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Public Policy Report to Submarines for Australia Australia’s Future Submarine Getting This Key Capability Right September 2017 Insight Economics Pty Ltd ACN:141 097 565 ABN: 29 627 712 906 Cover: Collins class submarine HMAS Sheean at anchor in Darwin Harbour with diesel generators running, Exercise KAKADU, September 2016. Copyright: Australian Department of Defence Disclaimer: While Insight Economics endeavours to provide reliable analysis and believes the material it presents is accurate, it will not be liable for any claim by any party acting on such information. © Insight Economics 2017 i CONTENTS Glossary of acronyms 1 Preface 2 Foreword 3 CHAPTER 1 19 Background 19 CHAPTER 2 22 Defence procurement: a hierarchy of risks 22 2.1 Background 22 2.2 A hierarchy of risks 23 2.3 Pitfalls of a bespoke design: the Collins class 30 2.4 Mortimer Report 35 2.5 Senate Report on Defence Procurement 37 2.6 Implications 37 CHAPTER 3 39 Acquisition process for the FSM 39 3.1 Background 39 3.2 The capability requirement 39 3.3 Options for acquiring the FSM 42 3.4 The Competitive Evaluation Process (CEP) 45 3.5 Problems with the CEP 46 3.6 Implications 53 CHAPTER 4 54 Economic and financial risks 54 4.1 Background 54 4.2 Addressing the economic risks 54 4.3 Cost of the future submarine 56 4.4 Analysing the financial risks 59 4.5 Contestability and competition 60 4.6 Implications 62 ii CHAPTER 5 63 Strategic risks 63 5.1 Background: changing strategic circumstances 63 5.2 Timeframe: can Australia wait 20 years? 65 5.3 Strategic capability priorities for the FSM 70 5.4 Does the RAN need nuclear submarines? 77 5.5 Does the ADF need a new forward base? 81 5.6 The French connection 82 5.7 Implications 84 CHAPTER 6 87 Technical risks 87 6.1 Background 87 6.2 Engineering expertise and Test & Evaluation 87 6.3 Technical risks and non-MOTS solutions 92 6.4 Technical risks with large SSKs 94 6.5 New propulsion-related technologies 100 6.6 Systems and weapons risks 103 6.7 Collins class life of type extension (LOTE) 106 6.8 Implications 109 CHAPTER 7 111 Industrial risks 111 7.1 Background 111 7.2 Benefits of a local build: myths and reality 112 7.3 Naval shipbuilding – lessons learned or not 117 7.4 Building the Shortfin Barracuda 120 7.5 Sustaining the Shortfin Barracuda 125 7.6 Implications 127 CHAPTER 8 129 A better way forward 129 8.1 Background 129 8.2 Avoiding the capability gap 130 8.3 Insurance policy for the Shortfin Barracuda 135 Appendix 1 137 iii A USTRALIA’ S F UTURE S UBMARINE: GETTING THIS KEY CAPABILITY RIGHT GLOSSARY OF ACRONYMS A2/AD Anti-access/area denial ADF Australian Defence Force ADFA Australian Defence Force Academy (University of NSW) AEW&C Airborne early warning and control aircraft AIP Air independent propulsion AO Area of operations ANAO Australian National Audit Office ARPANSA Australian Radiation Protection and Nuclear Safety Agency ASC Australian Submarine Corporation ASW Anti-submarine warfare ASuW Anti-surface ship warfare AWD Air warfare destroyer ASPI Australian Strategic Policy Institute C3 Command, control and communications CAD/CAM Computer assisted design/computer assisted manufacture CAPEX Capital expenditure CEP Competitive Evaluation Process CMS Combat management system DCNS Direction des Constructions Navales Services DMO Defence Matériel Organisation EEZ Exclusive economic zone FCD Full cycle docking FSM Future submarine FSP Future Submarine Project GDP Gross Domestic Product IP Intellectual property ISR Intelligence, surveillance and reconnaissance LOTE Life of type extension MOTS Military off-the-shelf MPA Maritime patrol aircraft NPV Net present value PLAN People’s Liberation Army Navy (China) RAAF Royal Australian Air Force RAN Royal Australian Navy RFT Request for tender RN Royal Navy (UK) ROV Remotely operated vehicle SF Special forces Shortfin Barracuda Shortfin Barracuda SLOC Sea lines of communication SSBN Ballistic missile nuclear submarine SSGN Guided missile nuclear submarine SSK Conventionally powered attack submarine SSN Nuclear powered attack submarine SUBFOR Submarine Force (Australia) T&E Test and evaluation tkMS thyssenkrupp Marine Systems TLAM Tomahawk land attack missile UAV Unmanned aerial vehicle UUC Usage and upkeep cycle UUV Unmanned underwater vehicle USN United States Navy VLS Vertical launch system 1 A USTRALIA’ S F UTURE S UBMARINE: GETTING THIS KEY CAPABILITY RIGHT PREFACE By Gary Johnston, Submarines for Australia It was not without considerable forethought that I decided to commission Insight Economics to produce an analysis of the decision by the Australian Government to select the French firm Naval Group to make Australia’s future submarines. After all, why would a businessman, with no previous links to military matters have any basis to criticise this decision? Actually, that motivation turned out to be easy! For some time now, my business associates and I have been concerned about the failure of Defence acquisitions and the waste of taxpayers’ money