Submarines for Australia - Australia's Future Submarine Do we need a Plan B?
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Submarines for Australia
March 2020
Australia’s Future Submarine
Do we need a Plan B?
!
AUSTRALIA’S FUTURE SUBMARINE: DO WE NEED A PLAN B?
Insight Economics Pty Ltd
ACN:141 097 565
ABN: 29 627 712 906
Cover: Four Collins class submarines off HMAS Stirling with the Los
Angeles class attack submarine, USS Santa Fe.
Photo: Licence: Alamy
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 2020
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AUSTRALIA’S FUTURE SUBMARINE: DO WE NEED A PLAN B?
CONTENTS
Glossary of acronyms iii !
Acknowledgements 4!
Foreword 5!
Executive Summary 7!
Chapter 1 11 !
Emerging problems with SEA 1000 11!
1.1! Elimination of competition 12!
1.2! Ambitious capability requirement 12!
1.3! Structure of the report 15!
Chapter 2 16 !
Problems arising from lack of competition 16!
2.1! Excessive cost of design and construction 16!
2.2! Collins class life of type extension 21!
2.3! Sovereign capability – local content and access to IP 24!
2.4! Technical risks 29!
Chapter 3 33 !
Will the Attack class be fit for purpose? 33!
3.1! What do Australian submarines do? 33!
3.2! Submarine operations ‘up threat’ in the Indo Pacific 34!
3.3! Strategic capability requirement for the Attack class 39!
3.4! Operational and tactical capability requirements 41!
3.5! Would the Attack class be suitable for a different role? 48!
3.6! Will the Attack class be cost-effective? 49!
3.7! Conclusion 49!
Chapter 4 51 !
The way forward: a risk mitigation strategy 51!
4.1! Collins 2.0 preliminary design study 51!
4.2! Review of submarine technology requirements 56!
! ii!
Glossary of acronyms
A2/AD Anti-access and area denial
ADF Australian Defence Force
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
AUV Autonomous underwater vehicle
AWD Air warfare destroyer
ASPI Australian Strategic Policy Institute
C3I Command, control, communications and Intelligence
CAD/CAM Computer assisted design/computer assisted manufacture
CAPEX Capital expenditure
CASG Capability, Acquisitions and Sustainment Group, Department of Defence
CDRE Commodore
CEP Competitive evaluation process
CMS Combat management system
DCNS Direction des Constructions Navales Services (predecessor of Naval Group)
DWP Defence White Paper
EEZ Exclusive economic zone
FCD Full cycle docking
FOC First of class
FSM Future submarine
IIP Integrated Investment program
IP Intellectual property
ISR Intelligence, surveillance and reconnaissance
IUSS Integrated Undersea Surveillance System
LOTE Life of type extension
MOTS Military off-the-shelf
MPA Maritime patrol aircraft
NATO North Atlantic Treaty Organisation
ORBAT Order of battle
PLA People’s Liberation Army (China)
PLAN PLA Navy
RAAF Royal Australian Air Force
RADM Rear Admiral
RAN Royal Australian Navy
RN Royal Navy (UK)
SF Special forces
SLOC Sea lines of communication
SOA Speed of advance
SSBN Nuclear powered ballistic missile submarine
SSK Conventionally powered attack submarine
SSN Nuclear powered attack submarine
TASS Towed array sonar system
T&E Test and evaluation
TKMS thyssenkrupp Marine Systems
TLAM Tomahawk land attack missile
UAV Uninhabited aerial vehicle
UUC Usage and upkeep cycle
UUV Uninhabited underwater vehicle
USN United States Navy
VLS Vertical launch system
!AUSTRALIA’S FUTURE SUBMARINE: DO WE NEED A PLAN B?
Acknowledgements
This independent report by Insight Economics has been commissioned by Submarines
for Australia, an entity with a website owned and operated by Gary Johnston, founder
and CEO of Jaycar Electronics Pty Ltd. Mr Johnston has no commercial interest in the
SEA 1000 program or Defence projects more generally. Over the last three years, Mr
Johnston has supported significant research by Insight Economics and others into
Australia’s future submarine project. We are extremely grateful for Mr Johnston’s
sponsorship of our work.
We are also keen to acknowledge the contributions from the members of an expert
reference group that has developed around this project. These individuals include
distinguished Australians with strong relevant experience who have contributed their
time and expertise in the national interest.
Inter alia, this group includes:
• Dr Michael Keating AC, former Secretary of the Department of Prime Minister and
Cabinet and head of the Australian Public Service
• Professor Hugh White AO, Emeritus Professor of Strategic Studies at the Australian
National University and former Deputy Secretary of the Defence Department
• Rear Admiral RAN (Retired), Peter Briggs AO, former commanding officer of
Oberon class submarines and CO of the Submarine Force, Director of Submarine
Warfare and Head of the Submarine Capability Team
• Rear Admiral RN (Retired), Chris Stanford CB, former anti-submarine warfare
expert and NATO squadron commander
• Commodore RAN (Retired), Paul Greenfield AM, former Engineering Officer in the
Submarine Force, and a principal of the Coles Review into Collins class
sustainment
• Commodore RAN (Retired), Terence Roach AM, former commanding officer of two
Oberon class submarines, former Director Submarine Policy and Warfare, Director
General Naval Warfare and Director General Maritime Development
• Dr Hans J Ohff, Visiting Research Fellow at the University of Adelaide, Managing
Director and CEO of the Australian Submarine Corporation from 1993 to 2002
• Dr Andrew Davies, Senior Fellow, Australian Strategic Policy Institute.
While these individuals have been extremely generous in contributing their expertise,
they may not all agree with some of the findings of this report. The responsibility for the
material in this report lies with Insight Economics and Submarines for Australia.
A large part of Chapter 4 of this report relies heavily on the work done by the retired
naval officers of flag rank in the context of the proposal they sent to the Prime Minister
in December 2018. This has been of very considerable assistance.
