Australia should reconsider building its own defence equipment, review finds

The Productivity Commission has cast doubt over the federal government’s decision to build nuclear-powered submarines in Australia, using its major report into the nation’s economy to argue for a complete re-appraisal of how the country meets its defence needs.

In the same week Prime Minister Anthony Albanese signed off on the AUKUS submarine project with the United States and Britain, at a cost of between $268 billion and $368 billion, the commission’s five-year review of productivity found that in most cases Australia was better off not developing its own defence production capability.

The Productivity Commission has raised doubts over the need to build nuclear-powered submarines in Australia.

The commission’s report, Advancing Prosperity, made 71 recommendations across more than 1000 pages of analysis. It follows a long-term decline in Australia’s productivity growth rate, which over the past decade has slipped to its lowest level since the 1950s.

Part of the report focused on government infrastructure spending and procurement, particularly around defence, which it noted had for years suffered from “imperfect processes” and huge cost overruns.

It found there were problems in defence spending due to the complexity of much of the equipment, the need for a high-skilled workforce and the costs associated with integrating new technologies with old. This meant in almost all cases, Australia should avoid building its own defence equipment.

“Depending on the context, buying an already proven technology from overseas and not quickly, if ever, developing a domestic production capability is likely to be optimal in many contexts,” it found.

“A sophisticated domestic capability to use, store and maintain equipment would still be required regardless of where it was sourced from but would involve lower costs than domestic production and assembly.”

Under the AUKUS deal, Australia will obtain three Virginia-class submarines from the United States – to arrive in 2033, 2036 and 2039.

In the 2040s, Australia will build a new type of submarine, the SSN AUKUS, based on an updated version of the current British Astute-class submarine and featuring American parts.

The Productivity Commission noted that for many years, the defence sector had received effective subsidy rates for domestic production of up to 300 per cent, compared to zero for most other parts of the economy.

There was also less transparency around projects as governments cited national security grounds. But the commission said these reasons did not justify “the present level of opacity”.

On Sunday, Defence Minister Richard Marles refused to be drawn on the individual cost of the submarines to be supplied under the AUKUS agreement.

Since announcing the project, the government has been at pains to talk up its benefits to the Australian economy, particularly in South Australia and Western Australia.

Last Friday, Albanese said the submarines would create 20,000 jobs directly in Australia and “many tens of thousands” more through the broader economic impact of the project.

Anthony Albanese, Joe Biden and Rishi Sunak at the AUKUS announcement in San Diego last week.Credit:Alex Ellinghausen

“What this will do is highly sophisticated manufacturing will lead to a renaissance of high-value manufacturing in Australia. That money, that economic activity stays right here,” he told ABC radio.

The Productivity Commission said the focus on local industry needs had added to the cost problems around many defence projects. It said that given the large sums of money involved in defence, more scrutiny from outside the sector was needed.

“Defence procurement is ripe for deep and disinterested scrutiny of its processes. There are strong grounds for re-thinking defence procurement, drawing on advice from those outside Defence,” it found.

“The productivity and efficiency benefits of better practices are large given the $270 billion of anticipated defence spending over the next decade.”

Apart from an outside examination of defence spending, the commission also argued all government spending needed closer inspection. It backed the public release of cost-benefit analyses of public projects.

The Grattan Institute’s transport and cities program director, Marion Terrill, said the growth in the number of “mega-projects” demanded more scrutiny.

She said two-thirds of the current major infrastructure projects under way across Australia are worth more than $5 billion, which meant the potential for cost blow-outs was increasing.

The $100 billion cost range for the submarine project meant it faced the same problems as a major infrastructure project.

The Grattan Institute’s Marion Terrill says all infrastructure projects should be vetted to ensure they provide value for money.Credit:Dominic Lorrimer

“The larger the projects, the bigger the contracts, the greater the chance of a cost overrun and the size of that cost overrun being larger. We’ve got to the point where a $100 million project is little more than a rounding error,” she said.

Terrill said she backed the commission’s call for more transparency around public projects.

“We need to look at these projects in terms of taxpayers being shareholders, so it’s only fair that they understand why a decision has been made on their behalf but also the underlying assumptions around the costs and benefits.”

Marles on Sunday rejected suggestions that Australia had given the United States a commitment to assist in a war over Taiwan in return for the purchase of its Virginia-class submarines.

“The answer to that is, of course not. Of course not. And nor was one sought. I’ve listened to that conjecture from a number of commentators. It is plain wrong,” he said.

“What Australia would do or not in respect of any future conflict will be a matter to be considered at that time by the government of the day.”

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