The economic case for building nuclear subs offshore not in Adelaide

In the fracas that accompanied the cancellation of the French submarine contract, one important issue was elided: where the AUKUS submarines would be built. Even before the type of submarine has been decided, both major political parties committed to build the submarines in Adelaide, with an open-ended promise to maximise Australian content.

Nuclear submarines are not only a different technological proposition from the French submarines, but a vastly larger undertaking. This decision cannot sensibly be based simply on the idea that it would be nice to have a domestic high-tech industry.

We need to get some economic common sense into this decision-process.

The comprehensive 2021 ASPI Report explored four options:

• Build all submarines domestically, with a production timetable to give construction continuity.
• Build all domestically, but at an economic pace (i.e. quicker).
• Buy the initial few from a foreign builder, then build the rest here.
• Following the example of the Joint Strike Fighter, some components made here and incorporated into an overseas production line.

The ASPI Report accepts that the commitment to Adelaide rules out simply purchasing overseas. Their main discussion is about production schedules, providing continuous work for the Adelaide facilities and the “capability gap”, with the Collins at the end of their life and the new boats unready.

This is a hugely complex project largely run by the government and private firms not operating within the discipline of the market.

Option one delivers the first submarine in 2040 if all goes to schedule, but even with this optimistic timetable, we would not have enough submarines to field an operational fleet (three boats) until late in the decade, and the slow pace of production would introduce costly inefficiencies.

The other options are progressively better: the less we do at home, the more efficient the production, the lower the cost, and the timelier the delivery. But the inexorably logical next step is not explored: to buy all boats overseas.

The economics – not ASPI’s main focus – greatly strengthens the case for offshore production. But before we look at that, let’s first look at the main stumbling block: the promise to build submarines in Adelaide.

The ASPI Report notes that the lifetime cost of keeping the fleet running will be much greater than the building cost. The current Collins class spend three years in every 12 years in maintenance, keeping the Adelaide facilities busy doing mid-cycle and full-cycle refits. ASPI says that there would be more work in sustaining the eight SSNs than was envisaged for sustaining the Collins class plus building the French submarines. The additional point ASPI makes is that sustainment needs are quite different from building: in America, sustainment is done in different shipyards from the building.

Thus, there is an alternative option which would give Adelaide more work than was promised under the French option, could be scaled up seamlessly from the current sustainment activity, is technologically challenging but more achievable, and would create a high-tech industry with guaranteed ongoing demand.

The idea that Australia could build SSNs even if we were cut off from America (the shorthand is “economic sovereignty”) was always a pipe dream: for a start, we’d never be able to make the reactor. Experience in WWII and currently in Ukraine show that efficient logistics are more vital than additional capital equipment: comprehensive repair which could be scaled up to meet allied needs as well as our own.

Two of the report’s authors make this case in a later blog-post.

And that gets us to the key point. In an environment where our human, financial and industrial resources are limited, does it make sense to dilute them by splitting them between construction and sustainment? Sovereignty rests in our ability to sustain the boats, so that should be the priority. Even that will create huge industrial demand.

What about the economics, which has hardly entered consideration so far?

Everyone understands the “guns versus butter” trade-off. If we spend more on submarines, we have less to spend on education, aged care, health, and the myriad urgent priorities now facing the government. More spent on submarines means less spent on personnel, tanks and planes. No sensible decision can be made unless all the options are realistically costed and weighed against alternative use of taxpayers’ dollars.

‘The pub test’

This is a hugely complex project largely run by the government and private firms not operating within the discipline of the market. Project costs and schedules notoriously blow out. Economists, themselves often criticised for poor forecasts, can at least argue that their forecasts are usually unbiased – as often wrong on the upside as on the downside.

The public is entitled to a high degree of transparency into the public-policy decision process. Even when high levels of specialised expertise are needed, “the wisdom of crowds” and “the pub test” are important inputs. This transparency has been absent so far.

Australia’s modest manufacturing capacity is a direct result of our comparative advantage: because we are so good at exporting commodities, we do this rather than manufacturing. Fortuitously for those who want a dynamic high-tech sector, we now have an opportunity to create an industrial specialisation which fits our comparative advantage. But it is not nuclear submarines. It is in climate change.

This month’s Smith-Houston Report should explore the case for buying all submarines overseas and focusing on sustainment here.

There is no point in strengthening our defence industry if we weaken the overall economy by doing so inefficiently. The egregious example is North Korea, but the UK may be another, if much less extreme, example. These decisions must be made, not just by experts behind closed doors or politicians counting senate seats, but in the wider context of a balance between a vibrant and efficient economy, and strong defence capability.