Finally, I would also like to acknowledge the contribution made by Senator Rex Patrick
who, before he entered Parliament, kindly sent me hard copies of a large number of
articles he had written on the future submarine. These were extremely helpful as I
began my long and arduous course of education on the subject.
Jon Stanford
Director, Insight Economics.
March 2020
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!AUSTRALIA’S FUTURE SUBMARINE: DO WE NEED A PLAN B?
Foreword
by
Gary Johnston (Submarines for Australia)!
Over a century ago, the Royal Australian Navy acquired its first submarines. Built in the
UK, AE1 and AE2 were state-of-the-art platforms, embodying the world’s best
contemporary technology. They were powered by diesel engines and lead acid batteries.
Their challenging voyage to Australia was undertaken on the surface and mainly under
tow.
Forty years later, USS Nautilus, the world’s first nuclear-powered submarine, put to sea
for the first time. It had a similar revolutionary effect as the entry into service of HMS
Dreadnought in 1905. At least at the highest end of offensive operations, diesel
submarines were arguably rendered obsolete.
In April 2016, 101 years after AE2 entered the Dardanelles on a wartime mission and 62
years after the Nautilus’s maiden voyage, Prime Minister Turnbull announced that the
French government-owned Naval Group had been selected to design Australia’s future
submarine, now the Attack class. Like AE1, it would have diesel engines and lead acid
batteries. If all went well, the first submarine would enter service in 2035. The program
will cost an eye-watering $50 billion in constant 2018 prices. Australia already holds the
record for the most expensive surface warships of their size ever built with the air-
warfare destroyers. Why not see if we can extend our Gold Medal performance to the
underwater domain?
In December 2019, the US Navy ordered nine Virginia class nuclear powered attack
submarines at a contract price of US$22 billion (or around A$33 billion). This was said
at the time to be the largest warship building deal ever (watch this space). These will be
more than twice the size of Australia’s Attack class, with a significantly more potent
offensive capability and unlimited endurance. Over their 30-year life they will never
need refuelling. They will all enter service in this decade, the ninth boat being delivered
in 2029, when we will still be waiting for the first Attack class boat.
When I heard Malcolm Turnbull’s announcement about the future submarine, I literally
couldn’t believe it. At the time, the French proposed to convert their nuclear powered
Barracuda design to diesel-electric propulsion (now they acknowledge it will be a new
design). Together with the elimination of any further competition solely on the basis of
an early concept design, everything about the project – particularly the cost, delivery,
technology and extremely high risk – suggested this was a dud idea. Simply put, it
involved dumbing down a nuclear submarine by removing the whole basis of its
superior capability, and then charging at least twice as much for a far less capable
submarine. When the first of class is delivered it will likely be obsolete, with the final
submarine due to be delivered 100 years after the Nautilus put to sea.
When the Super Seasprite helicopter was cancelled after outlaying a cool $1.4 billion in
return for not one single helicopter that the Navy could use, I wondered what the
Defence department could possibly do for an encore. We soon found out. But were this
massive project to fail, the consequences for our national security are on a completely
different scale and are simply unthinkable.
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!AUSTRALIA’S FUTURE SUBMARINE: DO WE NEED A PLAN B?
My first reaction, together with Dick Smith, was to place an advertisement in a national
newspaper at significant cost. Neither Defence nor the government took any notice.
Clearly this would be a hard nut to crack. I then commissioned Insight Economics to
undertake a substantial amount of research and come up with an alternative way
forward. Now working with an expert reference group, I am delighted with this new
Insight Economics report. It shows at least that if the government takes action now it is
not too late to change course.
But the most important message I draw from the report is that Australian submarines
are required to operate at the highest level of intensity, even in peacetime, in an
increasingly contested and congested theatre where four nations deploy nuclear
submarines and where the potential adversary is pursuing a strategy of anti-access and
area denial. With both the size and capability of the PLA Navy increasing at a prodigious
rate, by the time the Attack class are due to enter service the intensity of submarine
operations ‘up threat’ will be even greater. Not only will a diesel submarine have a lesser
effectiveness in our area of operations than the American nuclear submarines with
which we partner, but its lack of stealth while snorting and its low sustainable speed if
detected will give rise to an increasing threat to its survivability.
In my view, one of the most shameful episodes in our military history occurred in 1941-
42 when we sent brave young Australians, with predictable results, to fight the
advanced Japanese Zero fighters in obsolete aircraft. Never again should the nation
abrogate its duty of care towards its service men and women in this manner. We are a
wealthy country and have a moral obligation to provide ADF personnel with the best
possible military platforms when they are sent into harm’s way. I conclude, therefore,
that if the government wants to continue undertaking submarine operations at the
highest level of intensity, it should acquire a fleet of nuclear-powered attack
submarines, complemented by autonomous underwater vehicles.
If the government decides it is unwilling or unable to acquire nuclear submarines, it
should consider withdrawing from operations of this nature. But submarines are an
offensive weapons system and currently provide the ADF’s only substantial power
projection capability. If they can no longer be deployed in this capacity, the question
then arises of whether we should continue to operate submarines at all. With Australia’s
vast coastline to defend, there is little value in deploying a few conventional submarines
to chug around the archipelago. The answer may well be that two squadrons of
advanced bomber aircraft would provide a superior offensive capability, delivered much
earlier than the future submarine at a considerably lower cost.
But perhaps in light of the significant ongoing deterioration in Australia’s strategic
circumstances, in the future we will need both nuclear submarines and long-range
stealth bomber aircraft to provide a credible deterrent to any potential adversary.
Finally, I recognise the challenges involved in enhancing Australia’s capabilities in
nuclear science. Should the government decide to embark on the long and difficult road
to acquiring SSNs, I will commit to endowing a Chair in nuclear engineering in an
Australian university.
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!AUSTRALIA’S FUTURE SUBMARINE: DO WE NEED A PLAN B?
