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Future of Australia's Naval Shipbuilding Industry), 7 June 2018, P Chapter 2 Background 2.1 This chapter provides an overview of the Commonwealth's ambition to establish an indigenous naval shipbuilding enterprise in Australia and outlines some major developments following the tabling of the committee's third report in July 2015. 2.2 Since the committee's last report, the government has made a series announcements supporting the implementation of a continuous Australian naval shipbuilding industry worth $89 billion. These announcements, which were formalised in the government's Naval Shipbuilding Plan (NSP) published in May 2017, commit to the construction of naval vessels in Australia, as well as infrastructure upgrades and governance matters. 2.3 The government's commitment to a continuous shipbuilding program is based on three build programs for submarines, major surface combatants (frigates and destroyers) and minor naval vessels, including: • A rolling acquisition of submarines, commencing with the Future Submarine Program (SEA 1000)—a rolling acquisition program of 12 future submarines worth up to $50 billion, with construction commencing from 2022 to 2023 at the Osborne Naval Shipyard; • A continuous build program for major surface combatants, commencing with the Future Frigate Program (SEA 5000)—a continuous build of nine major surface combatants, with construction also at Osborne Naval Shipyard commencing from 2020 worth up to $35 billion; and • A continuous build program for minor vessels, commencing with the Pacific Patrol Boat Replacement Program (SEA 3036) in 2017 and the Offshore Patrol Vessel Program (SEA 1180) from 2018. The construction of 21 pacific patrol boats will take place at Austal's facility at the Henderson Maritime Precinct in Western Australia, and construction of the first two offshore patrol vessels will be at the Osborne Naval Shipyard before transferring to the Henderson Maritime Precinct for the build of the remaining 10 vessels in 2020. The Pacific Patrol Vessel Replacement program has been costed at $280 million1 and the Offshore Patrol Vessel Program at up to four billion dollars. 2.4 A detailed study of key documents, including the NSP and related documents, is provided in Chapter 3. 1 Department of Defence, Answers to question on notice, Question reference no. 6, 20 June 2017 hearing (received 25 October 2017). 8 The naval shipbuilding plan's program 2.5 These three major naval shipbuilding programs will co-exist with three significant current naval programs: the Hobart Class Destroyer (also known as the Air Warfare Destroyer or AWD) and the continuing sustainment of the Collins Class submarines and ANZAC Class frigates.2 Future Submarine Program (SEA 1000) 2.6 The Future Submarine Program (FSP) involves the construction of 12 military-off-the-shelf design diesel-electric submarines at the cost of $50 billion. The cost of sustainment for the fleet was estimated to be in the order of another $50 billion.3 The submarines will be constructed at the Osbourne Naval Shipyard in South Australia, commencing from 2022 to 2023, with the first submarine expected to enter service in the early 2030s. The last is expected to be constructed sometime in the late 2040s and sustainment to the end of the 2080s.4 These submarines will replace the existing diesel-electric Collins Class submarines.5 2.7 The selection of Naval Group of France (formerly Direction des Constructions Navales or DCNS) as the preferred international partner for the submarine's design on 26 April 20166 involved a competitive evaluation process.7 As part of the process, participants provided an Australian Industry Plan that identified how Australian 8 industry involvement could be maximised during the program. The other two invited 2 Australian National Audit Office, Audit Report No. 39 2017–18, Naval Construction Programs—Mobilisation, p. 15. 3 Senate Foreign Affairs, Defence and Trade Legislation Committee, Proof Committee Hansard (Budget Estimates), 29 May 2018, p. 32. Rear Admiral Sammut, Head Future Submarine Program, placed a caveat on the information he provided by adding that Defence was 'still in the design process for the future submarine and that many of the detailed costs of acquisition and sustainment will be determined during the design process through the choices made'. 4 Mr Brent Clark, Senior Advisor to the Chairman, Naval Group Australia, Proof Committee Hansard (Future of Australia's naval shipbuilding industry), 7 June 2018, p. 9; Department of Defence, Naval Shipbuilding Plan, 16 May 2017, p. 26. 5 The six Collins Class submarines are HMAS Collins, HMAS Farncomb, HMAS Waller, HMAS Dechaineux, HMAS Sheean and HMAS Rankin. ASC, 'Collins Class Submarines', https://www.asc.com.au/submarines/collins-class-submarines/ (accessed 21 June 2018); Department of Defence, Naval Shipbuilding Plan, 16 May 2017, pp. 25-26. 