In Canadian eyes, Australian defence policy appears to be getting it right. With seemingly bipartisan support on the country’s security challenges and generous defence budgets to boot, the Australian Defence Forces (ADF) have spent the last decade or more purchasing maritime patrol aircraft, amphibious assault helicopter carriers and air warfare destroyers. That such projects are being acquired amid a constant turnover of people in the prime minister’s chair makes the contrast with Canada’s ever-constant drip of procurement woe headlines even starker.
But dig a little deeper and it becomes clear that Australia has seen its share of procurement challenges. The Seasprite helicopter – a close parallel to Canada’s Sea King replacement saga – saw an A$746 million plan to buy 11 used American helicopters balloon to A$1.4 billion before being axed altogether in 2008 without ever a helicopter entering ADF service. Likewise, stories of competing political pressures, regionalism and demands for domestic offsets are no stranger to governments in Canberra either.
As these two countries entered the 21st century they had to contend with the prospect of replacing numerous naval capabilities over the short to long term. Wanting to move past previous boom-and-bust shipbuilding cycles, both countries independently committed to pursuing national shipbuilding plans aimed at generating sustainable naval industrial bases while equipping their fleets with the vessels they need in a timely, cost-sensitive fashion. Under both Canada’s National Shipbuilding Strategy (NSS), and Australia’s Naval Shipbuilding Plan (NSP) tens of billions of dollars will be spent over several decades to acquire new maritime capabilities. Neither country has a historical parallel for such an undertaking and notably, the NSP has singled out Canada as a country for Australia to learn lessons from.
While the NSS and NSP are still in their relatively early stages – the former having begun in 2010-2011, the latter in 2016-2017 – this article contends that important insights can be gleaned from looking at how these procurement plans emerged, what they have achieved so far and what challenges they have encountered.
Canada’s National Shipbuilding Strategy
Historical Context
The National Shipbuilding Strategy is a product of both recent and longstanding shipbuilding decisions.
But it took a failure in 2008 to get beyond the stand-alone shipbuilding projects of yore to a national, multi-decade shipbuilding strategy. The Joint Support Ships (JSS) was supposed to replace the four decades-old Protecteur-class auxiliary oil replenishment ships (AORs, but it came undone for several reasons: Like all previous shipbuilding projects in Canada it was to be a one-off build. Additional challenges came in the form of skyrocketing global shipbuilding material and labour costs of 200 per cent to 300 per cent, and inadequate shipyard infrastructure. Because of these reasons the first attempt at getting AOR replacements led to non-compliant bids.
The Solution and Early Success
The JSS failure necessitated a rethink on the federal government’s approach to domestic shipbuilding. Both DND and the CCG knew as far back as the early 2000s that a minimum of 30 ships was needed to replace both services’ aging fleets over the coming decades. This presented an opportunity. An interdepartmental National Shipbuilding Procurement Office struck in 2008-2009 in the wake of the JSS cancellation recommended moving beyond the boom-and-bust history of Canadian shipbuilding to a continuous-build strategy that would help avoid the inevitable economic impact of closed shipyards and lost shipbuilding skills of the country’s previous project-by-project efforts. The result is the National Shipbuilding Procurement Strategy (NSPS), launched in June 2010.
The NSPS/NSS program was broken down into combat and non-combat packages, for which the initial acquisition cost was $37.7 billion for larger vessels over 1,000 tonnes. Halifax-based Irving Shipbuilding Inc. and Vancouver-based Seaspan successfully competed for these packages in 2011.
Irving won the largest of the two packages, that for combat ships, and will be building 15 new replacements for the Halifax-class frigates and the now-retired Iroquois-class destroyers, otherwise known as the Canadian Surface Combatant (CSC). In October 2018 the federal government selected a Lockheed Martin-led consortium using the British Type-26 design for the CSC build. The CSC project is estimated to cost up to $60 billion and is the single largest, most expensive procurement in Canadian history. Work is not expected to begin on the CSC until the early 2020s. Irving is also building six Arctic and Offshore Patrol Ships (AOPS). In September 2018 the first of the $3.5 billion Harry DeWolf-class AOPS was launched.
