One year ago, Insight Economics, sponsored by Sydney businessman Gary Johnston, published a comprehensive, independent report on the future submarine (FSM) acquisition. Launched at the National Press Club by Professor Hugh White and Dr Michael Keating, the report highlighted the excessive cost of the FSM; its unacceptable delivery timetable leading to a dangerous capability gap; the extremely high risks around the capability it would deliver; and the challenges and high cost surrounding a life extension of the obsolescent Collins class submarines. Over the past year, nothing has occurred to change these conclusions. Indeed, recent developments have only served greatly to reinforce them.

Above and beyond a large number of ongoing concerns about the FSM, it appears that the relationship between Defence and Naval Group is not going well. To date the only contractual arrangement between the parties is an initial design contract, worth around $500 million. The intention was to have concluded a Strategic Partnership Agreement (SPA) between the parties by now, which would set out their contractual responsibilities and commitments over the next fifty years, covering issues such as intellectual property; technology transfer; technical requirements and capability; construction; local content; price basis; delivery and sustainment.

But it seems clear that Defence and Naval Group are experiencing some significant difficulties in their negotiations over the SPA. While no details have been made public, the suggestion that the SPA may not be concluded until next year, possibly after the election, indicates the problems may be far reaching. This provides more evidence of the dangers of the unique Competitive Evaluation Process (CEP) used in the selection process for the FSM. A conventional process, where a detailed project definition study would be followed by a competitive tender, could have obviated most of these difficulties. (It is instructive to note that the SPA for the Future Frigate, selected over two years later than the FSM, has already been negotiated and agreed.) Having selected the prime contractor but with few detailed commitments being agreed, Defence is likely to be on the back foot in the negotiations. In the context of an industry where some players have been known to promise highly advanced technical capabilities during the selection process but then later refuse to make a contractual commitment to delivering them, this must be a concern.

Cost

At $50 billion in what Defence calls ‘future dollars’ (ie a cost that incorporates expected inflation over time) the acquisition cost of the French submarine was excessive from the beginning. Various estimates from the Australian Strategic Policy Institute and elsewhere, suggested that this translated to a cost of around $35 billion at constant 2016 prices. At $3 billion per submarine this was about three times what other countries pay for a conventional submarine (SSK). Granted, Australia’s preferred submarine was over twice the size of most SSKs, but even a large contemporary submarine, Japan’s Soryu class, has a sail away price of about $750 million. The German contender, tkms, proposed a guaranteed overall cost of around $20 billion at constant 2016 prices for twelve advanced submarines, the same size as the French boat, to be built in Adelaide at the same cost as in Germany.

It is difficult to see how the cost situation could get any worse than this and yet it has. Earlier this year the project director, Rear Admiral Greg Sammut, announced that the acquisition cost of the submarine was now estimated at $50 billion in constant price dollars, rather than inflated dollars as before. This is a massive change, suggesting a blowout in the budget of 40 to 60 per cent when the submarine is still early in the design stage.

The response of the Minister for Defence, Christopher Pyne, was unrepentant. First, he denied there had been any blowout in the budget, saying that the acquisition cost had always been $50 billion. Then, oddly, he suggested that buying 12 submarines for $20 billion rather than $50 billion would mean you would have to think seriously whether the cheaper product was any good. Apart from defying conventional economics, this ignores the fact that the German bid would have been required to guarantee delivery of the required capability. Also, given that even $20 billion is still a great deal of money to pay for twelve conventional submarines, his statement reveals a lot about our new Defence Minister’s attitude to safeguarding the public purse and ensuring value for money in the acquisition of new military capability.

Capability

At the time the decision was announced in April 2016, the delivery schedule for the new submarines – from 2033 to 2050 – seemed unacceptable from a strategic point of view. With the six Collins class submarines reaching the end of their lives from the mid-2020s, a significant capability gap appeared inevitable. Should the project develop problems that would delay delivery, as complex military projects generally do, this gap would only grow.

Over the last two years, Australia’s strategic circumstances have deteriorated. Not only has China become a more assertive player, but the commitment of the United States under President Trump to play an ongoing military role in the Asia-Pacific and to maintain the extended nuclear deterrent to allies like Australia has become less clear. It is by no means impossible, perhaps even likely, that the influence of the ‘America First’ movement will continue to grow. Another scenario is a crisis over Taiwan, where the Americans decide it is not in their national interest to go to war and so, by default, cede to China leadership in the region. In any case, it is entirely possible that by the end of the 2020s Australians will be living in a far more dangerous region and, now ‘without America’, will be exposed to a much greater military threat.

In those circumstances, Australia’s submarine force will become of critical importance to the nation’s defence. Under the current programme, however, it will be many years, even decades, before a credible fleet of new boats comes on stream. Currently, with a force of six obsolescent submarines and very long transits, the RAN can maintain one boat on station for 50 per cent of the time. The government’s decision to extend the life of Collins, a highly costly exercise with a material technical risk that it will not provide an acceptable outcome, will only reduce this inadequate availability as submarines spend much longer periods in the dockyard. It will only be in the 2050s that the full complement of new submarines will be available – and even this will allow only one submarine to be on station in their area of operations at any one time.