6 Senator the Hon Marise Payne, Minister for Defence, 'Prime Minister, Minister for Defence – Future submarine program', Media release, 26 April 2016. 7 On 20 February 2015, the Hon Kevin Andrews MP, then Minister for Defence, outlined the competitive evaluation process for Australia's new submarines. See the Hon Kevin Andrews MP, Minister for Defence, 'Strategic Direction of the Future Submarine Program', Media release, 20 February 2015, http://kevinandrews.com.au/strategic-direction-future-submarine- programme/ (accessed 21 June 2018). 8 Senator Rex Patrick, Centre Alliance, Senate Hansard, 10 May 2018, p. 2922, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22chamber%2F hansards%2F4a4f29d6-cec4-4a55-97d8-b11f23b85dd4%2F0301%22 (accessed on 21 June 2018). 9 international participants were ThyssenKrupp Marine Systems (TKMS) of Germany, and the Government of Japan. 2.8 The selection of Lockheed Martin Australia as the preferred combat system integrator for the submarines, also through a competitive evaluation process, occurred in parallel with the selection of a partner for building the new submarines.9 2.9 The acquisition and procurement process for the submarine program was the subject of the committee's second report. Due to Australia's unique requirements, there is no military-off-the-shelf (MOTS) option that exists to replace Australia's submarine fleet.10 As a result, and reflecting the government's policy, the FSP is not subject to MOTS design constraints and will be a developmental acquisition.11 Despite criticism about the procurement process, the Australian National Audit Office (ANAO) found Defence had 'effectively designed and implemented a competitive evaluation process to select an international partner for the Future Submarine program'.12 However, in the most recent ANAO report Naval Construction Programs—Mobilisation, the Auditor General had concerns relating to issues of governance, program costs, and risk management.13 These issues are examined in detail below. 2.10 On 20 December 2016, the governments of Australia and France signed an agreement on the Future Submarine Program to establish a framework between the 14 two nations for the development of the Australian navy's new fleet of submarines. 2.11 The framework was the subject of an inquiry by the Joint Standing Committee 15 on Treaties (JSCOT) and a report was tabled on 13 April 2017. The report noted that 9 Subject to further discussion on commercial matters, on 30 September 2016, the Minister for Defence and Minister for Defence Industry announced that Lockheed Martin Australia had been selected. The Hon Christopher Pyne MP, Minister for Defence Industry, 'Combat System Integrator for Future Submarines', Media release, 30 September 2016. 10 Senate Economics References Committee, Part II: Future of Australia's naval shipbuilding industry – Future submarines, November 2014, pp. 37-43. Evidence before the committee indicated that there was not anything available that had the range and mobility to match Australia's needs. Any modification to an existing submarine is not a simple exercise and would mean a complete redesign with the accompanying time, costs and risks. Furthermore, there is a reluctance of overseas countries to relinquish their most advanced technology and this means in some instances that a submarine sold by a company resident in a country is not the same submarine exported overseas. 11 Senate Economics References Committee, Part II: Future of Australia's naval shipbuilding industry – Future submarines, November 2014, pp. 37-43; Australian National Audit Office, Audit Report No. 39 2017–18, Naval Construction Programs—Mobilisation, p. 19. 12 Australian National Audit Office, Future Submarine – Competitive Evaluation Process, Audit Report No. 48 2016–17, p. 7. The committee also criticised the procurement process for the submarine program in its second report. 13 Australian National Audit Office, Audit Report No. 39 2017–18, Naval Construction Programs—Mobilisation. 14 Senator the Hon Marise Payne, Minister for Defence, 'Australia and France sign Future Submarine Inter-Governmental Agreement', Media release, 20 December 2016. This treaty was tabled in Parliament on 7 February 2017. 10 the agreement was not an agreement to design or build the submarines, rather, it was an agreement to establish a framework for cooperation to support the delivery of the submarine program.16 The report recommended that the Department of Defence learn the 'full lessons' from the Collins submarine shipbuilding experience, including: • how to appropriately manage the FSP's associated intellectual property; • that future submarine agreements must allow Australian companies to bid
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