Seaspan’s non-combat package includes the restarted JSS project (now reduced to two ships), the Polar Icebreaker and a series of CCG scientific, survey and patrol ships. The $3.4 billion JSS, renamed as the Protecteur class, finally began construction in June 2018 with deliveries expected between 2022 and 2024. Work has already begun on the $687 million Offshore Fisheries Science Vessels with the three ships expected to be delivered by the end of 2019. Seaspan will also build the estimated $1.3 billion Polar Icebreaker and a single $331 million Offshore Oceanographic Science Vessel to be completed in 2021-2022.
The Challenges
Canada’s NSS has encountered many challenges, the most significant of which are project cost estimations, shipyard production gaps, intellectual property negotiations, bid protests and communications. On cost estimates, most project budgets were set before the NSS was launched in 2010. The CSC was originally billed for $26 billion but is now recognized as likely costing around $60 billion. Other projects have seen their budgets marked for revision (e.g., the Polar Icebreaker) as succeeding delays subject budgets to inflationary pressures.
It is true that the “uncertain, ambiguous interconnected global marketplace” can partly account for some of these escalating cost estimates but so can the lack of experienced naval procurement staff within government and industry, lost to cuts and yard layoffs in the 1990s, and, separately, shipyard start-up costs.
In Seaspan’s case, the yard took two years from 2012 to 2014 to generate additional sums needed for its upgrades and, separately, hire the necessary management and engineering expertise. A separate issue was modifying the German Berlin design selected for JSS to meet the smaller confines of the Vancouver yard.
For Irving, recent progress on the AOPS in conjunction with delays on the CSC have seen an 18-month production gap emerge between the two projects. The Halifax yard claimed it needed orders for two more AOPS and maintenance contracts for the seven East Coast-based Halifax-class frigates or it would have to lay off its workforce.
Regionalism and shipbuilding are not new in Canada but have returned to the surface over the last three years following Federal Fleet Services’ securing of a nearly $700 million contract for an interim AOR ship. The contract has been the source of industrial squabbling, allegations of confidential leaks, and the role of federal partisan political calculations in both Quebec and Nova Scotia.
There is also the question of poor communications concerning the NSS’s overall performance. Despite recognizing in its 2016 annual report on the NSS that there existed “insufficient communications with Canadians on the cost, timelines and progress of various builds”, the promise of regular reporting and updates has not been acted on.
Australia’s Naval Shipbuilding Plan
Historical Context
Australia’s Naval Shipbuilding Plan is largely the outcome of a 2015 RAND Corporation study born out of the experiences of acquiring the Collins-class submarines and the Hobart-class air warfare destroyers (AWD). Arguably, the more influential of the two projects, six Collins class were built in Australia and entered service between 1996 and 2003. The Collins class build did not go smoothly though. The project ran into delays and cost overruns. A lack of submarine building knowhow led to unrealistic specifications, costing and scheduling. The absence of early-stage industry engagement made this situation even worse.
The second project, the AWDs, began construction in 2012. Based on the Spanish F-100 design, two of the three ships have entered service, with the third expected in late 2019. Assembled in South Australia, the AWDs are A$1.2 billion over budget and 2.5 years behind schedule. The project largely enjoyed political support from across the spectrum as it created “jobs in politically sensitive regions” and, secondarily, it gave the RAN access to local expertise in maintenance and upgrades.
Aware that the country would need to replace its Anzac frigates and Collins submarines in the near future, the Department of Defence (DOD) commissioned the RAND Corporation to outline what the country’s next steps should be. The report provided several options, including continuing the momentum of the AWDs and build domestically; building hull overseas and outfit in Australia (the Canberra class approach); and buying an entire class of vessels overseas. The report eventually settled on the first option but with the caveat that Canberra pursue a multi-decade, continuous shipbuilding program. RAND reasoned that even with a 30 per cent to 40 per cent premium for building foreign designs domestically, Australia could drop this figure with steady production, a productive workforce and technology transfers.
