“The numbers tell the story. Next year the defence budget will fall in real terms by 10.5%, the largest year‐on‐year reductions since the end of the Korean conflict in 1953.
9th Dec 2012
: SEA 1000
WHAT LIES BENEATH?
Byline: Rex Patrick / Sydney
Defence Funding Implosion - Submarine Cost Explosion
“The numbers tell the story. Next year the defence budget will fall in real terms by 10.5%, the largest year‐on‐year reductions since the end of the Korean conflict in 1953. As a result, defence spending as a share of GDP will fall to 1.56%, the smallest figure recorded by Australia since the eve of WWII in 1938”.
These were the opening lines from this year’s Australian Strategic Policy Institute’s annual report “The Cost of Defence”.
It goes on to state; “As Defence budgets go, this year’s was pretty simple. A total of $5.5 billion was cut from the Defence budget over four years. Most of the money came from reductions in capital investment, $3 billion from military equipment purchases and $1.2 billion from facilities construction”. These are sobering words.
Defence is hurting. Even in the years where Defence enjoyed budget growth, there was an understanding amongst its senior ranks that the budget had a finiteness to it and that care had to be taken in allocating the spend. “Bang for buck” was essential. However, this year the focus has moved away from achieving the most with what it has been given to minimising the impact of the cuts.
It is against this backdrop that recent submarine sustainment cost revelations by the Collins Class Program Manager, Air Vice Marshall Deeble, must be viewed. Submarine sustainment in 2012-13 is set to consume $499 million. In 2013-14 it will rise dramatically to $605 million - and then climb again in 2014-15 to $640 million. Against that cost, aspirational submarine availability by Deeble’s own plan, presented to industry in July this year, will see two boats available to Navy in 2012-13 and 2013-14 and between two and three submarines in 2014-15.
Two years ago at Senate Estimates (“Estimates” as it is shortened to), Defence struggled to justify the money being spent on Collins as being value for money. Today it would be an impossibility. And no wonder - for the $600 million, plus annual cost of keeping between 2 and 3 twenty year old Collins Class submarines at sea, the RAN could buy a brand new reliable, deployable high end submarine every year.
And the forward estimates being presented by Defence don’t include the implementation costs of Coles review fix-its or the costs that might be associated with a submarine life extension program.
But that’s not what this article is about. As bad as these numbers are, there is something even worse that lies beneath them; something that should alarm the Government and general public at large.
“This Side of the Lake”
In October the Defence hierarchy and a supporting cast of hundreds, pack their various portfolio notes and headed “across the lake” to Parliament House for Estimates hearings.
Despite the fact that many senior Defence official loath Estimates, most will privately concede that they are an important part of our democratic processes. Estimates Committees play a key role in the parliamentary scrutiny of the performance of the executive branch of government. In Australia’s system of government, ministers and public servants are accountable to the Parliament for the use of the public resources with which they have been entrusted. Estimates is one of the few times Government and Opposition Senators get to question public servants directly ... and public servants are expected and encouraged to provide full and accurate information to the committees about the factual and technical background to proposed items of expenditure
And Senator Johnston, the shadow Defence Minister, saw it appropriate to question the head of the DMO, Mr Warren King, on Collins sustainment costs.
SENATOR JOHNSTON: “Mr King, in May 2011 last year, you and I discussed the cost of sustainment of Collins. We noted that the cost had gone to $443 million—an $80 million jump. You gave me the 2014 figure of $360 million. I challenged you on that, and Dr Watt told me it was actually $367.7 million. I said that you could not be serious and that it would be something like double that. In question on notice 195 you confirmed that the 2014-15 figure is in fact $560.7 million. What concerns me is that it does not appear that we have any real knowledge of where these costs are going for this force element group for the submarine enterprise”.
In a rare Estimates moment for Mr King, he struggled to find an answer. Some numbers were flashed around and the conversation recommenced as follows.
SENATOR JOHNSTON: “That is why I have gone through those numbers—purely sustainment. The figure that was offered to me by the DMO, through Mr King, was $360 million for the sustainment of Collins in May 2011”.
MR KING: “For the year 2014-15?”
SENATOR JOHNSTON: “For the year 2014-15. And I said to you, it will be something like double that. We had quite a discussion as to who was right and who was wrong. What really worries me is that I think I was much closer to the mark, and I am sitting over on this side of the lake with virtually no information”.
MR KING: “Yes, but I want to not concede that just yet, Senator. I want to have a look at what I said”.
“Bet the House”
So, best we trawl back through the Hansards to see exactly what was said.
February 2011 …
The submarine cost discussion really started back in February 2011. Senator Johnston flagged that between 2003-04 and 2009-10 the cost of submarine sustainment had gone from approximately $203 million to $325 million. For an increase in cost of 60% over that period there had been almost no increase in the number of Unit Ready Days achieved. He probed Defence on aspects of the costs and a range of questions on notice were taken by Defence.
