There have been claims in the media and by various commentators that the cost of Australia’s future submarine program has gone up. The Defence Department insists that it hasn’t. So, who’s right?

Unfortunately, nothing is ever straightforward with the cost of defence projects. That’s partly because the department doesn’t release much information, particularly before it has an acquisition contract. It’s also because people are rarely talking about the same thing when throwing numbers around. I’ve previously shown (see chapter 7) how a hypothetical project can cost $1 billion or $3.5 billion depending on how you present it. That’s just acquisition costs. Whole-of-life costs, which also include operating costs, are very different again. It’s easy to fall into the trap of comparing apples with gibbons.

It’s also important to understand the price basis of a cost estimate. Defence distinguishes between estimates done in constant dollars, which assumes a dollar has the same buying power over time, and those done in ‘outturned’ dollars, which take inflation into account.

In a constant-dollar estimate, something that costs $1 this year will always cost $1. It’s artificial, but it does allow for a more intuitive comparison of costs. But even constant-dollar estimates will change depending on your base year; one done in 2010 will look different from one done in 2020, even for the same thing.

The government works in outturned dollars because it needs to forecast its revenue and expenditure in future years. So Defence’s public numbers are also in outturned dollars. But with outturned dollars, the longer an activity goes on for, the more inflation compounds and the more an outturned estimate looks different from a constant-dollar estimate.

With the construction of the future submarine fleet lasting into the 2050s, the difference between constant and outturned estimates will be substantial, even if they are different ways of looking at the same thing.

The requirement for 12 large conventional submarines first appeared in the 2009 defence white paper. They were intended to have ‘greater range, longer endurance on patrol, and expanded capabilities compared to the current Collins class submarine’. In addition to the Collins’ anti-submarine, anti-surface and intelligence, surveillance and reconnaissance roles, the new submarines were to have a strategic strike capability. All of that implied greater size and complexity. Increasing size and complexity are the two main reasons why military equipment suffers significantly greater rates of inflation than the broader economy. Therefore, the new submarines were necessarily going to be much more expensive than the Collins, which cost about $5.1 billion for six 3,300-tonne boats.

Defence didn’t say how much more. The public version of the 2009 capability plan that supported the white paper stated that the acquisition cost was ‘Level 1 Very High > $1500m’. No sane person thinks that 12 manned submarines of any kind could cost anything remotely like $1.5 billion. The number was simply the biggest category of cost used in that document and Defence, for its own reasons, didn’t give the public a number that bore any resemblance to reality.

The corresponding figure in the 2012 public defence capability plan was ‘>$10b’—perhaps a vaguely reasonable, rough order of magnitude, constant figure for 12 small, off-the-shelf boats (which Australia was never going to get). But it was still far from a meaningful figure for 12 of the largest conventional submarines in the world.

Various commentators stepped into the vacuum and offered estimates. In 2009, Andrew Davies and Sean Costello, writing for ASPI, developed a $36.5 billion constant-dollar estimate for 12 4,000-tonne submarines. That number was developed by applying long-term historical rates of cost increases in submarines to the Collins and scaling it up to 4,000 tonnes to account for the greater capability ambitions for the future submarine. The number was widely repeated by commentators.

But some, particularly advocates of submarines, thought it was too high. Brice Pacey argued in a 2012 Kokoda Foundation piece that cost growth in modern conventional submarines had essentially stabilised, so a figure of around $18 billion for 12 3,800-tonne submarines was more appropriate. In my view, that would not have even covered a new fleet of 12 Collins boats, let alone larger, more modern and more capable boats.

By late 2015, Defence was deep into both the development of a new white paper and the competitive evaluation process that selected Naval Group (then DCNS) as Australia’s preferred partner for the design and build of the future submarine. The contenders in that competition didn’t submit their bids until 30 November 2015.

A month before that, on 21 October 2015, Defence testified at Senate estimates hearings that the cost estimate was $50 billion outturned. The then secretary of defence, Dennis Richardson, responsible for providing the government with advice on the defence budget, and Peter Baxter, then deputy secretary of strategy, responsible for developing the 2016 white paper and its supporting documents, were very clear:

Senator Conroy: Fifty billion dollars for acquisition of submarines sounds a little high.