The Solution and Early Success
The RAND recommendations were incorporated into the 2016 Defence White Paper. The white paper promised three continuous builds equating to almost A$90 billion for the Naval Shipbuilding Plan. Of the builds, one is for smaller vessels including A$3 billion for 12 Offshore Patrol Vessels and A$335 million for 21 Guardian-class patrol boats – the latter of which are to be transferred to Pacific island countries via a regional security initiative. The biggest builds are A$50 billion for 12 future submarines and A$35 billion for nine future frigates. Another A$1 billion has been allocated for shipyard upgrades and infrastructure. The NSP’s goal is to create a sustainable shipbuilding sector and avoid the boom-and-bust cycles of the past; it is, in short, to turn Australia from a “ship purchaser to a ship producer”.
Despite the emphasis on the national scope, the brunt of the construction work will take place at two locations, the government-owned ASC Pty Ltd yards in Osborne, South Australia and the Henderson Maritime Precinct, a common-user facility owned by the state of Western Australia, near Perth.
Canberra has mandated that off-the-shelf, proven designs be used for its new vessels and that “the technology, intellectual property, business processes and workplace cultures” be transferred to Australia to ensure that a “sovereign” naval shipbuilding base takes root. This transfer of knowledge and technology is seen as vital to ensuring that the future continuous builds are possible and a response to past mistakes.
The future frigate program, which will replace the eight Anzac frigates procured in the 1990s and early 2000s, announced a successful design in June 2018, BAE’s Type-26, the same design selected for Canada’s CSC project. Last, German firm Lürssen received the OPV contract in January 2018 and has already begun work on the first two ships at Osborne Naval Shipyard before moving production on the remaining 10 ships in 2020 to Henderson Maritime Precinct.
The Challenges
Despite being the younger of the two countries’ shipbuilding strategies, the NSP has already encountered problems and criticisms, key of which was a 2018 report by the Australian National Audit Office (ANAO) – the equivalent of Canada’s Office of the Auditor General. The report characterized the NSP as an “extreme risk”. The ANAO noted that the DOD had not updated its cost assumptions from the 2016 white paper on either the submarines or frigates even though recent government decisions on building the Barracuda subs in Australia and equipping the new frigates and the Aegis BMD system will entail significant design changes.
The feasibility of the NSP remains a concern as well. The plan, for instance, does not provide for in-service support costs nor is it clear that domestic industry will have access to the design information required for upgrading the combat and sensor systems, thereby repeating the problems of the Collins class. Others have pointed out that Australia’s domestic steel industry lacks the capacity to produce the 1,800 tonnes of steel needed for each submarine, further contributing to cost escalation. Doubts persist on whether Australia should even be in the business of building large platforms and resources better spent on supporting the country’s high-tech, niche defence suppliers. It was telling that in 2016 a A$1 billion contract for two new supply ships was placed with Spanish firm Navantia on the grounds that they could be delivered 12-24 months earlier and cheaper than if built domestically.
Problems have also emerged in advancing the submarine project. Negotiations on a strategic partnering agreement with the French state-owned majority firm Naval Group have hit a roadblock over Australia’s requirements for technology transfer, intellectual property and warranties. The current impasse has attracted partisan attacks with the opposition Labour Party claiming, should it win government in 2019, that it may review the project if the dispute is not resolved.
Finally, allegations of regionalism have not dissipated either. A Labour-led government in Victoria, whose Williamstown Dockyard outfitted the A$3 billion Canberra-class amphibious assault helicopter carriers, accused the prime minister in 2017 of snubbing the state from NSP contracts in favour of garnering votes in South Australia and Western Australia. The premier demanded that Victoria get its “fair share” of the contracts.
Analysis: “Go Big or Go Home?”
