Australia’s next submarine will be the single biggest purchase Australia has ever made, we will live with the decision for decades, and if we don’t try to get the maximum bang for our buck — going instead for an impulse buy of the cheapest thing on the shelf with no due process — we are morons.

When it was announced in 1987, the $4 billion Collins class submarine build was the most expensive program in the history of our defence force. And at a purchase price of up to $36 billion, its replacement will also be. Each new 4000-tonne submarine will cost $2 billion-plus to build and another two times that to maintain, so we’re up for more than $100 billion over a service lifetime running to 2070. By comparison, it is costing us $12 billion to buy 58 F-35 joint strike fighters — more than $200 million apiece — and maintaining them for the next 30 years will cost the same again.

Manufacturing expert Goran Roos, who wrote a story arguing for Australian-made submarines in Crikey yesterday, explained in this note that apart from a space re-entry vehicle, nothing is more complex to build than a modern submarine. And subs are very strategically important. “For Australia, being an island nation with six marine choke points, submarine systems are one of, if not the most important advanced complex defence system,” Roos said.

But who should make them? If a Japanese sub can meet that same capability as an Australian-built son of Collins for half the price, roughly $20 billion, according to ballpark figures from Australian Strategic Policy Institute, then surely a decision to go with the ASC (formerly the Australian Submarine Corporation) is a straight-up $16 billion subsidy to that government-owned entity — money that could be spent on extra defence capability or elsewhere in a sorely stretched federal budget.

Not so simple. First, the capital or up-front cost is only part of the equation. In fact, it’s roughly a third of it. According to Roos, some of what you save up front you end up paying for overseas over the life of the submarine. That’s not counting any trade-offs in sovereign defence capability, consequential on getting service and parts overseas.

Second, there are spillover benefits from local spending, like local employment, transfers of technology and know-how, which we miss out on if we buy overseas. Roos cites a Swedish study that estimated the spillover benefits at three times investment and suggests that may be conservative. In Australia, Allen Consulting estimated the spillovers from naval shipbuilding were more like 1.5-2.4 times investment, but that is still significant. On that kind of multiple, it can make more economic sense to buy a higher-priced local item than a cheaper item overseas.

“Defence is unique. Because the public is both customer and beneficiary of defence spending and its spillovers, there is a win-win.”

It would be nice to be more concrete. Sadly, there appears to have been no rigorous assessment of the spillover benefits of the Collins program. That doesn’t mean there were none. A frequently cited example is ASX-listed Bisalloy Steel, based just south of Wollongong, NSW, which collaborated with BHP and the Defence Science and Technology Organisation to create a new armoured steel plate for the Anzac Frigates, Collins class submarine and Bushmasters, and now has defence customers around the world. Right now unfortunately, for the sake of our argument, it’s in a world of pain battling a mining downturn, stubbornly high dollar, and overseas dumping. Bisalloy shares have slumped.

But Roy Green, dean of the University of Technology Sydney Business School, told Crikey this space — “micro multinationals”, companies with a global niche and a competitive edge that allows them to price product out of proportion to their cost of production — is precisely where Australian manufacturing should focus. Local success stories that have levered defence industry spending include shipmaker Austal, making brilliant aluminium surface vessels in Kwinana; CEAFAR, making world-beating radar in Fyshwick; and Thales, making export-quality Bushmaster troop carriers in Bendigo.

Defence is unique. Because the public is both customer and beneficiary of defence spending and its spillovers, there is a win-win. The defence industry is highly advanced and operates as a technical university — better in fact, because it offers real-world production experience. Defence spending can be a prime example of advanced public procurement, one of the most effective forms of industrial policy, and this is where a bigger picture comes in.

Roos argues all the focus in Australian industry policy debate, from the likes of the Productivity Commission and elsewhere, is on supply side programs — public spend on grants, subsidies, tariffs. It’s a neo-classical approach, but there are at least five other schools of economic thought that don’t get a look-in. Demand-side programs, like procurement, innovation-spurring regulation and industry clustering, simply aren’t discussed. Good industry policy is the opposite of giving handouts to losers or picking winners. It’s about creating the environment in which winners emerge themselves.

That’s not to say we should write a blank cheque to build locally. Unlike most defence spending decisions you can think of, let’s have a rigorous, open, competitive tender for once … if the government has left itself enough time with its deadline to decide within 18 months of the election. But let’s look at real value for money, not just sticker price.

Nor should we throw good money after bad. Insight Economics director Jon Stanford explains that the last submarine made in Adelaide was completed a decade ago. The skills in submarine design and construction, which take years to develop, have largely been lost. If it takes eight years from selection of the design concept to cutting of steel — as Defence Minister David Johnston said in April — then work won’t start until early next decade. We’ll be starting from scratch. And where does making the next submarine get us? “We will never be able to export subs; not only are we uncompetitive, but all our naval platforms incorporate sensitive American technology,” Stanford said.

But other First World governments that use defence spending to support their manufacturing industries are either fools who’ve failed to cotton on to protectionist rorting or they’re onto something.

What if it’s the latter? What about Team Australia? The Business Council and cabinet appear to have decided this week that submarine building is not something we have a competitive advantage in. Let’s stop and think before we toast the unravelling of another local industry.

Peter Fray

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