Mr Richardson: It is an out-turn cost.

Mr Baxter: It is on an out-turn cost basis.

Mr Richardson: It is inflation into the 2040s et cetera.

Mr Baxter: The last of the submarines is likely to be built into the 2040s.

Mr Richardson: For the last of the submarines—if they were built, say, in the early 2040s—it is the out-turn cost of what the submarines would cost in 2040 dollars.

…

Mr Richardson: It sounds high except if you start to think of it in out-turn dollars and what that means.

It’s not clear what the $50 billion outturned number was based upon. Since Defence hadn’t received the contenders’ bids at that point, it was probably a mix of parametric and analogous cost-estimation methodologies.

Since then, however, Defence has informed the Senate that the estimated cost is around $80 billion outturned. So, what happened? I’ll look at that in part 2.

In part 1, I posed the question of what, conceptually, the life-of-type extension (LOTE) for the navy’s Collins-class submarines is. Is it simply an obsolescence-management program, allowing the Collins to degrade more or less gracefully while avoiding excessive investment in an ageing platform? Or is it a program that seeks to preserve the Collins as a frontline capability until its retirement?

The question can only be answered as part of a coherent overall transition model. The obsolescence-management approach might (just) be compatible with a transition model that seeks to get us out of the Collins business as soon as possible (transition option 1 in my study Thinking through submarine transition), but it doesn’t seem compatible with a transition model that seeks to increase our submarine capability as soon as possible in response to escalating strategic uncertainty (transition option 2). Why would we extend the service life of all six boats but not give them the capability enhancements necessary to keep them as a frontline fighting force?

Aside from the capability benefits, one of the advantages of option 2 is that it provides a buffer against delays in the future submarine program. And whether we like it or not, the evolving future submarine schedule seems to be moving us from option 1 closer to option 2.

In my transition study, I assumed we would get useful capability from the first future submarine from 2032. At this month’s Submarine Institute of Australia conference, Rear Admiral Greg Sammut, the head of the future submarine program, presented a program schedule that suggests the first future submarine won’t complete trials until around 2034 or 2035. That view is consistent with comments from the chief of navy. But if events are moving us from transition option 1 to option 2, we should also be moving away from an approach to capability that simply manages a process of graceful degradation.

There is a second, related question, which is when will the LOTE take place? In the transition tables in Thinking through submarine transition, I drew on Defence officials’ Senate testimony about the LOTE, which essentially presents it as an additional round of full-cycle dockings—the third for the Collins—starting in 2026, giving each submarine a further 10 years of service.

But if the LOTE is about enhanced capability and not just additional service life, why should it be tied to a particular point in time? If these submarines really are one of our pre-eminent strategic capabilities, why we would accept a schedule that only delivers the full, enhanced Collins fleet by 2038, which is when the final full-cycle docking on the sixth boat would be completed? A final round of full-cycle dockings will be required, but the capability enhancement delivered by a LOTE doesn’t necessarily need to completely coincide with them.

I don’t want to get into the interminable terminological disputes that pervade Defence about LOTEs versus mid-life upgrades versus capability assurance programs, but it does seem that the term LOTE doesn’t fully describe what we need to do with the Collins.

It may be more useful to regard the LOTE as a mindset, or philosophy, that is focused on doing whatever we can, whenever we can, to enhance the Collins’ capability.

The presentations at the SIA conference suggest that, despite the policy vacuum, Defence has begun to work with industry to see what’s possible with the Collins, and industry is generating many exciting ideas about how to enhance its capability. But if enhancements are worth doing, then perhaps Defence should start doing them as part of the current round of full-cycle dockings—or as part of mid-cycle or intermediate dockings that will occur well before the final round of full-cycle dockings.