Executive Summary*
The selection in April 2016 of the French government-owned company Naval Group as
Australia’s design partner for the Navy’s future submarine was the outcome of a novel
competitive evaluation process (CEP) between French, German and Japanese
companies.
The Turnbull government accepted Defence’s recommendation of Naval Group despite
the fact that Ministers did not know how much the submarine would cost, its level of
Australian industry content (AIC) and, with a very late delivery, the implications of a
capability gap. The government rejected an attractive German offer – fixed price of
$20bn; 12 submarines to be built locally in a new digital shipyard at same cost as in
Kiel; 70 per cent local content; and delivery in 2028.
A major difficulty was that with Defence intending to work in an integrated way with
Naval Group on the submarine design, the SEA 1000 team felt unable to manage any
further competitive process. One lesson from previous acquisitions was the need to
invite two or more proponents to prepare preliminary designs and then provide a
tender covering price, delivery and AIC. Instead, further competition was eliminated.
Naval Group were gifted a monopoly position on the basis of only a very early concept
design for the Attack class and with no commitments on cost, schedule and Australian
industry content.
The second problem was around capability. The Defence department was attracted by
the capability offered by the French during the CEP, but perhaps took insufficient
account of the risk that it could not all be delivered. As occurred with the original
combat system for the Collins class, it is possible that Defence’s ambitions for the
submarine’s capability are inconsistent with the limits of contemporary technologies. A
previous Defence Minister had stated that the Navy needed a conventional submarine
(SSK) with the capability of a nuclear submarine (SSN) – effectively an oxymoron. The
French offered the RAN just that, a diesel-electric platform based on their Suffren SSN.
Yet the French concept was the riskiest possible – an ab initio design with an extended
delivery schedule, with the first Attack class submarine due to enter service after the last
Collins boat reached the end of its design life. By emphasising capability over both cost
and delivery, Defence may have forgotten the maxim: “the last 10 per cent of the
performance sought generates one-third of the cost and two-thirds of the problems”.
In a recent report, the Auditor General noted the high risks in the SEA 1000 program
even at this very early stage. The ANAO also revealed that the government-appointed
Naval Shipbuilding Advisory Board, including US Admirals who had previously
endorsed the French proposal, advised the government to consider terminating the
arrangement with Naval Group. In March 2020, a member of that Board told the Senate
that the main problem with the program was that it lacked a contingency ‘Plan B’.
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*No!references!are!provided!in!the!Summary.!These!can!be!found!in!the!body!of!the!report.!
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!AUSTRALIA’S FUTURE SUBMARINE: DO WE NEED A PLAN B?
Emerging problems
Excessive cost
The government should be deeply concerned at the cost of its naval acquisitions. The air
warfare destroyers, for example, are the most expensive warships of their size ever built
and cost nearly three times the benchmark global price. The budget for the Hunter class
frigates suggests that RAN will pay at least twice as much as the Royal Navy for those
ships. Even before a preliminary design has been produced, the cost of the Attack
program has escalated from an already extremely high level:
• The design of the submarines will cost at least $4bn, compared to the ~$1bn that
is a contemporary benchmark for complex submarine designs
• Since the announcement, the acquisition budget has been increased by 60 per
cent to $80bn in out-turned dollars (confirmed in the recent ANAO report) – an
outlandish cost for a conventional submarine
• Defence has confirmed that the whole of life cost for the 12 submarines will be
$225bn out-turned, compared to ~$90bn out-turned for the TKMS bid.
Inadequate Australian industry content
After experience with the cost of maintaining Oberon submarines and the unreliability
of supply from UK, the principal reason for building submarines in Australia is to
establish a sovereign capability to sustain them. Sustainment of Collins is now achieved
very efficiently with ~ 90 per cent AIC. With Naval Group having an economic and
political incentive to maximise French content, the outcome in terms of AIC is unlikely
to be satisfactory. The first CEO of Naval Group Australia promised 90 per cent AIC,
which Minister Pyne said he would ensure was a commitment. In February 2020, Naval
Group flagged less than 50 per cent Australian content, possibly much less if the
overseas content in work by local subsidiaries of French companies is taken into
account. The recent commitment to 60 per cent is not yet contracted and, with a
definition of local content that includes Australian resorts and other services, may not
meet the requirement to ensure the advanced industrial capability required for future
submarine sustainment.
Dangerous capability gap
The Collins class reaches the end of its design life between 2026 and 2034. The first
Attack class submarine is expected to be operational by 2035-36. This implies a very
substantial capability gap. Since ab initio submarine projects almost inevitably run late
or fail, it is possible that the first Attack will not enter service until 2040. For the first
time, Defence now acknowledges the possibility of a capability gap.
Beyond the obvious impact on national security, the implications of a gap in submarine
capability are far reaching. In particular, the effect on the availability of trained
submarine personnel can persist for a long time. Due to an early lack of operational
availability of the Collins class, the transition from the Oberons was a fraught
experience in regard to the impact on recruitment and retention, from which, over 15
years later, the Submarine Force has only recently recovered.
It is inevitable that all six Collins submarines will need a life extension (LOTE). This will
be a high risk exercise, including replacement of diesels, the main motor and other
major systems, with estimates of cost ranging between $6 and $15bn. The ANAO report
8!
!AUSTRALIA’S FUTURE SUBMARINE: DO WE NEED A PLAN B?
states that planning for this is at an early stage. No budget for the LOTE separate from
that of SEA 1000 has been announced. Taken together with an increase in activity in
Attack class construction at the same time, in the late 2020s this will make a major
impact on Defence’s Integrated Investment Program (IIP).
The plan is also to undertake the LOTE within the 10-year full cycle docking major
maintenance schedule that take two years to complete. There is a high risk that the
LOTE will not be able to be completed within this timeframe. This would exacerbate the
likely capability gap. According to industry experts, the most efficient way of
incorporating the installation of new propulsion systems would be to build a
replacement hull section for the after end of the submarines. This would require
expertise beyond repair and maintenance, including in design and construction. The
high risks in this suggest that Saab Kockums, the designer and builder of Collins, should
be engaged by the Design Authority, ASC, to assist in what will be a very complex task.