associated with that. About 20 years ago, for example, the government decided to acquire Seasprite helicopters for the Anzac frigates. One of the fundamental flaws in the SeaSprite purchase was the attempt to build a custom solution to our perceived ASW helicopter needs. This procedure – in industry parlance – is to build an ‘orphan’ rather than take the safe (but perhaps less than ideal) route of buying a proven off-the-shelf helicopter, generally at a fixed price. The result was that $1.4 billion was spent over eight years with absolutely no result – not even a single helicopter. All that money, which could have been used to build two new fully equipped teaching hospitals, was completely wasted. Not only that, but the frigates were left without an ASW helicopter for about half their lives, leaving a major capability gap in Australia’s defences. So when the Government announced the decision to make another custom piece of military hardware, this time at the eye-watering price of $50 billion, the alarm bells rang. The submarine acquisition is far bigger and more important than the SeaSprites and if anything goes wrong the consequences could be huge. In a period where our part of the world is becoming a more dangerous place, we could be left with no submarine capability at all for a decade or more. As numerous Senate inquiries have pointed out, Defence doesn’t understand how to deal with risk when making investment decisions. When analysing alternative options for investment in military hardware, they need to involve people who are totally independent from the process, people with a financial or commercial background who understand how to generate better outcomes with an appropriate adjustment for risk. Of course, Defence would still have a role, but mainly as military and technical advisers. The people at Insight Economics have produced this independent report in a thoughtful, balanced way. I urge you to read this document and draw your own conclusions. It is not (of course) the last word on the matter, but it just may help to get the debate back into a rational position and (hopefully) get us some submarines to protect us before we have none left. For further information on Gary Johnston check www.submarinesforaustralia.com.au for details. 2 A USTRALIA’ S F UTURE S UBMARINE: GETTING THIS KEY CAPABILITY RIGHT FOREWORD The origins of this report lie in widespread concern in the Australian community in general, and among defence experts, economists and public policy specialists in particular, following the government’s announcement that Australia’s future submarine would be the French designed Shortfin Barracuda. Since this may well be the largest public investment in Australia’s history, these concerns are legitimate and need to be addressed. The main concerns are the: • Suitability of the proposed acquisition having regard to the most likely strategic risks facing Australia • Cost of the proposed acquisition • Lack of competition and consequent loss of control over future costs • Extended delivery timeframe with the acute danger of a capability gap • Associated need for a comprehensive, costly life extension of the Collins class • Significant risks (economic, strategic, technical and industrial) arising from the selection of an untested bespoke design for a very large submarine. In December 2016, a concerned individual, Mr Gary Johnston (Submarines for Australia), commissioned Insight Economics to prepare an independent report on the FSM acquisition. The report would include an analysis of the cost and risks of the project and, if necessary, propose an alternative approach to the acquisition. The expertise of the principals of Insight Economics lies in economics and public policy. When they formerly worked in government, all four Directors of Insight Economics had significant experience in industry policy – Dr David Charles was Secretary of the federal Industry Department – and have subsequently worked extensively in that domain in the private sector, including in the naval shipbuilding industry. Dr Michael Keating spent eleven years, including five years as Chair, as a member of the senior officials group that coordinated the advice provided to the National Security Committee of Cabinet. While strategic issues and the technical characteristics of the new submarine are obviously of major importance and are addressed extensively in the report, they have to be considered within a more holistic critical appraisal of a very substantial public investment in military capability. The objective of such an investment should be to provide an adequate defence against the most likely and most potent threats facing Australia at least cost and on the shortest practical schedule while taking full account of the welfare of service personnel. In this respect, we place a high level of importance on assessing the risks involved (and seeing that risk mitigation strategies are incorporated) in this acquisition process.

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