In the first part of this series, we saw that by late 2015, before Australia's Defence Department had received industry responses in the competitive evaluation process for selecting the designer and builder of the future submarines, its cost estimate for the program was AU$50 billion (US$33 billion) "outturned".
A defence white paper and supporting investment program were released on February 25, 2016. By that time, Defence had had industry responses to the competitive evaluation tender for nearly three months, so it would have had time to adjust the $50 billion figure if it had been incorrect.
But the estimate wasn't changed, other than the addition of a "greater than" sign – ">$50 billion". Defence works in outturned dollars, which takes inflation into account, and there was nothing in the 2016 investment program to suggest the number was different.
However, at Senate estimates hearings in late May 2018, the program head, Rear Admiral Greg Sammut, stated that the acquisition cost estimate was "$50 billion on a constant price basis". I estimated at the time that in outturned dollars that would be around AU$79 billion. Since then, Defence has been using an AU$80 billion outturned figure as equivalent to its $50 billion constant figure.
How did the estimate go from $50 billion outturned to $80 billion outturned in the space of two years? First, we should note that Sammut also implied at the May 2018 hearings that the cost hadn't changed since DCNS was announced as the preferred contractor on April 26, 2016:
Senator Patrick: It has been two years since DCNS, now Naval Group, were announced the winners. You've done a bit of work. Are there any updated costs on the acquisition for the submarine?
Rear Adm Sammut: It's still in the order of $50 billion based on the work that we've done to date on early design activities.
Senator Patrick: Do you have any idea of, say, the design cost or the build costs?
Rear Adm Sammut: Those costs are being determined in greater detail as we complete preparations to enter the full contract for design and build of the submarine. At this stage, as I said, total acquisition for the 12 submarines is remaining at $50 billion.
If the $50 billion constant/$80 billion outturned estimate hadn't changed since Naval Group was selected, then the window in which the estimate increased must have been between the receipt of bids from the participants in the competitive evaluation process at the end of November 2015 and the announcement in April 2016.
What caused the change? Recently there's been discussion—for example, at Senate estimates – about whether the Commonwealth has been commercially "captured" by Naval Group because it chose a single provider too early, exposing itself to cost increases. While that's an ongoing risk to guard against, it doesn't explain cost increases during the competitive evaluation process when there was still competitive tension.
There are likely two reasons for the growth of the estimate during the competitive evaluation process. The first is that Defence's $50 billion outturned figure was already too low. ASPI's 2009 estimate of $36.5 billion constant becomes around $42 billion constant when re-baselined to 2015. Outturned, that becomes $67 billion.
The second reason for the increase is the more demanding performance requirements. The 2016 white paper moderated the requirements for the future submarine by dropping its strategic strike role, which should also have reduced the cost. But the white paper also introduced the undefined term "regionally superior". If anything was going to lead to an open-ended expansion of requirements, that would be it.
The Attack class will be in around 4,500 to 5,000 tonnes, up to 50 per cent larger than the Collins. The size is no doubt driven by the range and endurance requirements, but it's also related to the pump-jet that will propel it.
The acoustic benefits of a pump-jet appear to have been a key discriminator in Defence's selecting DCNS over the other competitors. But a pump-jet is viable on a conventional submarine only if it's big. It's not clear whether the Attack class is big because it uses a pump-jet, or, conversely, is capable of operating a pump-jet because it is big. Either way, the Attack class is big. That is a key cost driver, and there are likely others.
ASPI's original estimate of $67 billion was for a 4,000-tonne submarine, so an additional 500 to 1,000 tonnes per boat gets the figure close to $80 billion in a parametric cost estimate. If we also take into account the overheads associated with being the parent navy for what is essentially a unique class of submarine, it's easier to see how the cost became $80 billion as Defence worked through the competitive evaluation process and understood what it was getting itself and the country into. Unfortunately, it didn't update the price tag in the 2016 white paper so that the country would also know what it was on the hook for.
We don't need speculation about whether the French are taking advantage of us to understand why the future submarine is costing $80 billion. Those who think that the Germans can deliver something similar for only $20 billion are deluding themselves and simply wishing away the iron laws of defence costing. An extremely large, unique, manned conventional submarine that seeks to be "regionally superior" will inevitably come at an exquisite cost, regardless of who designs and builds it.
We are potentially at the end of the development curve for conventional submarines. Andrew Davies has written: "We are investing many billions of dollars to get small, incremental improvements in stealth, range and endurance while the counter-technologies are on the cusp of massive, and potentially relatively cheap, increases in performance."
Keeping the future submarine regionally superior means being superior not only to adversary submarines, but to the full range of counter-technologies – a challenging, expensive and increasingly futile task.
Defence has stated that the future submarine will be built in batches, with the design progressively updated to adapt to developing technologies. It would be interesting to know how much funding Defence has factored into its $80 billion cost estimate to keep the design regionally superior, because that quixotic chase will surely be a source of future cost growth.