Low cost-effectiveness and questionable strategic value
Apart from the vital considerations of cost, delivery, local content and the risk of a
capability gap, we have a more fundamental concern in regard to the Attack class. The
main role for RAN submarines is to operate with the US Navy in intelligence gathering
missions in the South China Sea, 3,500 NM from their base. The long distance to their
primary area of operations is a major challenge – no other conventional submarine in
the world undertakes similar operations – and means that nearly half of a RAN
submarine’s 70-day operation is spent in transit. Even with 12 submarines by 2050, in
peacetime generally only one submarine will be able to be on station at any time. By the
mid-2030s, half the world’s submarines will be operating in the South China Sea, many
of them nuclear powered. The cost-effectiveness of outlaying $225 billion in whole of
life costs in order to deploy one conventional submarine to such a congested theatre at
any time must be in doubt.
With the ongoing increase in the intensity of undersea operations in the South China
Sea, the operational effectiveness and survivability of conventional submarines become
ever more challenged. Developing its anti-submarine capability is now a high priority
for the PLA Navy, with the aim of creating an ‘underwater great wall’ and denying
access to foreign submarines. The first tactical problem for a diesel submarine is the
need to ‘snort’ near the surface every few days so as to recharge its batteries. This makes
them far more liable to detection. The second tactical problem is their inability to
sustain a high speed for any length of time. This limits their ability to track nuclear
submarines and other high value targets. Together with limited endurance, it also
compromises their ability to break contact if detected and escape at high speed, thereby
reducing survivability.
The operations undertaken by RAN submarines can be at the highest end of the
intensity scale, similar to NATO operations during the Cold War over 30 years ago
where ultimately all the parties used SSNs. As technologies continue to develop,
intensity is only likely to increase over time. Taking account also of the very long
transits for Australian submarines, we do not believe that a conventionally powered
submarine will be fit for the purpose of operating in this theatre in the 2030s and
beyond. Compared to the SSNs operated by the US Navy, a SSK will not only be less
effective but it will also have a lower level of survivability.
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!AUSTRALIA’S FUTURE SUBMARINE: DO WE NEED A PLAN B?
Proposed risk mitigation strategy: Plan B
In responding to the ANAO report, Defence acknowledged, at the highest level, there
was a need to mitigate the very high level of risk in the SEA 1000 program.
Re-introducing competition
Our proposal for mitigating the risks around SEA 1000 would not involve delays to the
present program with the Attack class, and a very small increase in cost that we are
confident would be recouped many times over. Fundamentally, it would introduce a
parallel pathway that would give rise to valuable competitive pressure. The alternative
pathway is for an evolved Collins class submarine – Collins 2.0. This recognises that
evolving a new submarine from an existing successful platform – and the Collins class is
now performing extremely well – is the approach followed by all other countries that
build and operate submarines. The main advantage of this approach, which the
Americans advised Defence to follow in the first place, is that it involves a significantly
lower risk. But there are also benefits in terms of lower costs and a shorter delivery
schedule, as well as being able to utilise an existing supply chain.
On the basis of expert professional advice, we consider that an evolved Collins 2.0
submarine, with a comparable capability to Attack, could be delivered at least five years
earlier, at a much lower cost and with 70 per cent local content. There would also be
benefits from significant synergies with the Collins class LOTE.
We propose that in parallel with the Attack class program, the government should
commission a preliminary design of a Collins 2.0 option. The estimated cost of the
design is less than 0.2 per cent of the future submarine budget, money that would be
recovered many times over even if only by the effects of eliminating the current
monopoly. In 2022-23, the government could then choose between the Attack class and
Collins 2.0 on the basis of fixed price tenders for the first six submarines, also including
firm proposals for delivery, AIC and intellectual property rights. This task could be
undertaken by an independent expert review team reporting to the Minister for Defence
through the CDF and the Secretary of Defence.
Review of submarine technologies
Operations ‘up threat’ in an offensive, power projection role using conventional
submarines will be highly challenging by the 2030s. Only nuclear powered submarines
have limitless dived endurance on an operation and the speed required to put more
submarines on station – perhaps three times as many as with diesel boats – in the face
of RAN submarines’ long transits. Their sustainable high speed also offers major
advantages in terms of operational effectiveness and survivability. We recognise it
would be difficult for Australia to acquire SSNs, however, and would take 15-20 years.
The Navy would require 12 conventional submarines first (including six life extended
Collins boats) in order to build up numbers of trained personnel.
The 2016 Defence White Paper flagged a review of future submarine technologies in the
late 2020s. We believe this review should be brought forward and undertaken as a
matter of urgency. It should include an analysis of whether Australia should explore the
option of acquiring nuclear-powered submarines. The future role of autonomous
underwater vehicles (AUVs) should also be investigated in detail.
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!AUSTRALIA’S FUTURE SUBMARINE: DO WE NEED A PLAN B?
Chapter 1
Emerging problems with SEA 1000
In April 2016, the Turnbull government announced that the French company Naval
Group (then DCNS) had been selected as Australia’s strategic partner to design the
Royal Australian Navy’s future submarine. Naval Group is majority owned by the
Government of France with major French defence companies as minority shareholders.
Now, nearly four years after the announcement, some significant problems are
beginning to emerge, as detailed in a report by the Auditor General released in January
2020.1 These include:
• A lengthy delay in concluding the Strategic Partnership Agreement (SPA)
between the Australian and French governments
• A 60 per cent increase in the acquisition budget, confirmed by the ANAO, for the
submarine to $80 billion in out-turned (inflated) dollars
• A delay of nine months in the completion of the preliminary design so that the
project has already missed two milestones
• A delivery schedule that requires all six Collins class submarines to have a ten-
year life extension (LOTE), but with little preparation having been made for the
LOTE even though the need for it was understood years ago
• A poor relationship has developed between Naval Group and Defence due to
cultural differences and disagreements about Australian industry content
• Very high risks around the SEA 1000 project, as also acknowledged by the
Defence Department
• Before the SPA was agreed, the government was advised by the Naval
Shipbuilding Advisory Board, which included three retired American admirals,
that the risks were so high that Australia should consider walking away from the
project even were the SPA to be concluded satisfactorily.