May 2011 …
Four months later the Senator probed costs again, quoting figures from the May budget. “This year's budget sets out sustainment at $443 million, a $90 million jump and a 25 per cent increase from last year's $353 million. Since 2004, sustainment costs have gone from $203 million to $443 million, a 120 per cent increase.” As Defence officials pondered quietly amongst themselves ... Senator Johnston read out Defence Budget statements going back to 2005 – each year describing how it was seeking to contain submarine sustainment costs.
DEFENCE BUDGET STATEMENTS ON SUBMARINE SUSTAINMENT
2005 and 2006 –the management of logistic requirements to maintain the submarine remains a challenge”.
2009 – “Several initiatives are under implementation to control and optimise the cost of ownership, including the stabilisation of the Integrated Master Schedule, improvements in inventory levels, rationalisation of maintenance and measures within the prime integrator, ASC AWD Shipbuilder, to streamline improved efficiency”
2010 – “the support objective is to maintain the submarines materiel capability, optimise the logistic cost of ownership of the submarines, and provide sustainable and cost effective design, engineering and logistic support under the through life under the through life support agreement for platform systems with ASC Pty Ltd, and through Raytheon Australia, Thales and BAE Systems for combat systems” also … “seeking platform availability through increased efficiencies”.
2011 – “the support objective is to maintain the submarines materiel capability, optimise the logistic cost of ownership of the submarines, and provide sustainable and cost effective design, engineering and logistic support under the through life under the through life support agreement for platform systems with ASC Pty Ltd, and through Raytheon Australia, Thales and BAE Systems for combat systems” … also … “reform initiatives underway to stabilise the Integrated Master Schedule built on a rationalised 11 year maintenance and operating cycle, supported by the implementation of performance based in service support contracts to drive increased industry efficiency and effectiveness”.
Referring to those statements, the Senator fired this shot, “The committee has been told this pack of 'yes minister' jargon for more than six years now. You must think we are as green as cabbage water to just see it in the budget again and again”.
And then a short time later … we come to the moment referred to above.
SENATOR JOHNSTON: “….. what is the 2014-15 [Collins sustainment] figure, the last of the out years?”
MR KING: “The 2014-15 figure in the forward estimates is $360 million”.
SENATOR JOHNSTON: “That is $360 million for sustainment of Collins?”
DR WATT: “It is $367.7 million”.
SENATOR JOHNSTON: “You could not be serious. You are sitting there telling me that that figure has any legitimacy on the facts I have given you?”
MR KING: “Well, it is certainly on the basis of our estimating, yes, Senator”.
SENATOR JOHNSTON: “If I was a gambling man, I would bet the house that that figure is about half of what it is going to end up being, because you have gone through the roof on your numbers already and you are now telling us those figures are going to come down. They have never ever come down before; they have gone up at a rate which is far and beyond any other force element group in the ADF; and you are telling me they are coming down in the out years. I have to tell you the credibility of that statement is as low as I ever heard or witnessed at a Senate hearing, given the facts I have just given you”.
October 2012 …
Using Chris Deeble’s updated 2014-15 numbers forward estimates have hit $640 million, thereby approaching the doubling that the Senator predicted.
What Lies Beneath
And that leads us back to the real issue and comment by Senator Johnston, “What really worries me is that I think I was much closer to the mark, and I am sitting over on this side of the lake with virtually no information.”
It’s a very fair point. How does this happen? How does the DMO – an organisation of more than 7000 people - with access to the information that it does, do worse than a Senator and his Chief of Staff, no doubt working on limited information and gut feel?
Two explanations spring to mind. One of them is that the DMO’s senior executives have not been frank with the Senate. The second possibility is that they have had no idea, and that would be a tragedy. So, which is it?
Certainly this writer rejects the first proposition.
As to the second proposition - others may agree, sighting the influx of expertise from outside the Australian submarine community over the past few years; Steve Ludlum - CEO of ASC (from the UK), John Coles - Head of the Collins Class Sustainment Review (from the UK) and David Gould – General Manager Submarines (from the UK). But this writer also suggests the second proposition is wrong too, on account of the experience and commensurate salaries of the DMO team.
So, with both those propositions ruled out, what is the answer?
No Forest, Just Trees
A third proposition exists; we have a DMO executive group that is so close to the trees, they just can’t see the forest.
Warren King was an RAN Weapons Electrical Engineer Officer (note also, that in his early civilian life, he had involvement in the Collins program – this writer first meet him after being posted to NUSHIP Collins). He has spent 45 years in the domain. Much of the rest of his team have also been around Defence or in uniform for decades. People of that background are passionate and loyal. If their dedication was a knife, it could cut through carbon steel.
That loyalty can be seen in the defence-of-Collins that has been mounted in the Senate in relation to submarine availability.
For the past three years Defence has been arguing that it was doing well with respect to submarine cost versus availability. Even this time around at Estimates, distance travelled by our submarines was been put out as a mitigating factor, along with complexity.
