PC hits out at submarines pork


By Leith van Onselen

The Productivity Commission’s (PC) 2014-15 Trade and Assistance Review, released yesterday, fired a direct shot at the Turnbull Government’s spurious decision to spend $50 billion of taxpayers’ money to build a fleet of 12 submarines locally, claiming that it is a “major step back” from decades of reform to industry assistance:

To the extent that it involves a premium over an overseas build, the local build of the submarines also confers significant industry assistance. This is a major step back from the historical reduction in using government procurement preference as industry policy…

Paying more for local builds, without sufficient strategic defence and spillover benefits to offset the additional cost, diverts productive resources (labour, capital and land) away from relatively more efficient (less assisted) uses. It can also create a permanent expectation of more such high cost work, as the recent heavily promoted ‘valley of death’ in naval ship building exemplifies.

Such distortion detracts from Australia’s capacity to maximise economic and social wellbeing from the community’s resources. The recent decision to build the new submarines locally at a reported 30 per cent cost premium, and a preference for using local steel, provides an illustrative example of how a local cost premium can deliver a very high rate of effective assistance for the defence contractor and the firms providing the major steel inputs (box 3.1). While based on hypothetical data, the example reveals that the effective rate of assistance provided by purchasing preferences can be higher than the peak historical levels recorded for the automotive and textiles, clothing and footwear industries prior to the significant economic reforms of protection. It is notable that this cost premium does not include any delays in deploying the new submarine capability.

…the effective rate of assistance for building the proposed submarines locally, at a reported premium of around 30 per cent more than an overseas assembly, has been estimated to be around 300 per cent, perhaps a record high…

The Turnbull Government’s defence procurement policy is one of the most wasteful spending decisions I have ever seen.

In addition to its decision to spend $50 billion on submarines, the Government’s has also decided to build nine frigates locally at a cost of about $35 billion, taking the total estimated taxpayer cost of revamping its naval fleet to an astronomical $85 billion! And that assumes no further cost over-runs, which are highly likely given the cost blowouts in the construction and maintenance of the troubled Collins-class submarines.


As noted by Brian Toohey, the Government’s refusal to go with an off-the-shelf design also means that the first of the new submarines will not be operational until after 2030 and the last until almost 2060. This means that the existing troubled Collins-Class submarines will need to be kept in service for more than 20 years beyond their planned 2025 retirement date – necessitating expensive maintenance and operating costs that will soon pass $1 billion a year. Hence, even more cost blow-outs are likely.

And where is the underlying rationale for undertaking such a large submarines purchase in the first place? Couldn’t it just lead to a classic “security dilemma” whereby our regional neighbours feel less secure and embark on their own futile defence spending to “keep up”, thus leading to a lose-lose regional arms race?

All of this to “create” 3,000 manufacturing jobs and save a handful of seats in South Australia, including Christopher Pyne’s, who has now become Minister for Defence Industry within the Defence portfolio.


And to think, the same Coalition Government decided to jettison 40,000 to 200,000 jobs in the car industry into the sea by refusing to pay a paltry $500 million in assistance.

I cannot think of a worse example of government waste and mismanagement than this.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.