{"id":16951,"date":"2014-11-18T12:30:36","date_gmt":"2014-11-18T01:30:36","guid":{"rendered":"http:\/\/www.aspistrategist.ru\/?p=16951"},"modified":"2014-11-19T09:41:29","modified_gmt":"2014-11-18T22:41:29","slug":"submarines-reader-response","status":"publish","type":"post","link":"https:\/\/www.aspistrategist.ru\/submarines-reader-response\/","title":{"rendered":"Submarines: reader response"},"content":{"rendered":"

\"A<\/a>Henry Ergas and Mark Thomson criticise<\/a>, on a number of counts, the paper on Economic analysis of Australia\u2019s future submarine program <\/em>prepared by the South Australian Economic Development Board. Each count requires detailed rebuttal, but there\u2019s space for only a brief response here.<\/p>\n

Ergas and Thomson state that the paper assumes that the cost would be the same (AUD$20bn) whether built in Australia or overseas. In fact, that conclusion was the result of gaining frank opinions from submarine construction experts from several countries. All of those experts were in a position to assess the international commercial realities of the construction task. The model used a US$0.92 exchange rate but also included a \u2018purchasing-power-parity\u2019 exchange rate of US$0.73, which when used, yielded an even stronger case for building in Australia: a $26.7bn benefit compared with $21bn.<\/p>\n

The authors make much of reported errors and cost blowouts on Australian defence construction projects. Only those cost problems relating to the Collins class submarines have been assessed in the analysis. Evidence submitted to the Commonwealth Senate Economics References Committee\u2014and reproduced in the Coles and other reports\u2014point to administrative errors on the part of the Defence Materiel Organisation and the Navy that had a greater, but less widely publicised, impact on costs and outcomes than errors by ASC.<\/p>\n

Assuming the identified errors are corrected, Australia has \u2018the smarts\u2019 to build and maintain submarines to a standard and cost comparable with its competitors. It\u2019ll certainly have to partner with firms in other countries for design and to gain access to the weapon systems and new technologies it wants to deploy in the vessels but, as in the case of the Collins class, it retains the ability to coordinate the project and gain skills in installing and maintaining that technology. That there\u2019d be gains in knowledge spillovers, employment and firm development is beyond question.<\/p>\n

Ergas and Thomson\u00a0refer to \u2018agency problems\u2019 of having a national monopoly supplier\u2014which do exist, but there are numerous ways of constraining them to levels that make a national monopolist the most efficient and effective supply option. In this case, \u2018efficient and effective\u2019 includes addressing the problem that other countries with defence monopolists face: ensuring existence of on-shore capabilities to respond to unforeseen challenges in the event of military attack.<\/p>\n

The question of need for adequate on-shore capability arises again in the authors\u2019 criticism of the assumption that what the report describes as \u2018heavy maintenance\u2019 (HM) must be done at the location of construction. HM includes replacing and upgrading to address new technology that inevitably becomes available to Australia and its potential enemies over the life of the new submarines. They clearly don\u2019t understand that a major cost of such HM is maintaining the capability to do it. That includes a detailed understanding of the new and existing technology\u2014and since we don\u2019t know, in advance, what elements will need upgrading, we must maintain capability in all aspects of the submarines built.<\/p>\n

Building and maintaining such capability is also a major cost of the construction phase and the most effective way to do that is to have the relevant experts involved in design and construction\u2014so it doesn\u2019t make sense to separate the HM function geographically. The logic is all the more compelling since the total cost of HM is only 21% of the total $20bn cost as the cost of maintaining capability is absorbed by the construction phase. It\u2019d be significantly more otherwise.<\/p>\n

In addition, it\u2019s worth reflecting on Australia\u2019s requirement to be the \u2018parent navy\u2019<\/a> for this new class of submarines since we\u2019ll be the only user of this class\u2014which is different from buying an off-the-shelf product like a US fighter plane. The parent navy role entails the full design, development, test and evaluation effort for both the construction phase of the class and for the class\u2019 operational life, some 40-50 years all in all. A parent navy must understand all emerging issues, set aims and objectives, pay for changes, and ensure that design certification is assured and design intent preserved. Failure to do this will result in the mess that brought about the Coles Review. A parent navy role can only be taken on if the submarine is built in Australia.<\/p>\n

Finally, most OECD countries have come to realise that they can\u2019t remain prosperous without a thriving manufacturing sector with its linked service sector. For that reason, most have large programs, including defence procurement, to stimulate innovation and thereby to provide a competitive edge to their industries. Eliasson estimates<\/a>, for example, that between 1982 and 2007, the Gripen multi-role combat aircraft project in Sweden generated at least<\/em> $350bn Swedish Krona (SEK) in additional production from a government investment with a 26-year opportunity cost (at 4% real discount rate) of SEK$132bn. That\u2019s a turnover multiplier of 2.6 times the investment. Most of these benefits come from \u2018spillovers\u2019 in the form of new knowledge. In the South Australian case, analysts used a conservative knowledge spillover multiplier of 0.35. It\u2019s safe to assume that almost all such spillovers will be lost to Australia if the submarines are built overseas.<\/p>\n

G\u00f6ran Roos is professor of business and strategic design at Swinburne University of Technology and chairs the South Australian government\u2019s Advanced Manufacturing Council. Image courtesy of Wikimedia Commons<\/a>.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Henry Ergas and Mark Thomson criticise, on a number of counts, the paper on Economic analysis of Australia\u2019s future submarine program prepared by the South Australian Economic Development Board. 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