Periscopes down

It is telling that when the Prime Minister announced that Australia will spend $50 billion or more on 12 new submarines he was flanked by the South Australian-based federal Minister for Industry, Christopher Pyne. Since the start of the Future Submarine project, the key driver has been pacifying the shipbuilding industry in Adelaide.

One of the most persistent myths in the case of the subs is that spending $50 billion in Adelaide will automatically help the economy of South Australia and thereby is in the national interest.

There are several flaws in this argument.

First, the premium paid for an Australian build is substantial. RAND Corporation estimated that it was 30%-40%, however it could be much higher. The challenges of the troubled Air Warfare Destroyer project are instructive: the project is plagued by cost overruns, poor delineation of authority between Defence and the AWD partners, and scheduling issues. 

The AWD price tag has nearly doubled, increasing by billions of dollars. The build for the original Collins Class submarines also ran over time and over budget. Cost overruns of just 10% could see the premium for an Australian built submarine comfortably exceeding $10 billion. As this must be funded by extra taxation, it represents a significant deadweight loss.

Much like the failed automotive manufacturing industry, protection for one industry comes at the expense of higher costs for all other industries. This economic law doesn’t cease to apply simply because the industry is defence.

Second, defence manufacturing involves significant spending on technology rather than labour. Most of the cost of the Future Submarine will be spent on components, many of which will be imported. Less than 3,000 workers will be employed in the build and supply chain.

Moreover these are highly specialised jobs, requiring specific training and preferably experience. Defence industry policy simply isn’t a good area for government dollars if your primary objective is reducing unemployment.

Finally, we cannot ignore the opportunity cost involved in this acquisition. By committing $50 billion to submarines, the money available for other projects (or even just for efficiency generating tax cuts) will be lessened. Too often these nation building projects come with nation crippling price tags.

Simon Cowan is Research Manager at the Centre for Independent Studies, and author of the report Future Submarine Project Should Raise Periscope for Another Look.