Canada and Australia are still in the early stages of their national shipbuilding plans. Despite challenges in start-up costs, hiring and establishing shipyard infrastructure, both countries have started to see progress made; however, certain themes have also emerged reflecting the challenges of effective long-term implementation. For one, the rational approach to naval shipbuilding is not devoid of procurement politics and regionalism. Determining which province or state will be home to billions in contracts over many years remains a zero-sum game no matter how arms-length the process of yard selection. The clamour for a province’s or state’s fair share of shipbuilding dollars will not dissipate, especially when delays begin mounting in those selected yards and/or when existing capabilities begin aging out.
Still, for the time being, domestic shipbuilding remains an attractive defence industrial policy in both countries. The production of other big ticket defence platforms like fighter jets (either indigenously or under licence) has long been abandoned in Canada and Australia and yet successive governments across party lines have remained committed to undertaking ambitious shipbuilding projects. The likely explanation lies in the ability of the NSS and NSP to offer governments the ability to do highly visible multi-year projects that employ thousands of people, and spend large sums of money using largely existing shipyards without being too susceptible to the pressures of export sales to justify public expenditures.
International trade agreements permit deviation away from prohibitions on protectionist policies on the grounds of national security; as such, shipbuilding industrial policies are an accepted international norm. Sending such large sums of money to overseas yards can make for bad politics and it opens a governing party up to pressure from provinces, industry, labour and opposition parties.
There is also a sovereignty calculation at play. As Australia and Canada experienced with overseas submarine purchases, foreign builds bring problems in obtaining spare parts and maintenance support. At a minimum, domestic shipbuilding provides a means to develop domestic supply chains and, crucially, local expertise in the maintenance and refit of vessels. Likewise, it’s not always clear in the long term how much cheaper building ships overseas is when intellectual property transfer costs and overseas in-service support are factored in. Altering foreign designs to meet RAN and RCN needs is a given, and if the money is going to be paid, at the very least a domestic build carries the bonus of stimulating local industry and generating expertise in highly skilled advanced manufacturing.
With the brunt of the NSS and NSP dollars going to one yard in each country, there is a risk of fostering a powerful constituency that may make it hard to maintain flexible policy options. At the same time, such a constituency may prove useful in incentivizing government decision-making. Either way, this will prove to be a headache for naval planners and government decision-makers alike.
However, even with a focus on jobs and industrial rejuvenation, cost increases are a reality. Project delays increase this premium, something Canada has already experienced when initial NSS acquisition costs, pegged at $37.7 billion nearly a decade ago, jumped to an estimated $73 billion. Australia’s delays in securing an agreement with Naval Group on its $A50 billion future submarine project could mean additional cost increases. In this context, in both the NSS and the NSP, schedule is king.
Avoiding cost increases requires keeping to planned shipbuilding schedules. Failure to do so opens production gaps and necessitates that Ottawa and Canberra consider alternative options. In Canada this has meant turning to contracting a non-NSS yard to convert commercial vessels for naval and coast guard use and purchasing a sixth AOPS, respectively. In Australia, the Navantia yard in Spain was hired in 2016 to build two supply ships rather than risk building them at home.
Given such cost sensitivities there may come a time when both countries need to consider what the trade-offs are between committing more money to continuous shipbuilding at the expense of acquiring other military capabilities. Canada, for instance, will need to make decisions at some point on whether to spend billions on replacing the North Warning System in the country’s North and, separately, its four Victoria submarines – none of which is funded for in the 2017 defence policy, Strong, Secure, Engaged. Australia, living in a more uncertain geopolitical environment, will have to grapple with an Indo-Pacific region proliferating with relatively cheaper but lethal anti-ship missiles. In this context, money spent on nine surface combatants or 12 submarines may be perhaps better spent on other capabilities.
None of this is to say that progress has not occurred in either the NSS or NSP – after all, ships are getting built, or that these respective strategies will not achieve their goals of bypassing the boom-and-bust eras. They are, though, a reminder that even with the best-laid plans, naval shipbuilding is complicated.
This article was condensed from its original format that appeared as a policy paper on Canadian Global Affairs Institute’s website in January 2019.
(Image: Seaspan)
