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Limited and flawed research in Productivity Commission industry assistance review

Tuesday, 26 July 2016

he State Government has criticised the limited analysis, assumed figures and incorrect conclusions contained in the latest Productivity Commission’s review of trade and assistance.

The review out today is critical of Government support for the submarine construction program and claims assistance will exceed the level of support for the car industry.

Its conclusions are made in a two and a half page observation in a broader 85-page review of Government assistance to industry, and which Defence Industries Minister Martin Hamilton-Smith told State Parliament today, conflicts with more in depth analysis commissioned by the Weatherill Government in 2014.

Carried out by the National Institute of Economic and Industry Research, this analysis relied on detailed cost data on building overseas and locally and gathered and checked detail with numerous Australian and overseas experts.

Its overwhelming conclusion was that it will cost no more to build locally.

Defence SA will write to the Productivity Commission to counter the assumptions, falsehoods and hypotheticals contained in its brief analysis to ensure that the sweeping statements of today don’t become the accepted wisdom of tomorrow, the Minister said.


The Commission is an Australian Government agency, located within the Treasury portfolio and undertaking a variety of research.

The Commission’s review of the Defence Industry Policy Statement and the Submarine Procurement Decision is made with several caveats. The Commission says at the outset, that “it is difficult to ascertain whether the intended support is an increase in what would have been provided had previous programs continued as previous funding arrangements were not transparent”.

It also says that the “recent decision to build the new submarines locally at a reported 30 per cent cost premium, and a preference for local steel, provides an example of how a local cost premium can deliver a very high rate of assistance…”.

Quotes attributable to Defence Industries Minister Martin Hamilton-Smith

The analysis, based on a reported 30 per cent cost premium, is not their figure – it’s someone else’s. The figure comes from the RAND report titled Australian’s Naval Shipbuilding Enterprise: Preparing for the 21st Century, released in April 2015.

RAND said that by adopting a continuous build program and reforming shipbuilding practice, the current 30 per cent cost premium could be reduced by half by midway through the future frigate program.

As we know, the Federal Government has adopted the concept of a continuous build. So, the Productivity Commission’s underlying assumption of a 30 per cent cost premium is already halved.

Since the time of the RAND report, the productivity at Australia’s only naval shipbuilder - ASC at Osborne – has improved markedly. The Commission’s 30 per cent assumption, which it admits is hypothetical, now looks very wobbly.

Finally, the Commission states that its conclusions are based on a local spend of just 50 per cent. The Federal Government is on the record stating that at least 90 per cent of the project will be local.

While there is a role for independent think tanks such as the Productivity Commission, it should be careful when making a sweeping statement that the decision to build submarines in Australia is “a major step back from the historical reduction in using government procurement preference as industry policy”.

The conclusions of the NIEIR report were that Australia is at least $21bn better off to build in Australia than to purchase overseas in addition to creating 120,000 man years of additional jobs in the economy over the life of the project, as compared to building overseas.

The Future Submarines program will generate employment in emerging advanced firms with high productivity. It creates the option for these firms to enter new industrial domains resulting in increased employment.

The often quoted figure of $89 billion for the program is not just a cost of construction figure.

It includes build, maintain and sustain.

As a guide, the Collins Class through Life Support (TLS) project, signed in 2012, contributes around $150 million and 1400 jobs to Australia’s economy every year.

Or converted it would equal to 112,000 FTE man years over a 40 year period for 12 submarines.