There is another problem. A critical assumption underlying the FSM acquisition was that in a future conflict Australian forces would operate in a coalition with the United States. The FSM was therefore designed to complement the US Navy’s powerful nuclear submarine force, in part undertaking offensive operations ‘up threat’ in the South China Sea. In the absence of America, the strategic priority would be the defence of Australia. Under those circumstances a different type of submarine force would be required, involving a larger number of SSKs perhaps complemented eventually with nuclear attack submarines.

Technical risks

Another major concern over the last year has been Defence’s determination to proceed with a pump-jet propulsion system on the FSM rather than conventional propellers. Initially, this was highlighted in the announcement that the French had emerged as the successful contender in the CEP, where the associated material from Naval Group stated that propellers were now obsolete as a propulsion system for submarines. The use of a revolutionary pump-jet on the French submarine appeared to be the main justification for selecting it over the similarly sized German contender, which had the advantage of being substantially cheaper with a much earlier delivery date.

The Navy has been interested in pump-jets for a decade or more. During the CEP, Defence was highly impressed with a Naval Group demonstration of the stealthy qualities of French ‘bomber’ nuclear submarines, which, like many nuclear boats, are equipped with pump-jets. But, for very good reasons, every operational diesel-electric submarine in the world uses propellers not pump-jets. For although pump-jets offer acoustic advantages at higher speeds, conventional submarines generally travel very slowly when submerged, being capable of high speeds only in short bursts. At the same time, pump-jets are considerably less efficient than propellers. This is irrelevant for a nuclear submarine, which has virtually unlimited reserves of power, but of critical importance to a conventional submarine which has to approach the surface periodically to run noisy diesel generators and re-charge its batteries. Because of its vulnerability to detection and destruction while ‘snorting’, a design imperative for any SSK is to minimise this ‘indiscretion ratio’, thereby effectively ruling out pump-jets.

Naval Group must be well aware of this and, allowing a decent interval after declaring them obsolete, they suggested that the FSM may well have propellers after all. Perhaps appreciating that such a move would undermine the case for picking the French submarine over its much cheaper German rival, Defence issued an immediate rebuttal. The Navy definitely wanted the “pump-jets offered by Naval Group” during the CEP, which, they claimed, could be more efficient across the whole speed range.

Gary Johnston, the sponsor of our work on submarines, then supported research into pump-jets by Aidan Morrison, a physicist with expertise in marine propulsion systems. In his first report, submitted to the Senate Economic References Committee, Morrison found that: “In a comparison between two otherwise identical [diesel-electric] submarines, the one with the pump-jet will always have a lower dived endurance, a lower dived range, a worse indiscretion ratio, a lower overall endurance and a lower overall range than the one with a propeller”.

The Senate Committee requested a further paper from Defence in response to Morrison’s findings. When Defence eventually delivered the six-page paper, it failed entirely to rebut Morrison’s conclusions, as Morrison pointed out in a subsequent rejoinder, but also appeared to contain some factual errors in terms of the underlying physics. Unsurprisingly, Defence has also invoked national security considerations to justify its inscrutability on the subject.

This is not a trivial issue. First of all, fundamental technical errors by so-called experts may have resulted in Australia selecting the wrong future submarine, at excessive cost and with a clearly unsatisfactory delivery schedule. Secondly, equipping a SSK with pump-jets while at the same time not adopting critical modern technologies such as Lithium-Ion batteries and air-independent propulsion will give rise to a submarine with a dangerously poor indiscretion ratio in future combat conditions. Thirdly, if and when Defence ‘fesses up to its error, re-designing the submarine for propellers is no simple task, partly because of the different weight distribution associated with the two propulsion systems.

Quo vadis?

The outcome from the selection process for the FSM, as well as the CEP itself, has generated a great deal of concern among experts and informed commentators ever since the announcement was made in April 2016. Developments over the past couple of years, including the deterioration in Australia’s strategic situation, the FSM’s considerable cost blow-out from an already unacceptable level, its delivery schedule and what may well be a far-reaching technical howler relating to pump-jets, have led to a situation where the future of the project must be in serious doubt. Many adjectives could be applied to the submarine, but ‘regionally superior’ is not one of them.

Possibly an even greater concern relates to the competence of Defence itself in the selection of appropriate military hardware in the face of a challenging strategic environment; their commitment to achieving value for money; their commercial ability to negotiate and manage extremely complex contractual arrangements worth many billions of dollars; and even their technical capability in the wider domain of advanced defence technologies. Unfortunately, an informed debate of these critical issues is problematic when the response of the Defence Minister himself to legitimate public concerns continues to plumb the depths of the trivial.

We understand that, in the past at least, there was a protocol within Defence that when a project experienced a cost blowout of 10 per cent or more it would be placed on hold pending a review. A number of cross-bench Senators are now proposing such a review for the FSM project. We consider there is ample justification for a comprehensive review to be undertaken as a matter of urgency.

Jon Stanford is a Director of Insight Economics and principal author of last year’s report – Australia’s Future Submarine: Getting this Key Capability Right.

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