Abstracting from the individual problems around issues such as cost and risk, there are
two main categories of issues that require the government to intervene and establish a
‘Plan B’. The first problem, that underlies most of the current issues between the
parties, is the premature elimination of any competition long before a preliminary
design has been completed, and the serious issues that are arising as the consequence of
the gifting of monopoly power to Naval Group. The second is a much more fundamental
problem that will be even more difficult to address. This is the likely pursuit of an
unrealistic capability requirement for the Attack class in light of the unique role that
Australia requires its conventional submarines to undertake.
These two issues are discussed below.
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1!ANAO$(2020),$Future&Submarine&Program&–&Transition&to&Design,$Auditor0General$Report$No.$22$2019020,$para.11,$
https://www.anao.gov.au/sites/default/files/Auditor0General_Report_201902020_22.pdf!
11!
!AUSTRALIA’S FUTURE SUBMARINE: DO WE NEED A PLAN B?
1.1 Elimination of competition
The elimination of competition beyond the concept design stage is giving rise to
problems that any economist would expect when a large contractor is gifted with a
monopoly position. The competitive evaluation process (CEP) that led to this decision
was controversial. In the largest ever Australian capital project, for the government to
commit to a single partner on the basis of a simple concept design seemed risky. It went
against all the lessons learned from previous unsuccessful acquisitions about
maintaining competitive pressure for as long as possible. Without negotiating any
bankable commitments while having stated that the budget for the project was $50
billion, the government had gifted Naval Group with a monopoly position. In doing so it
has severely compromised its negotiating position on every aspect of the project – cost,
delivery, Australian industry content and rights to intellectual property.
Even if the government was determined to down select to a single company so very early
in the program, this need not have occurred. Although ultimately unsuccessful, the
German group, thyssenkrupp Marine Systems (TKMS), had made a firm lump sum
offer. They proposed a fixed price of $20 billion for building 12 submarines, with the
first being delivered in 2028 with 70 per cent Australian industry content. They would
all be built in Adelaide at the same cost as in Kiel. This was in accord with the then best
practice global cost of a conventional submarine of about $400,000 to $450,000 per
tonne.2 This was not a will of the wisp proposal. The German principals needed to be
convinced that Australian industry could achieve this while delivering an acceptable
profit and at the same time maintaining a contingency margin.
We are not arguing that the German offer should necessarily have been accepted, but it
did establish a strong benchmark for acquiring a submarine of the same size as the
French design with a similar need to satisfy Defence’s ambitious capability requirement.
As was their right, the government selected the French on the basis of Defence’s
recommendation that the capability offered by Naval Group’s concept design was
markedly superior. But Ministers could at least have used the German proposal as a
benchmark and made acceptance of the Naval Group proposal contingent on the
negotiation of a comparable agreement, no doubt with some flexibility included. They
could also have nailed down the degree that Naval Group would guarantee that the
highly advanced capability they offered could be delivered. Indeed, it is surprising that
the three coordinating departments and their Ministers (Prime Minister and Cabinet,
Treasury and Finance) did not insist on a much tighter approach along the lines
suggested.
1.2 Ambitious capability requirement
The greatest underlying problem with the Attack class program is that the evidence
suggests that Defence is seeking to develop an unprecedented level of capability in a
conventionally powered submarine (SSK).
After the RAN began operating submarines again in the late 1970s, it was only later on
that an important role for the Oberon class became to undertake intelligence,
surveillance and reconnaissance (ISR) operations in waters far to Australia’s north.
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2!Unsurprisingly,!since!the!estimates!were!nonGbinding,!all!contenders!submitted!a!rough!order!of!magnitude!
cost!within!10!per!cent!of!each!other.!
12!
!AUSTRALIA’S FUTURE SUBMARINE: DO WE NEED A PLAN B?
These operations involved very long transits. But they were conducted mainly on the
surface. This was commonplace for conventional submarines at that time operating in a
strategic environment with a low level of intensity and a fairly rudimentary anti-
submarine warfare (ASW) capability on the part of potential adversaries.
As submarine detection technologies improved and satellites became more numerous,
operations undertaken mainly on the surface became less tenable. The Collins class
submarines that replaced the Oberons with a similar role were designed to operate
dived throughout. In order to maintain the same speed of advance (SOA) as the
Oberons in transit, this required frequent recourse to snorting, close to the surface, so
as to recharge batteries. On a 3,500nm transit, frequent snorting imposes a degree of
stress both on a submarine’s crew and on its machinery. It also exposes the submarine
to a significantly greater risk of detection and interdiction, albeit a lower risk than when
travelling on the surface.
At the same time, high intensity blue water submarine operations in other parts of the
world, particularly the Atlantic theatre, increasingly became the preserve of nuclear-
powered attack submarines (SSNs). These operations were highly intense during the
Cold War, entering the dangerous ‘grey zone’ between peace and war. Both their speed
and their ability to remain fully dived throughout for a 90-day operation gave SSNs a
higher level of effectiveness. High speed and virtually unlimited dived endurance also
provided SSNs with a higher level of survivability because of their ability to break
contact when detected and escape at very high speed. By the end of the last century, the
US, Britain and France had discarded all their conventional submarines.
