{"id":52808,"date":"2020-01-07T06:00:00","date_gmt":"2020-01-06T19:00:00","guid":{"rendered":"https:\/\/www.aspistrategist.ru\/?p=52808"},"modified":"2020-01-07T06:31:18","modified_gmt":"2020-01-06T19:31:18","slug":"editors-picks-for-2019-the-very-hungry-future-submarine","status":"publish","type":"post","link":"https:\/\/www.aspistrategist.ru\/editors-picks-for-2019-the-very-hungry-future-submarine\/","title":{"rendered":"Editors\u2019 picks for 2019: \u2018The very hungry future submarine\u2019"},"content":{"rendered":"
<\/figure>\n

Originally published 5 November 2019.<\/em><\/p>\n

We\u2019ve known for a while that SEA 1000, the Defence Department\u2019s future submarine program, is going to cost a lot of money\u2014we just haven\u2019t known exactly how much. But as time moves on and Defence releases more data, we\u2019re starting to get a better sense of the program\u2019s cost.<\/p>\n

Let\u2019s review what we know about the cost of the program. In 2012, ASPI\u00a0estimated<\/a>\u00a0it to be around $36 billion, in constant dollars, which doesn\u2019t take inflation into account. But the Australian government, including the Defence Department, works in \u2018out-turned\u2019 dollars, which includes an allowance for inflation. Once out-turned, that number becomes $50\u201360 billion.<\/p>\n

While many commentators suggested that that was way too high, the\u00a02016 integrated investment program<\/em><\/a>\u00a0provided a number of \u2018>$50 billion\u2019. But later, at Senate estimates, Defence officials conceded that that was a constant-dollar figure, so\u00a0ASPI converted<\/a>\u00a0it to an out-turned number of $79 billion based on a projected annual inflation rate of 2.5%, a pretty modest amount for military equipment.<\/p>\n

Those dollars aren\u2019t \u2018approved\u2019 in Defence\u2019s parlance, which means the department doesn\u2019t have the government\u2019s approval to spend all that money. The recent release of Defence\u2019s\u00a02018\u201319 annual report<\/a>\u00a0confirmed that the total approved budget is now $5,963 million after the government approved the latest tranche of funding of $3,723 million (web table D.3). That apparently gets the program to the end of the design phase and to the start of construction in 2022\u201323; $6 billion doesn\u2019t buy us any actual submarines.<\/p>\n

It\u2019s also important for any business to understand its cash flow\u2014that is, how much it needs to spend each year. We can determine historical cash flows from Defence\u2019s reporting. The program\u2019s annual spend is increasing rapidly and, according to advice from Defence, it will be around $750 million in 2019\u201320. We can also estimate the cash flow for the next few years. The total approved budget for the program to 2022\u201323 is $5,963 million. From figure 1, we can see that the cumulative spend to the end of this financial year will be around $1,712 million, leaving $4,251 million for the next three years. That will likely be apportioned something like how we\u2019ve done it in figure 1.<\/p>\n

Figure 1: Future submarine program annual spend, 2014\u201315 to 2022\u201323<\/strong><\/p>\n

<\/figure>\n

That\u2019s a lot of money to spend every year. If correct, those numbers, when combined with the costs of the future frigate program, will soon start to cause significant problems for the rest of Defence\u2019s investment portfolio. So, are they reasonable? We can check by taking a look at the corresponding data for the Collins-class submarine and the nearly completed air warfare destroyer (AWD) programs.<\/p>\n

As described in a\u00a0previous\u00a0Strategist<\/em>\u00a0piece<\/a>, a useful tool for modelling the cost of major projects is the Rayleigh\u2013Norden curve. It\u2019s a simple two-parameter model in which the overall cost and duration of the program are the only variables. Despite its uncomplicated form, this model fits the two historical programs very well. Figure 2 shows the modelled and actual cumulative spending on the Collins-class program from 1987 to 2007.<\/p>\n

Figure 2: Collins-class submarine program spending, model versus actual<\/strong><\/p>\n

<\/figure>\n

As figure 3 shows, the agreement between the modelled and actual spends on the AWD program is even better. (The correlation between the two curves is 99.9%.)<\/p>\n

Figure 3: Air warfare destroyer program spending, model versus actual<\/strong><\/p>\n

<\/figure>\n

So, having convinced ourselves that the model is a pretty good predictor of the spending spread of Australian naval shipbuilding programs, it seems reasonable to apply it to the future submarine program and see what happens. Assuming that it\u2019s a 40-year program that will run from approval in 2016 out to the mid-2050s (consistent with public statements on delivery rates) at a total cost of $43.7 billion in today\u2019s dollars (the inflation-adjusted value of ASPI\u2019s earlier $36 billion estimate), the calculated curve is shown in figure 4.<\/p>\n

Figure 4: Future submarine program spending, model versus actual<\/strong><\/p>\n

<\/figure>\n

Based on those calculations we can make two observations. First, despite the fact that Defence will have spent around $6 billion before the boats start being built, it\u2019s certainly not an overspend compared with previous programs. In fact, when compared with ASPI\u2019s estimate, spending seems to be right on track. (Alternatively, if the \u2018>$50 billion\u2019 figure is right, it would be\u00a0behind<\/em>\u00a0the predicted spend.)<\/p>\n

Second, and far more importantly, the biggest outlays are yet to come. If the program tracks according to the Rayleigh\u2013Norden model\u2014and there\u2019s no reason to think it won\u2019t\u2014the second and third five-year blocks will require investment of $9.6 billion and $10.9 billion, respectively. That\u2019s close enough to $2 billion per year (or more, in the worst case) being absorbed by this one program.<\/p>\n

We could expect the frigates and offshore patrol vessels combined to be spending a similar amount. In other words, close to 10% of the entire defence budget, and more like\u00a030% of the capital investment budget<\/a>\u00a0(see chapter 6), will be going into naval shipbuilding for a full decade.<\/p>\n

That\u2019s a big opportunity cost to other force modernisation initiatives. And it\u2019s not likely to improve much once the peak spend of the current shipbuilding projects is passed. A commitment to continuous in-country naval shipbuilding means that the planning and designing of the next generation of vessels will happen concurrently with the later phases of delivery of today\u2019s megaprojects.<\/p>\n

We can only hope that the revolutionary technologies of tomorrow will be affordable with what\u2019s left in the kitty.<\/p>\n","protected":false},"excerpt":{"rendered":"

Originally published 5 November 2019. We\u2019ve known for a while that SEA 1000, the Defence Department\u2019s future submarine program, is going to cost a lot of money\u2014we just haven\u2019t known exactly how much. But as …<\/p>\n","protected":false},"author":6,"featured_media":51674,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_mi_skip_tracking":false,"footnotes":""},"categories":[1],"tags":[2436,253,1051],"class_list":["post-52808","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-general","tag-attack-class","tag-collins-class","tag-future-submarine-project"],"acf":[],"yoast_head":"\nEditors\u2019 picks for 2019: \u2018The very hungry future submarine\u2019 | The Strategist<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.aspistrategist.ru\/editors-picks-for-2019-the-very-hungry-future-submarine\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Editors\u2019 picks for 2019: \u2018The very hungry future submarine\u2019 | The Strategist\" \/>\n<meta property=\"og:description\" content=\"Originally published 5 November 2019. 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