and recommendations, while examining the naval shipbuilding plan, and recent procurement and policy announcements made by the Australian Government.
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The Plan's release attempted to formalise a long-term approach for the industry. However, the committee believed that further work was required to provide a more comprehensive and holistic long-term plan for the Australian naval shipbuilding industry.
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The committee believed that the plan lacked guidelines about mandated levels of Australian industry involvement and content in defence projects. As a result, information about when Australian industry involvement and content should be achieved in these projects, how these requirements would be enforced, and what penalties exist for not adhering to the mandated requirements, was, in the committee’s view, absent.
1.35
The committee argued that the government’s Naval Shipbuilding Plan was limited in scope and fell short of contributing to the goal of a continuous building of ships in Australia. The committee considered that a continuous build of ships and utilisation of Australian industry was more readily achievable through the development of a truly national shipbuilding plan that includes all Australian vessel procurements and leases, state vessel procurements, as well commercial opportunities and support for a growing exports industry. Thus, the committee considered that one national plan was required. In the committee’s view, this plan should incorporate the government's existing naval shipbuilding plan, along with plans for other Australian and state/territory vessels, commercial vessels, and all existing Australian shipbuilding yards believing that Australia can only plan for, and achieve, a continuous build of ships, if all ships produced in Australia are included in a national plan.
1.36
The committee believed that the Plan provided no detail about the long-term strategy for the location and usage of Australian shipyards. The committee argued that a naval shipbuilding plan should have been published with holistic consideration of all Australian shipyards and their employees. This, the committee believed, led to greater uncertainty for Australian industry and for Australian workers.
1.37
The committee believed an Australian sovereign capability in naval shipbuilding is vital for the defence of the nation and the capacity of Australian industry to meet future defence needs. However, without clearly defined and mandated requirements outlining the level of Australian industry involvement and content required in defence projects, the survival of an Australian naval shipbuilding industry with sovereign capability was, according to the committee, at risk.
1.38
The committee sought clarity about what constitutes Australian involvement, or definitions of terms such as 'involvement', 'content' and participation'. The committee believed that clear and precise definitions agreed to by industry and the government are essential to examine any mandated requirements. The committee believed that this was a necessary first step in securing Australian sovereign capability for each of the major projects set out in the naval shipbuilding plan.
1.39
The committee believed there was value to be gained through prescribing a formal, periodic Senate examination of these plans against actual project progress to ensure that Australian industry commitments outlined in the plan are met. The committee argued that drafting and finalisation of contracts and Australian Industry Capability (AIC) plans should not take place behind closed doors. The committee believed that these processes should be transparent and subject to parliamentary and public debate considering the amount of Australian taxpayer money is going to be expended.
1.40
Accordingly, the committee recommended that AIC plans for new Defence naval projects are subject to examination by the Senate—conducted in a manner similar to international treaties. The committee further recommended that finalised AIC plans be subject to six monthly reviews against progress by the Senate.
The 46th Parliament
1.42
As previously discussed, on 19 September 2019, the Senate referred an inquiry into Australia’s sovereign naval shipbuilding capability to the committee for inquiry and report during the 46th Parliament. Prior to this Final Report, the committee tabled two Interim Reports.
Interim Report—May 2021
1.43
In May 2021, the committee published its first Interim Report: Future Submarine Program: Ringing of Bells, Wringing of Hands. The committee felt compelled to do so for two reasons:
the status of the Future Submarine Program was causing deep concern not just within the committee but within the defence and security policy community generally; and
the increasingly concerning recalcitrance of the Department of Defence to provide requested information on the projects included in the Naval Shipbuilding Program.
1.44
Accordingly, as part of the Interim Report, the committee made the following four recommendations:
Recommendation 1
The Commonwealth Government and the Department of Defence report to the Parliament on what discussions were or are being undertaken with Saab/Kockums, or any other alternative submarine builder, about the provision of a Collins-class derivative boat, or any other design, as part of a 'Plan B' should the Naval Group agreement be cancelled.