It was also clear at the conference that industry is putting a lot of thought into exploring commonalities between the Collins and the future submarine. There are opportunities to de-risk the design of the future submarine by using the Collins as a testbed and allowing Collins crew to train on the systems they’ll be using on the future submarine (such as non-penetrating optronics masts).

Perhaps the benchmark of what’s possible in this regard is the Swedish navy’s submarine transition; many of the key systems that will be installed in its new A26 have already been installed on its predecessor, the Gotland, in its recently completed mid-life upgrade. It’s unlikely that such a high level of commonality will be possible between the Collins, with its Swedish design heritage, and the French future submarine, but we need to think creatively in the quest to keep the Collins as a viable frontline capability. And part of that creative thinking may involve inserting future submarine systems into the Collins well before its final round of full-cycle dockings begin.

There has been discussion about acquiring an interim submarine to prevent a capability gap. I would argue that introducing a third submarine into what is already the most challenging capability transition that Defence has ever undergone is an unmanageable risk. It is the Collins itself, creatively and continuously enhanced, that offers the best prospect for an interim capability.

Moreover, while crystal ball gazing is inherently dangerous, an enhanced Collins provides some mitigation against a range of future scenarios. Say we get to 2030 and it becomes more and more apparent that large submarines crewed by dozens of personnel are too risky a proposition for undersea warfare. We could dial back investment in future submarines that would be in service until the 2080s knowing that the Collins and a small number of future submarines could provide our undersea capability during transition to a future made up of unmanned systems or a mix of manned and unmanned systems. Who knows what the future will bring—the point is that an enhanced and extended Collins provides options to limit risks in the transition to whatever future we find ourselves in.

Of course, a program that keeps the ageing Collins as a frontline capability for another 30 years will cost more than one that simply lets it gradually fade away. But it’s clear from the most recent Coles report on sustainment of the Collins that, despite the dramatic progress towards international benchmarks in its availability, there’s still some way to go in affordability. There’s potentially more to be learned about cost consciousness from small operators who go far on the smell of an oily rag, such as the Swedes. However it’s done, sustainment costs need to be brought down and the savings need to be put towards capability enhancements.

But before a transition plan can be developed, the government needs to decide what it wants from the transition. Is it trying to get out of the Collins business as quickly and cheaply as possible? Or is it trying to enhance Australia’s submarine capability as soon as possible to meet the challenges of an era of strategic uncertainty?

Australia’s future submarine capability isn’t in a good place. We started the program at least five years too late due to a combination of indifference from successive governments and a lack of drive from the Department of Defence to kickstart it. Then we settled on an approach that’s going to take more than another decade to deliver anything at all, even if things go according to plan. And we’ve loaded the program with enough technical risk to pretty much ensure that it won’t.

A slide presented by Defence at the Submarine Institute of Australia’s 2018 conference had an in-service date of around 2035 for the first boat. That date might ring a bell, because it was the timeframe for the strategic assessment in the 2016 defence white paper. It told us that ‘China’s policies and actions will have a major impact on the stability of the Indo-Pacific to 2035’ (paragraph 2.10). So the first new boat could arrive only after the strategic direction of the Asia–Pacific for the 21st century is largely settled. I invite you to think about the changes in the South China Sea over the past four or five years. China has gone from dredging sand and making territorial claims to having functional runways, missile systems and radar stations throughout the area.

I think an aggregate failure of clear thinking has led us here, from big-picture strategy to project implementation. The aim of procuring any weapon system should be to provide future governments with military options that deter aggression or, if deterrence fails, allow a response to hostile moves from an adversary. In either case, it’s important to have both the capability and the capacity to field a credibly decisive force. We talk a lot about capability, but not so much about capacity. In a world with no real threat—which was the case for Australia from the end of the Vietnam War to a few years ago—we could indulge ourselves with boutique force elements, call the ADF force structure ‘balanced’ and have a little something for everyone.

For a low-population, conventionally armed middle power like Australia, there aren’t that many force elements that provide value for money in deterring bigger powers. High-end air capability with sophisticated surface strike options is one, and it’s especially effective for keeping an adversary at arm’s length from our shores. But it’s limited in range in the absence of forward bases or aircraft carriers, while submarines, on the other hand, aren’t much good for local defence, but provide pretty much the only way for us to take the war to an adversary.