Because only six countries currently deploy SSNs – the US, Russia, China, Britain,
France and India – these blue water, high intensity operations ‘up threat’ now are
effectively limited to great powers – with a few exceptions. Countries that operate
conventional submarines generally undertake short operations – perhaps of around 21
days maximum – and operate dived throughout, with a minimal need to snort due to
their use of air-independent propulsion (AIP) systems and/or modern batteries with a
much greater level of energy intensity. Japanese Soryu class submarines, for example,
undertake covert ISR operations in liaison with the US Submarine Force in the East
China Sea, but we understand these are generally of two weeks duration undertaken
fully dived throughout. Their use of AIP, or more recently Li-Ion batteries, allows them
to achieve this without the need to snort.
Australia is the only country that requires its conventional submarines to undertake 70-
day operations involving 3,500nm transits and then a long patrol of 30+ days far from
base. When they reach their primary area of operations (AO) they also work in an
extremely high intensity operational and tactical environment. Given that Australian
governments from both sides of politics have rejected the use of nuclear propulsion for
Australian submarines while still seeking to undertake the same, increasingly
challenging, operations as in the past, this gives rise to a capability requirement for a
unique conventional submarine.
The then Defence Minister, David Johnston, said in 2015 that Australia required a
submarine with the capability of a nuclear powered boat but with diesel-electric
propulsion. Given that a SSN derives its capability from the advantages in terms of
speed and endurance offered by a nuclear reactor, this is an oxymoron. It is probable
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!AUSTRALIA’S FUTURE SUBMARINE: DO WE NEED A PLAN B?
that the RAN’s capability requirement may well test the boundaries of what
conventional submarines can reasonably be expected to do.
We believe the desire to design and build what is essentially a unicorn lies at the heart
of most of what is wrong with the Attack class program. The major issue is that the
Naval Group won the SEA 1000 CEP not on the basis of cost, delivery or local content
but rather on the claimed superior capability it offered. But just as the CEP failed to lock
in any commitments on cost, schedule and local content, it also failed to lock in
commitments around capability.
The decision by the German group TKMS to offer a fixed price well below the budget for
the future submarine appeared a smart move at the time. But in retrospect it may have
been an own goal. It meant that unlike their rivals, they couldn’t afford to offer
capability that would be risky and perhaps impossible to deliver. But for other
proponents who had made no commitments around price or delivery, the sky was the
limit. Defence’s statements about the superiority of the capability offered by the French
suggest they apparently accepted all Naval Group’s claims without undertaking a
serious risk assessment of whether the capability could actually be delivered.
This can be illustrated by the much spruiked proposal by Naval Group to use a pump-jet
propulsor on the Attack class. Naval Group said at the time of the announcement that
pump-jets had rendered propellers ‘obsolete’ for submarines. Yet the physics of pump-
jets tell us that while they can provide a superior acoustic solution for power-rich SSNs,
they are too inefficient for use on conventional submarines. Indeed, four years later it
appears that none of Naval Group’s designs for SSKs have adopted pump jets. More
tellingly, within 18 months of winning the contest, the French head of the Australian
program suggested that propellers might be used in the Attack class after all. This drew
a response by Defence insisting on pump-jet propulsion as demonstrated during the
CEP process.
The second straw in the wind regarding the onerous nature of the capability
requirement is how the design schedule is blowing out, with Naval Group already
requesting a delay of 15 months in the preliminary design.
If there is a disconnect between the design partners on what level of capability can be
expected to be delivered, this substantially increases the risks around the project. A
former Secretary of the US Navy, Norman Augustine, proposed what he called ‘the law
of insatiable appetites’ in defence procurement. There was a strong basis in past
experience to support Augustine’s proposition that “the last 10 per cent of the
performance sought generates one-third of the cost and two-thirds of the problems”. In
Australia’s case, we may be looking at an even higher level than 10 per cent of the
required capability that is at risk.
With the exception of local content, this fundamental tension between the Navy’s
required capability and what is presently achievable dominates every issue around the
project.
Perhaps most importantly, it explains the lack of competition, which underlies current
issues around cost, delivery, local content and IP. Defence stated at the outset that it
only had the resources to manage one project proposal. This may well be correct,
although in any normal project it shouldn’t be. The reason is that in selecting a design
partner, they meant exactly what they said; Defence is the other partner in designing
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!AUSTRALIA’S FUTURE SUBMARINE: DO WE NEED A PLAN B?
the submarine and a very active one. Early in the design process, there were more
Australian designers than French on the team. Defence, has been involved in designing
an ideal submarine since before the 2009 Defence White Paper (DWP). It intends to
make a major contribution to the design with Naval Group. This, no doubt, is why Naval
Group publicly refers to Defence as a very demanding customer. Also, if Defence’s
requirements for capability are regularly extending further into the wish list than was
understood at the time of the CEP, this is also probably why the design has encountered
a significant delay.
There is no way Defence could manage two competing design proposals and run a
neutral competition when it is working on a complex design in an embedded way with a
single partner. But this also reflects fundamental governance issues, when the customer
is also part of the team designing the submarine in liaison with the Prime contractor.
Should the design fail, this fundamental conflict could well be a major cause. But then
the same question arises as with the air warfare destroyers where all the parties to the
partnership arrangement seemed to be in bed together. If it the project fails, who does
the Australian government sue?
This also reflects another problem – the equivalent of “don’t ever let a fighter pilot
design the air force’s next fighter”. Without Ministers driving the project, the emphasis
is likely to be on capability with a lesser consideration for cost, schedule, local content,
ownership of IP or, particularly, deliverability. This is always inappropriate. It is
particularly inappropriate when Australia’s increasingly threatening strategic
circumstances suggest we need new submarine capability as soon as possible and when
there is a financial constraint in terms of the various new programs, across all three
services, that are making growing demands on the defence budget.
1.3 Structure of the report
The remainder of the report is structured as follows:
• In Chapter 2 we examine problems around cost, delivery, AIC and IP protocols
and discuss how these have been exacerbated by the lack of competition in the
process
• The significant challenges around what Australian submarines do and what
technologies are required to support their role are discussed in Chapter 3
• A proposed ‘Plan B’ risk mitigation strategy is presented in Chapter 4.
!
15!