Recommendation 2
That the Department of Defence provide the Senate Economics References Committee, on a confidential basis, an un-redacted version of the renegotiated Strategic Partnership Agreement with Naval Group for scrutiny.
Recommendation 3
With the aim of increasing its staff’s awareness of their democratic responsibilities:
the Department of Defence re-examine its induction and training programs and corporate culture regarding its role as a department answerable to the Australian people through the processes of the Australian Parliament; and
report back to the Parliament on the progress it making on those induction and training programs.
Recommendation 4
That the Department of Defence provides to the committee in un-redacted form all the documents requested under the Senate's Order of Production of Documents (General Business Motion, No. 786).
1.45
A more detailed summary in provided in Chapter 4.
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As of 13 May 2022, the committee had yet to receive a response from the government to these four recommendations.
Second Interim Report—February 2022
1.47
On 16 September 2021, Prime Minister Scott Morrison announced the Australia-United Kingdom-United States (AUKUS) agreement through which the Royal Australian Navy was to acquire a fleet of at least eight nuclear submarines partnership with the United Kingdom (UK) and the United States (US), and that the Attack-class would be cancelled.
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In response to this announcement, the committee conducted a further two public hearings and produced a Second Interim Report: Future Submarine Acquisition: A shambles—we don't think, we know.
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The Second Interim Report explored further the failed Competitive Evaluation Process, reviewed the practical difficulties associated with a country without a deep and established nuclear industry acquiring nuclear submarines and asked a series of questions about the proposed nuclear submarine acquisition.
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The committee concluded that the process to acquire new submarines for the Australian Navy had become a shambles. As a result, there was a significant chance that Australia would be left with a capability gap between the retirement of the Collins-class, and the arrival of the new submarine fleet—be they nuclear or not.
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The committee made three recommendations. As the Government and Department of Defence did not respond to the first interim report, the committee repeated its recommendation regarding the responsiveness of the Department to the Parliament’s information requests:
Recommendation 1
Noting bipartisan support for AUKUS and to ensure delivery of critical military capability, that the Government establish a bipartisan process to oversee the implementation of the AUKUS partnership and the delivery of the AUKUS objectives and military capability.
Recommendation 2
That the Department of Defence provide in a manner suitable for publication:
an explanation as to why the Department informed the Parliament that the cost of the Future Submarine Program was $50 billion out-turned when the Department of Finance already had put that figure significantly higher; and
an explanation for the claim that the original tender for the Attack-class was $20 billion—$25 billion range in 2016 dollars rather that the $50 billion that has since 2016 consistently been cited by both the Government and the Department.
Recommendation 3
With the aim of increasing its staff’s awareness of their democratic responsibilities:
the Department of Defence re-examine its induction and training programs and corporate culture regarding its role as a department answerable to the Australian people through the processes of the Australian Parliament; and
report back to the Parliament on the progress it making on those induction and training programs.
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A more detailed summary in provided in Chapter 4.
Structure of this Final Report
1.53
Apart from this introductory chapter which outlines the background to the inquiry, this report is structured in the following way:
Chapter 2 – Offshore Patrol Vessels. This chapter will review the status of the Arafura-class patrol boats;
Chapter 3 – Hunter-class frigates. This chapter will review the status pf the Hunter-class frigates;
Chapter 4 – Future Submarines. This chapter will provide a short update on the status of the AUKUS nuclear submarine proposal in the context of the previously tabled interim reports on the submarine acquisition; and
Chapter 5 – Conclusions and Committee Comment. This chapter will sum up the committee’s observations and conclusions.
Senator Alex Gallacher
1.54
This inquiry was referred to the committee by Senator Alex Gallacher, ALP Senator for South Australia. The committee notes with sadness that Senator Gallacher passed away after an 18-month battle with cancer on Sunday, 29 August 2021. The committee would like to acknowledge the long-standing service of Senator Gallacher to the Australian Senate and the Australian people, and also express our deepest condolences to his family and friends.