There have been claims in the media and by various commentators that the cost of Australia's future submarine program has gone up. The Defence Department insists that it hasn't. So, who's right?
Unfortunately, nothing is ever straightforward with the cost of defence projects. That's partly because the department doesn't release much information, particularly before it has an acquisition contract. It's also because people are rarely talking about the same thing when throwing numbers around. I've previously shown (see chapter 7) how a hypothetical project can cost $1 billion or $3.5 billion depending on how you present it. That's just acquisition costs. Whole-of-life costs, which also include operating costs, are very different again. It's easy to fall into the trap of comparing apples with gibbons.
It's also important to understand the price basis of a cost estimate. Defence distinguishes between estimates done in constant dollars, which assumes a dollar has the same buying power over time, and those done in "outturned" dollars, which take inflation into account.
In a constant-dollar estimate, something that costs $1 this year will always cost $1. It's artificial, but it does allow for a more intuitive comparison of costs. But even constant-dollar estimates will change depending on your base year; one done in 2010 will look different from one done in 2020, even for the same thing.
The government works in outturned dollars because it needs to forecast its revenue and expenditure in future years. So Defence's public numbers are also in outturned dollars. But with outturned dollars, the longer an activity goes on for, the more inflation compounds and the more an outturned estimate looks different from a constant-dollar estimate.
With the construction of the future submarine fleet lasting into the 2050s, the difference between constant and outturned estimates will be substantial, even if they are different ways of looking at the same thing.
The requirement for 12 large conventional submarines first appeared in the 2009 defence white paper. They were intended to have, "greater range, longer endurance on patrol, and expanded capabilities compared to the current Collins-class submarine." In addition to the Collins' anti-submarine, anti-surface and intelligence, surveillance and reconnaissance roles, the new submarines were to have a strategic strike capability. All of that implied greater size and complexity.
Increasing size and complexity are the two main reasons why military equipment suffers significantly greater rates of inflation than the broader economy. Therefore, the new submarines were necessarily going to be much more expensive than the Collins, which cost about $5.1 billion for six 3,300-tonne boats.
Defence didn't say how much more. The public version of the 2009 capability plan that supported the white paper stated that the acquisition cost was "Level 1 Very High > $1,500 million". No sane person thinks that 12 manned submarines of any kind could cost anything remotely like $1.5 billion. The number was simply the biggest category of cost used in that document and Defence, for its own reasons, didn't give the public a number that bore any resemblance to reality.
The corresponding figure in the 2012 public defence capability plan was ">$10 billion"—perhaps a vaguely reasonable, rough order of magnitude, constant figure for 12 small, off-the-shelf boats (which Australia was never going to get). But it was still far from a meaningful figure for 12 of the largest conventional submarines in the world.
Various commentators stepped into the vacuum and offered estimates. In 2009, Andrew Davies and Sean Costello, writing for ASPI, developed an AU$36.5 billion (US$23.8 billion) constant-dollar estimate for 12 4,000-tonne submarines. That number was developed by applying long-term historical rates of cost increases in submarines to the Collins and scaling it up to 4,000 tonnes to account for the greater capability ambitions for the future submarine. The number was widely repeated by commentators.
But some, particularly advocates of submarines, thought it was too high. Brice Pacey argued in a 2012 Kokoda Foundation piece that cost growth in modern conventional submarines had essentially stabilised, so a figure of around $18 billion for 12 3,800-tonne submarines was more appropriate. In my view, that would not have even covered a new fleet of 12 Collins boats, let alone larger, more modern and more capable boats.
By late 2015, Defence was deep into both the development of a new white paper and the competitive evaluation process that selected Naval Group (then DCNS) as Australia's preferred partner for the design and build of the future submarine. The contenders in that competition didn't submit their bids until 30 November 2015.
A month before that, on 21 October 2015, Defence testified at Senate estimates hearings that the cost estimate was $50 billion outturned. The then secretary of defence, Dennis Richardson, responsible for providing the government with advice on the defence budget, and Peter Baxter, then deputy secretary of strategy, responsible for developing the 2016 white paper and its supporting documents, were very clear:
Senator Conroy: Fifty billion dollars for acquisition of submarines sounds a little high.
Mr Richardson: It is an out-turn cost.
Mr Baxter: It is on an out-turn cost basis.
Mr Richardson: It is inflation into the 2040s et cetera.
Mr Baxter: The last of the submarines is likely to be built into the 2040s.
Mr Richardson: For the last of the submarines – if they were built, say, in the early 2040s – it is the out-turn cost of what the submarines would cost in 2040 dollars.
…
Mr Richardson: It sounds high except if you start to think of it in outturn dollars and what that means.
It's not clear what the $50 billion outturned number was based upon. Since Defence hadn't received the contenders' bids at that point, it was probably a mix of parametric and analogous cost-estimation methodologies.
Since then, however, Defence has informed the Senate that the estimated cost is around $80 billion outturned. So, what happened? I'll look at that in part 2.