!AUSTRALIA’S FUTURE SUBMARINE: DO WE NEED A PLAN B?
Chapter 2
Problems arising from lack of competition
The Competitive Evaluation Process (CEP) to select a design partner for the FSM was a
novel initiative for the Defence department. Given that it effectively led to the selection
of a platform, based only on a design concept, a major source of risk source of risk to the
FSM project was the government’s decision to eliminate any further competition
following the selection of Naval Group as design partner.
As the Auditor-General pointed out in his initial (2017) audit of the CEP for the FSM,
this is a high-risk program. The implications of compounding these risks by eliminating
competition were identified clearly by the ANAO:
The approach taken by Defence for the Future Submarine program removes
competition in the design phase, and removes incentives for the international
partner (DCNS) to produce a more economical and efficient build. This places the
onus on Defence to ensure that its approach to the Future Submarine’s design and
build phases, where final costs and schedules will be determined, returns value-for-
money to the Commonwealth in the absence of a competitive process.3
We are especially concerned that the elimination of competition at a very early stage of
this project exposes the government and the taxpayer to a number of very substantial
risks and a contingent liability that is enormous both in financial terms and also in
respect of the delivery of what is a vital defence capability. Having been gifted a
monopoly position at the very start of the project, a rational approach by Naval Group
would be to maximise the commercial benefit it will derive from the project. We can
point to some emerging evidence, even at this very early stage, that significant problems
are becoming apparent as a result of abandoning competition so early in the acquisition
process. We discuss below the emerging effects of lack of competition on risks around:
• The cost of designing and building the Attack class
• The timely delivery of the submarine and the capability gap
• Australian industry participation and sovereign capability
• Australian access to and ownership of critical intellectual property
• Technical specifications of the Attack class.
These are considered below.
2.1 Excessive cost of design and construction
Among several issues apparent with SEA1000, excessive cost is perhaps the most
obvious. It has serious and broad implications. The budget breakdown has not been
explained but it appears to us to be far above what we should pay for the capability
sought. The problem of embarking on major acquisition programs much too late and
then paying much too much for them is not confined to the SEA1000 program.
Australia paid between two and three times the benchmark price for the AWD and we
look like paying much more for the frigates than we should. This is unacceptable,
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3
$ANAO$(2017),$Future&Submarine&—&Competitive&Evaluation&Process,$Performance$Audit$Report,$27$April,$para$3.31,$
https://www.anao.gov.au/work/performance0audit/future0submarine0competitive0evaluation0process$!
16!
!AUSTRALIA’S FUTURE SUBMARINE: DO WE NEED A PLAN B?
particularly after the successful and cost-effective Anzac frigate program. We note too
that the first AWD was delivered 16 years after the last ship of the class it was replacing
was decommissioned.
Design cost and risks
Currently, approved expenditure on SEA 1000 is $5,959 million, including outlays to
date of $779 million. Defence had spent $396 million on design to 30 September 2019.4
But in addition, the Director of SEA 1000 told the Senate that the budget to complete
the design process would be ‘in the order of $4.5 billion’.5
Our research, including discussions with Australian shipbuilders, suggests that a
complete design of a contemporary submarine should not cost more than $1 billion.
Admittedly, however, this cost represents what you would expect to pay for an evolved
design, which is what most submarine builders around the world seek to undertake
because of the much lower risk. In many cases, around 60 to 70 per cent of systems
used in these designs are already proven in existing submarines. If indeed the designers
of the Attack class are starting with a clean sheet of paper, however, it seems clear that
the process would be more resource-intensive and take a much longer time.
It would also be much more risky. This is another significant problem with selecting an
ab initio design. It now appears that the Shortfin Barracuda, initially presented as a
diesel-electric version of the French Barracuda class SSN and then an evolved version of
the Scorpène (of which details of its performance were leaked to the world’s media), is
in fact rather more of a “new” design than were the other two contenders. Even so, to
pay $5 billion for designing a SSK seems excessive. Given that Defence told us that the
rough order of magnitude project price presented by the three contenders were fairly
close, it seems extraordinary that design costs could account for around 25 per cent of
the overall budget for a program to deliver 12 very large submarines. Perhaps the simple
answer to these imponderables, as one retired senior naval officer told us in regard to
the proposal to use pump-jet propulsion, is that “our guys just had the wool pulled over
their eyes”.
Another major risk in terms of the design task concerns the possibility that the
specifications may be subject to significant change. As discussed later in this
submission, the current design excludes air independent propulsion (AIP) and modern
batteries as well as including power-hungry pump-jet propulsion. Should the
requirements change in regard to any of these features, perhaps as a result of land-
based testing, a very substantial re-design would be required mainly because of
significant changes is weight distribution. This could give rise to a considerable delay.
In addition, with lead acid batteries embodied in the first ‘flight’ of three or four
submarines, it is almost inevitable that much more energy-dense batteries would be
incorporated in the second flight. This would also require a major change in the design.
For example, lead acid batteries play a second role in providing the submarine with the
required ballast, but lithium-based batteries are much lighter. If, however, a different
technology such as the emerging nickel zinc design, were to be adopted, this would
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
4
$ANAO$(2020),$Future&Submarine&Program&–&Transition&to&Design,$Auditor0General$Report$No.$22$2019020,$para.11,$
https://www.anao.gov.au/sites/default/files/Auditor0General_Report_201902020_22.pdf$
5!Hellyer,!Marcus!(2019),!“The!cost!of!defence,!ASPI’s!Defence!budget!brief,!2019G20”,!ASPI,!June,!pages!82G83,!
https://s3GapGsoutheastG2.amazonaws.com/adGaspi/2019G05/Cost%20of%20Defence%202019G2020.pdf!
17!
!AUSTRALIA’S FUTURE SUBMARINE: DO WE NEED A PLAN B?
simplify things if only because the weight of a nickel zinc battery is similar to lead-acid,
although the energy density is much greater.
