The Commonwealth has entered into a contract for the construction of the first three Hunter-class frigates under project SEA 5000. Defence can’t sign a contract unless the government has approved a budget that it can actually spend. This approval is known as second pass, although large projects such as SEA 5000 may have multiple second passes.
The 2024-25 Portfolio Budget Statements, issued as part of the Commonwealth budget in May this year, still had an approved budget figure of $7,254 million, comprising $6,243 million for Military Equipment Acquisition and $1,011 million for Other Project Inputs to Capability (page 128). But that amount only covered the "design and productionisation" phase, not the construction of any actual ships.
So when the government announced only a month after the budget was released that it had signed a contract with BAE Systems Australia for the construction of the first three ships, the question was how much the budget had increased to cover that.
For some time now I’ve been asking the Department of Defence for the total approved budget of SEA 5000. Defence hasn’t provided me with an answer, but fortunately the Australian Senate has more pull than I do.
In response to a question on notice from Tasmanian Liberal Senator Claire Chandler, the Department of Defence has provided an answer. It states that "an additional $19.87 billion was approved to support construction for the first three ships as well as procurement of other items, including delivery of the support system and initial training that will support the class of six frigates."
The response doesn’t do the maths, but that makes the total approved budget $27.12 billion. That covers the initial design and productionisation, build of the first three ships, facilities and the support system. As far as I am aware, that figure doesn’t include the redevelopment of the shipyard at Osborne in Adelaide as that was funded by a capital injection into Australian Naval Infrastructure, owned by the Department of Finance.
SEA 5000, the future frigate program, was originally scoped to acquire nine frigates. Its provision in the 2016 Integrated Investment Program was ">$30bn". In the 2017 Shipbuilding Plan this had become "more than $35 billion" for nine frigates. In the 2020 Force Structure Plan, the provision had grown to $45.6 billion, still for nine frigates.
The 2020 document included the explanation that "in its decision to approve the Hunter-class frigate program, the government allocated additional funding to enable construction of ships at a deliberate drumbeat over a longer period of time than originally planned to achieve a continuous shipbuilding program." This statement essentially admitted that the continuous naval shipbuilding emperor had no clothes: slowing construction down to ensure a continuous build process actually increases costs by requiring an inefficient build rate.
Earlier this year, the Enhanced Lethality Surface Combatant Fleet review recommended that the Hunter program be reduced to only six frigates, a recommendation the government accepted. It also recommended that the government pursue the rapid acquisition of 11 smaller general purpose frigates.
At the time some commentators suggested that the reduction in the number of Hunters would achieve savings that could be put towards the general purpose frigates or some other program. Many of us were, however, sceptical there would be any savings, particularly in the near term.
So how much of the $45.6 billion provision that was meant to acquire nine ships will now be required for the reduced scope of only six ships? Will anything be left over?
The new $19.87 billion covers the build of three ships as well as some program level elements like the support and training system. With no further detail, it’s hard to separate the costs for those elements—unlike US Department of Defense budget documents, our government never releases unit costs in Defence contracts.
But on 17 June Defence published a contract amendment with BAE Shipbuilding for "Hunter Class Frigate Design and Build" worth $11.2 billion, which presumably covers the build. But that doesn’t include many of the subsystems on the ships so three complete ships will cost more than that. Let’s somewhat arbitrarily pick a mid-point between the $19.87 billion and the $11.2 billion and say the three ships themselves cost in the order of $15 billion.
Ships four to six, whenever they are approved, might then appear to be another $15 billion. But the Commonwealth Government and Defence work in out-turned dollars, i.e., dollars that take inflation into account. Because inflation operates over time, we need to understand the schedule for the Hunter’s build to understand the cost.
Defence’s response to Senator Chandler’s question on notice conveniently gives a broad schedule. The first ship will be delivered in 2032, with subsequent vessels following on "an approximately two- to three-year cadence" and entering service around two years after delivery. So if we assume an average of 2.5 years between deliveries, ship six will be delivered around 2044-45. That’s plenty of time for inflation to work away.
The $15 billion for ships one to three will out-turn to well over $20 billion for ships four to six. That will bring the total cost for six ships to over $47 billion. In short, the $45.6 billion meant for nine ships won’t even be enough for six, so no funds have been freed up.
Moreover, we’ve blown well pass the original $30 billion provision for nine vessels. In all fairness, $30 billion was never going to be enough for nine large frigates. The three-ship Hobart-class destroyer program came in around $8.3 billion, so a nine-ship program would clearly be a lot more. Plus the last Hobart was commissioned in 2020; there was going to be another 20-plus years of out-turning for Hunter so the cost inevitably would be well over $30 billion.
And once Defence recommended a frigate that started off larger than the Hobart and then required so many design changes that its now 40 per cent bigger than the Hobart, $30 billion or even $35 billion wasn’t going to come close.
This illustrates a key feature of Defence’s capability development process: under-estimation of costs at the very start of projects. Contrary to popular opinion, very few Defence projects go over their approved second pass budgets because Defence has received tender responses from industry by that point and applied very conservative risks margins to them (ICT projects are the glaring exception to this rule).
Where cost growth—often massive—does occur is in the journey from initial entry into the investment plan to second pass approval. In the case of the future frigate program, the estimated cost looks like going from around $3.3 billion per vessel to something in excess of $7.5 billion.
Of course, because of shifting baseline syndrome, the government and Defence will say the project didn’t go over its second pass-approved budget so there was no blow out (assuming in 20 years’ time the project hasn’t gone over its approved budget…). Nevertheless, it’s disappointing to say the least that six frigates are going to cost over $45 billion.
It’s yet another example of the cost-capability death spiral that western militaries are in. As the size and complexity of platforms increases, the number they can afford decreases, leading to shrinking, under-capitalised fleets of ageing ships, aircraft and vehicles. The bizarre thing is that they seem to be happy to go along for the ride rather than finding better ways to deliver better bang for the buck.
The other disappointing element in Defence’s response to the question on notice is that significant investment in a new shipyard at Osborne in Adelaide appears to have delivered no benefit whatsoever. The government has touted the shipyard as the most advanced, automated shipyards in the world. That should have led to faster construction, reduced costs, and smaller workforce.
Yet earlier claims by Defence that it would recover schedule once construction started have evaporated. Indeed, previous suggestions that the delivery drumbeat would be around two years have slowed to "approximately two to three years." The costs have gone up rather than been reduced. One can only wonder whether any workforce efficiencies have been achieved.
When the government’s measure of project success seems to be the number of jobs "created", one is probably right to be sceptical that efficiency is a key project driver.
It’s hard to imagine there could more bad news out of what is surely the most incoherent project in Defence’s history, but with another eight years to go before delivery of the first vessel, we’re probably not out of the woods yet.
This article is reposted here with the permission of Strategic Analysis Australia.