Submarines: Chairman ASC to Prime Minister

In Future submarine: why the design competition? I reported on the Defence Materiel Organisation’s puzzling approach to SEA 1000, the project to develop Australia’s next generation submarine. The DMO has opted to involve selected European submarine builders in a design competition for a submarine that everyone in the business knows will have to be designed and built in Australia.

The Australian Financial Review for Friday 24 April 2009 carries an interesting item by John Kerin which reports that ASC (formerly Australian Submarine Corporation) Chairman John Prescott has written to the Prime Minister to outline his concerns about a series of disputes between ASC and DMO.

John Prescott is a business-like person of moderate behaviours, not given to extravagant gestures, needless confrontation or the creation of high drama. And as the former Managing Director of Australia’s largest company, he would expect even the most difficult issues to be resolved in sensible discussions between sensible people – especially as we are dealing here with transactions between a Government agency and a wholly Government-owned business enterprise in the same portfolio. If John Prescott is writing to the Prime Minister, there is a problem.

The AFR article tells us a little about what the issues are and it is worth having a closer look at those:

(1) ASC is understood to have become increasingly dissatisfied with the DMO’s planning approach to the new generation of submarines...

One would have to sympathise with ASC here, because it is difficult to explain why DMO has opted to run a design competition when there is only one submarine in the world which comes close to being the starting point for our next generation submarine and that is the one that ASC designed, built and maintains.

One would have to assume that part of the problem is some confused notion of the benefits of “competition” in the mind of DMO and perhaps Government at large. Competition only works when there are at least two credible competitors, and in this case there are not. As the report of the Defence Procurement and Sustainability Review (“Mortimer Review”) noted (p. 19), “...on occasions, the market may simply not be offering anything suitable now or in the future – as was arguably the case with the Collins class submarines – and the Commonwealth will have to bear the cost and risk of development alone”.

In any event, design represents only a small proportion of the total cost; the real benefits of competition are to be found later on in the project, when competition between potential sub-contractors and suppliers of sub-systems could produce real cost benefits.

It is worth noting here that one of the duties of the Defence Materiel Organisation is to foster and nurture the Australian industrial capacities that are required to support the warfighting capabilities of the Australian Defence Force. Any behaviour on the part of DMO that seeks to marginalise the role of ASC, or has that effect, would seem to run counter to that very important role.

Perhaps another part of the problem is the long-standing fantasy on both sides of politics that the Government will at some stage privatise ASC, leading DMO to attempt to treat ASC as just another company. As I have said in Let's keep ASC where it belongs, it will never be a good time to sell ASC. We should acknowledge that and proceed on the basis that ASC is in Government hands to stay.

(2) DMO claims the submarine builder’s maintenance on the existing Collins submarine fleet involves too many delays and is too costly.

I have no way of knowing the strength of this claim, but as ASC is the design authority, and much of the through life support is integrally connected to safety, it is hard to know how DMO could be sure either.

Also, in an environment in which Defence is being asked by Government to make heroic (and in my view unachievable) savings, I would have to wonder whether or not DMO is trying to contribute to the achievement of the savings target by demanding that its support contractors make efficiency gains. If so, one would expect strong push-back from the contractors – there are limits to which man-hours and materiel costs can be reduced without compromising safe, reliable and effective operation, and in any event the contractors are bound by contract to perform to prescribed standards.

(2) DMO chief Stephen Gumley has embarked on a global search for design, propulsion, weapons and sensor systems for the next generation of submarines as well as seeking an expression of interest from ASC.

This is quite extraordinary. Since 2005 ASC has been the technical design authority for the Collins Class submarines. It is the only organisation in Australia with the technical and engineering depth and experience to design a submarine. Why would DMO itself embark on the “global search” when there is a taxpayer owned organisation that is the Government’s designated design authority? Would it not have been more efficient from the outset to have designated ASC to lead the development of the future submarine and for ASC itself to conduct the global search for partners and inputs?

Instead ASC, the custodian of the Government’s technology, is invited to put an “expression of interest” to a less technically capable organisation. And as I understand it, even that was an afterthought – ASC was initially excluded from this phase of the exercise.

(3) But ASC’s leadership is miffed that its expertise in some specialist areas is not being sought and that the DMO appears to have paid little heed to the government’s election promise that the next fleet be built in Adelaide.

The apparent notion that the decision about who will build the submarine is a matter for another day certainly flies in the face of the Government’s election promise. Either that or DMO is using the European submarine builders as stalking horses to force the most cost-effective deal out of ASC, which would mean that DMO is not being straight with the Europeans. Besides which, contemporary engineering contracting practice offers much more efficient ways to achieve the desired result.

(4) Defence Minister Joel Fitzgibbon announced in November last year that the DMO would embark on a global search to source possible designs for the new submarines.

Presumably this was on the recommendation of DMO. Quite bizarre – we all know that there are no designs out there that come close to our requirements. We also know that our future submarine must incorporate both United States and European technology, and that the U.S. Navy and the Europeans will not release to each other the sensitive technologies required for our next generation submarine. This makes the design competition a completely redundant and costly step. And given all the other pressures on DMO, one wonders where it will acquire the manpower and expertise to manage two separate submarine design projects.