In a report released in January 2020, the Auditor-General found that Naval Group had
requested an extension of 15 months for the preliminary design process. In response,
Defence agreed to a nine months extension:
The program is currently experiencing a nine-month delay in the design phase against
Defence’s pre-design contract estimates, and two major contracted milestones were
extended. As a result, Defence cannot demonstrate that its expenditure of $396 million on
design of the Future Submarine has been fully effective in achieving the program’s two
major design milestones to date.6
This delay before even the preliminary design has been completed is a major concern. It
suggests some early difficulties, perhaps with delivering aspects of the advanced
capability that Defence requires.
Production cost
Under the CEP, each contender was required to provide a non-binding, rough order of
magnitude of their submarine’s overall cost. We understand these came in within about
ten per cent of each other – not surprisingly because the estimates were non-binding
and the three contenders, as well as Defence, would all have known the approximate
benchmark cost per tonne of building a submarine. Although TKMS publicly offered a
guaranteed fixed price, the others may have pitched at a similar level, being confident
they could quote a much higher price later if successful when monopoly status had been
achieved. A rational monopolist would be loath to leave money on the table, particularly
in a rare instance where the customer had thoughtfully published a program budget
that would have appeared generous to the point of extravagance.
When the initial budget for the FSM of $50 billion (excluding the combat system) was
announced, it caused many eyebrows to be raised. Compared to what other nations
spent on acquiring conventional submarines, this seemed excessive, even after
accounting for the large size of Australia’s requirement. Yet that budget was framed in
terms of what Defence calls future or out-turned dollars, meaning that it allows for
inflation at an assumed annual rate of 2.5 per cent until the completion of the program
in the mid- 2050s. In June 2018, however, Defence announced that while the headline
figure for the Attack class budget remained the same, it was now expressed in constant
dollars. This implied that the previous $50 billion in out-turned dollars had become
$80 billion overnight. Only a couple of years after the decision on the CEP and before
even a concept design of the submarine had been produced, the budget for SEA 1000
had increased by nearly 60 per cent. While the then Minister denied there had been any
increase – “it was always $50 billion” – the recent ANAO report confirmed the increase
from $50bn to $80bn in out-turned dollars.7
In evaluating whether the submarines will provide value for money, the key question is:
how much should submarines cost? This is a challenging exercise because comparable
and verifiable data are difficult to find. Credible analysis undertaken over several years
in Australia by people closely involved in the submarine enterprise has produced
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
6
$ANAO$(2020),$op.&cit.,¶.$11.$
7!Ibid,&page!7.&
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!AUSTRALIA’S FUTURE SUBMARINE: DO WE NEED A PLAN B?
estimates of a global western benchmark cost for a conventional submarine. 8 Despite
all the hype and misinformation at the time, this study found that the average cost per
submarine for the Collins class was just under the contemporary benchmark. This was
quite a remarkable achievement for submarines built by an inexperienced work force in
a new shipyard built on a green field site and in a country that had never built
submarines before.
On the same basis, we are advised that the global benchmark cost per tonne at the time
of the CEP was around $450,000 per tonne. By 2018, this had risen to
$500,000/tonne.9 Using this parametric, we could accept that the average cost of the
Attack class at around 4,270 tonnes (the publicly available surfaced displacement)
should be in the order of $2,135 billion per submarine, This suggests an acquisition cost
for 12 submarines should cost $25.62 billion.
Defence has stated that the budget for SEA 1000 is $50 billion in constant 2018 dollars
(equivalent to $80 billion in out-turned dollars). Other statements lead us to
understand that this does not include the combat system (an additional $6 billion), the
cost of extending the life of the Collins class submarines or sustainment costs for the
Attack class. What then is the remaining $24.38b buying? Design fees, project
management costs, spare parts, integrated logistic support, new infrastructure
including a shipyard, training and education systems such as the Naval Shipbuilding
College, weapons, provision for project contingency and other foreseeable items would
all quite reasonably be a part of the $50 billion total. But based on what those items
should cost, it’s very hard to see anything like another $24.38b.
We note too that the unsuccessful German proposal was to build 12 Type 216
submarines in Australia with a high local content for a fixed price not to exceed $20
billion, or a maximum of $1,667 million per boat at 2016 prices. At 4,200 tonnes
surfaced displacement, this amounts to $400,000 per tonne, equivalent to eleven per
cent below the estimated global benchmark cost at that time. Although there is
insufficient information available on which to make a definitive judgement about the
difference between that bid and the current SEA 1000 budget, the size of the difference
must raise very serious questions. Even if we allow $10 billion for the ancillary items
identified above, which seems generous, at $40 billion the Attack class would still be
twice as expensive as the German Type 216.
In the absence of any official public breakdown of the budget for SEA 1000, this
analysis suggests that we are at risk of paying a great deal more for the Attack class than
we should. If SEA 1000 is costing even a few billion dollars more than we should pay,
the opportunity cost to the rest of the Defence IIP and to national security are very
serious indeed.
The problem is that with Naval Group knowing the size of the budget, it gives them a
free hit. Like any rational monopolist, they will set a price consistent with the budget, or
may even ask for more. Already the cost of the design is excessive and in a couple of
years or so when the construction contract will need to be signed, Defence will have
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
8!Pacey,!Brice!(2012),!Sub&Judice:&Australia’s&Future&Submarine,!Kokoda!Papers,!No.!17,!January,!page!50,!
https://www.regionalsecurity.org.au/Resources/Documents/KP17.pdf.!!
9!More!recent!estimates!are!based!on!correspondence!with!CDRE!(Rtd)!Paul!Greenfield!RAN,!who!contributed!
to!the!Kokoda!report.!The!estimates!are!expressed!in!constant!2018!dollars,!tonnage!being!the!submarine’s!
displacement!on!the!surface,!not!when!dived.!!This!cost!benchmark!figure!includes!the!combat!system!but!not!
the!weapons,!which!are!usually!costed!and!procured!separately.!
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