The government’s decision to award the construction contract for the next generation of the Royal Australian Navy’s submarine fleet to France, with the boats to be mostly constructed in Adelaide, is probably the least worst decision we could expect from a desperate government trying to shore up its electoral position in South Australia.

The Prime Minister today announced that the DCNS Group’s normally nuclear-powered Barracuda design would be adapted as a diesel-powered boat. The total cost of building 12 submarines over next quarter century is currently estimated to be around $50 billion, which in defence procurement terms means the final cost may well be closer to $100 billion.

The decision marks a repudiation of Tony Abbott’s “captain’s pick” decision to award the submarine contract to Japan’s Mitsubishi Heavy Industries, despite the lack of Japanese experience with building boats for export. Abbott had opted for the Japanese bid due to his close relationship with Japanese Prime Minister Shinzo Abe and his desire for a closer strategic relationship with Japan against China.

However, that would have meant an outright breach of the government’s election commitment to build all of the boats in South Australia — an electorally toxic outcome that would have redoubled the impact of the government’s decision to chase General Motors and Ford out of Australia early in its term. With talk of seats like Boothby and Christopher Pyne’s seat of Sturt being written off, Abbott invented a new “competitive evaluation process” for the submarine tender involving German, French and Japanese bids, with a heavy emphasis on local construction. Nick Xenophon’s establishment of a political party to run both in the Senate and the House of Representatives — and his strong polling — further focused Coalition minds on neutralising the loss of manufacturing jobs.

According to Turnbull, the “bulk of the work” on the subs will occur in Adelaide, with additional work done elsewhere in Australia and the United States. The government has recently moved to establish a long list of naval shipbuilding projects in South Australia, and the submarine program — the first boat should be put to sea in the early 2030s —  is the finishing touch to a procurement list drawn up exclusively with political considerations in mind.

Even advocates of local build accept that there is an immense local cost premium to building naval vessels here — based on previous builds like the Air Warfare Destroyer, the premium is around 30-40%, while the economic benefits of local build are doubtful. The decision to opt for a local build will thus cost taxpayers perhaps an extra ten billion dollars in order to subsidise 2800 jobs, or around $4.7 million per worker across the life of the project, a rate of effective assistance that dwarfs by orders of magnitude the kind of subsidies the automotive industry was receiving.

However, DCNS is itself the result of protectionism — the company is majority-owned by the French government.

There’ll be much talk of the economic and strategic benefits of a local build, but no evidence will be forthcoming — as the Productivity Commission pointed out a couple of years ago, there is virtually no analysis ever done of the economic benefits of local procurement for defence hardware. The only truly objective measurement that applies to today’s announcement will be the Liberal vote in South Australia on July 2. No one is interested in any other metric.

Peter Fray

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