Consistent with that, the big Australian defence programs include the F-35 acquisition and the future submarines. But much of the government attention being devoted to the submarine program is focused on jobs and industry cooperation. For those, a slow and steady approach and a fixed delivery rhythm are optimal, delivering hard-hat-and-fluoro-vest photo ops in perpetuity. But it’s not what you’d do if you really thought a major strategic dislocation was possible in the next 15 years. Instead, you’d bolster those parts of the force as quickly as practicable. You have to conclude that the government doesn’t really believe that a crisis could occur in the next two decades, or perhaps it hasn’t really thought about it.

The strategist community is aware of the incipient dangers, and is debating what China’s possible trajectories mean for us, the future role of the US in our region and what a national ‘Plan B’ might look like in the event of US retrenchment. But the ‘big hands on small maps’ debates need to translate to defence policy and military strategy. Someone needs to think seriously about the principles we might be prepared to go to war over, where and when we might have to do so, the capabilities and capacity of putative adversaries, and how we might seek to prosecute any such conflict. But the Department of Defence—whose day job that is—seems comfortable enough with the lackadaisical timeframe for delivery of the future subs. Again, you could be forgiven for thinking that Defence doesn’t really believe the intelligence agencies’ darker prognostications about the near future.

Then there are the project aspects. Having watched defence projects pretty closely for over a quarter of a century now, I’d put this one in the top 10% for risk. I don’t have detailed knowledge of the proposed design, but the intended product is very different—and larger and more complex—than other conventional submarines. The history of projects with that level of ambition hasn’t always been pretty. It might be that it’s not as risky as it looks, but my gut says otherwise.

We’re told—repeatedly—that the Shortfin Barracuda will be ‘regionally superior’. In some limited respects that’s probably true. The combination of advanced European conventional submarine design and US combat and weapon systems ought to be formidable. So, provided that the concept design can be successfully translated through to hardware, our future submarine should be a superior platform to other conventional subs, compared one on one.

There are two problems with that way of thinking about submarine capability. First, our future submarine will operate in waters with nuclear-powered submarines from at least four other countries, which will necessarily outmatch it for speed and endurance. Second, unit performance superiority isn’t the sole determinant—or maybe not even a major determinant—of mission success.

The question really should be whether our total force is sufficient to achieve strategic goals. By 2035 we might have one or two future submarines and a handful of Collins-class boats. If that’s not enough to get the job done against 70+ boats and the rest of the anti-submarine warfare capability of a major power, it won’t matter whether the two new boats are ‘regionally superior’ or not. This isn’t—or at least shouldn’t be—an exercise in building the best conventional submarine known to man. It should be a national effort to reduce future strategic risk by matching strategy with the right number of suitably capable submarines, whether that be six, 12 or 20.

ASPI’s Marcus Hellyer recently wrote about the transition to the future submarine fleet. Under certain assumptions—Hellyer calls it ‘pulling out all stops’—it might be possible to grow the submarine fleet to 12 by the mid-2030s. That would require extending the life of all six Collins and accelerating the delivery of the future submarines to one a year. In the light of the strategic assessments summarised earlier, that seems to be a sensible aspiration, though I don’t know if it’s feasible. In fact we might never know if it is, because there doesn’t seem to be anything like the will to try. If we really wanted to accelerate delivery, we might be able to get our boats faster by having one or more built offshore. That won’t happen, but being able to say, ‘Oh well, at least our undersized fleet was built here’ would be little consolation after losing the next war.

The biggest strategic error we could make would be to act like it’s still the 1990s and assume that having a defence force without the capability and capacity to prosecute a serious war is a luxury we can afford.

This post was adapted from a presentation to the Submarine Institute of Australia’s biennial conference, ‘Collins Life of Type Extension—Issues and Opportunities’, Canberra, 7–8 November 2018.