With respect to distance travelled, King talked of “smaller, less widely used submarine” before the Chief of Navy, Vice Admiral Griggs, proudly provided a snapshot of what had happened with the three Collins boats that operated between May and October of this year. “There have been 163 days at sea, 23,716 nautical miles … 13 programmed exercises. They fired 16 torpedoes, one warshot which resulted in the sinking of the former US tanker during RIMPAC, and 15 exercise shots. We have qualified 25 new personnel and we have only lost 28 days in that period against planned Materiel Ready Days”. It was clearly a good five months, and no one should take away what was achieved.
But we need to put what King and Griggs said into perspective, least we not be left inadvertently liking our own ice cream.
An August 2011 article in “Janes International – Navy” by LCDR Sebatiano Rossitto, Commanding Officer of the Italian Type 212 submarine, ITS SCIRE, on a 2009 deployment to the US is instructive. He stated he had been underway for 108 days of SCIRE’s 150 day deployment, a trip in which he had deployed from Italy to the East Coast of the United States, embedded into a US Naval Task Group in a series of exercises and then returned to Italy. Upon arrival back in the Mediterranean SCIRE continued her high tempo ops as a participant in Proud Manta, NATO’s major ASW exercise and finally, after a 30-month operational period, entered Fincantieri shipyard in Muggiano for a five month overhaul.
His story is not an isolated one. German Type 212s have been conducting 240 day Mediterranean deployments, a Portuguese Type 214 recently deployed to the US and returned, the Dutch are operating their Walrus class boats off Somalia and Pakistan has conducted 60 plus day patrols away from Karachi in their Agosta class submarines.
The distance argument is misleading – based on a 1980’s perspective. But even if it wasn’t, the cost of availability for boats which undisputable travel afar should not be where it is for Collins. The USN deploys their Los Angeles and Virginia class submarines great distances on a regular basis. A recent US Department of Defence Selective Acquisition Report (see Table 1) put the per boat operating and sustainment cost of the Los Angeles and Virginia class at $50 million and $59 million per annum respectively (1995 dollars adjusted to 2012 dollars). The annual cost of sustainment alone for each Collins class submarine is just shy of $100 million, a number made even worse when one considers their availability.
Table 1 US SSN Annual Operating and Sustainment costs (Source: US DOD)
With respect to his other line of argument – complexity - King is kidding the Senate along with himself. A Collins Class submarine is no more complex than a modern Scorpene, S-80 or Type 214. Each have pressure hulls, torpedo tubes, weapon discharge systems, fully integrated combat/ communication/navigation systems, periscopes and mast, batteries, high powered diesels, main motors and highly skewed propellers. It’s worth pointing out that each of these submarines also has Air Independent Propulsion, modular mast systems, external countermeasure launchers; things that Collins doesn’t. Collins would also fail to win a complexity comparison with a Los Angeles or Virginia Class submarine … and note that Los Angeles class submarines have 56 week full cycle docking periods, compared with Collins’ 147 weeks.
When pushed by Senator Johnston, Mr King had to concede that Mr. Coles had normalised availability figures across a range of nations and found, with respect to availability, that “Yes, I think it is about 50 per cent of what we could—given the design and given the boat.”
Objectivity and Leadership Please !!!
This article series is about SEA 1000; Australia’s future submarine program. Yet all that has been talked about this month is Collins and estimation/value-for-money appreciation problems within the DMOs leadership team. But there is a direct link with respect to SEA 1000 forward estimation and an indirect link with respect to avoiding a submarine capability gap at an acceptable cost to the taxpayer.
DMO will have significant influence in the SEA 1000 procurement strategy, the submarine selection, build management and through-life sustainment. Mr King stated in a speech to the Submarine Institute of Australia in November that it was his obligation to provide Government with “advice on cost and schedule, advise on programmatic risk and commercial matters, and advice on Australia’s industrial capacity to deliver”. Based on the failures of his organisation in appreciating the significance of the Collins problem and estimating the forward cost of that program, Government would have every right to be nervous about anything put forward by the DMO with respect to SEA 1000.
And in the meantime the cost of Collins spirals and the looming gap between the current and future submarine widens. In 2014 – 15 the accounting cost of Australia’s submarine force will, by Defence’s own numbers, hit a billion dollars. There are many inside the DMO that have put their heart and soul into the Collins Class submarines. Their allegiance to the boats is admirable. However, there comes a time when one has to stand back from the trees so that the forest can be seen. Whilst some might feel the path to submarine redemption is to persist and get them going again, at any cost, a change in tack must occur. Dogged tax payer funded determination is not required; leadership is.
If the DMO can’t stand back, then the Chief of Navy, Griggs, must direct them to … or perhaps Chief of the Defence Force, General Hurley … or perhaps the Minister, the Hon Stephen Smith.
Every member of the Parliament, the Government, Defence and the general public should have a reasonable expectation that the DMO will act with objectivity in its pursuit of its public purpose. It stems to the integrity of public administration, and i this case, national security. 2967