Morrison drops local construction requirement to 40% in nuclear submarine deal

Australia’s fleet of nuclear submarines will be primarily built in the US or the United Kingdom, with the Morrison government agreeing to drop its requirement for local construction to just 40%, according to a briefing delivered by a senior government figure on Thursday morning.

The now-binned contract for the Attack-class boats to be built by France’s Naval Group required that 60% of the submarine be built in Adelaide, Australia — a requirement that Naval Group struggled with throughout the five years of the contract and which played a crucial role in the government’s decision to cancel the deal.

By dropping the local build level to 40%, the government is de facto recognising that its local build requirement is inconsistent with a project within acceptable cost or outcome parameters. As Crikey flagged on Thursday morning, trying to maintain local build with the new fleet simply kicked the local content problem with Naval Group down the road.

The drop to minority local build may also strengthen Naval Group’s hand if it decides to contest the break fee the government proposes to give it for binning the contract — said by a ministerial source to be $500 million.

Naval Group could argue that as the government has changed the project requirements without offering it the opportunity to compete for it, it merits compensation in addition to the break fee. France has already ferociously criticised what it is calling a “stab in the back”, which augurs poorly for a clean settlement.

The government does not yet know whether the new vessels will be a UK or US design, but it is expected that a US firm will provide the nuclear reactors required for the boats’ propulsion systems, and that the reactors will be fitted offshore without ever entering Australia.

According to a senior government source, the government is very concerned about the crewing requirements of nuclear submarines, which are more than twice those of diesel-electric subs (given that the Royal Australian Navy already struggles to fully crew the existing Collins-class fleet), and it expects significant ongoing problems with sourcing both submariners and the onshore expertise needed to maintain nuclear-powered submarines, with foreign workers expected to fill the majority of positions given the skills and experience needed.

One figure mentioned is that the government is budgeting $1 million per migrant worker in order to be able to obtain the necessary skills.

Another concern of the government is paying for the project, which will cost at least as much as the Naval Group contract and likely a significant premium more to accommodate even a reduced local build requirement.

Thinking within the government is that a significantly expanded migration program will be needed to drive up government tax revenue sufficiently to fund the $100 billion plus bill for the submarines.

The one-third reduction in construction in Adelaide that will result from the drop in the local build requirement may be politically costly — but will also reduce the overall budget given the relative inefficiency of local construction.

This article was first published by Crikey.