May 30, 2018

Pick a Number. 100% Rise in Australian Future Sub estimate to $100 Billion

Andrew Tillett for The Australian Financial Review (AFR), May 29, 2018 reports:

“$100 billion babies: Defence reveals true cost of new submarines for taxpayers”  

"Taxpayers will spend $100 billion to build and operate [Australia's future submarines], [Australian] Defence Department officials have revealed for the first time as they also fended off warnings the naval shipbuilding program was at risk of cost blowouts and delays.

While the $50 billion budget to build the 12 French-designed submarines in Adelaide has been known for several years, Rear Admiral Greg Sammut told Senate estimates on [May 29, 2018] the same amount again would be spent on sustaining the submarines throughout their operating life, although he conceded the costs were yet to be finalised..."

COMMENT

How do you count the costs of a submarine program that may stretch to 2080?

A.  In 2018 dollars or 2080 dollars or somewhere in between? 

B.  In Australian Dollars, or factor exchange rate changes in US dollars or, in 20 years time, in Yuan
      World Currency

C.  Recall that we are not just talking Naval Group (was DCNS) or ASC costs in calculations. A
     quarter or a third of the money will go to Lockheed Martin as Combat Systems Integrator.

D.  What do you include? Inclusions are vital. Cost of:
-  building new shipyard sheds, slips and other facilities
-  costs of personnel in Australia's Defence Department, Navy, Army (for some Special Forces) 
-  cost of building 6 to 12 new submarines? As Australia's Defence Department or Navy try out
   higher numbers (say 12, 10 then 8) before settling for 6 (see my 2014 article). Hence 6 Oberons
   then 6 Collins submarines in the past.
-  "sustainment"(?) does that mean regular maintenance and upgrade costs?
-  training costs
-  some operational costs, eg. special skills (eg. US Navy may be Off-the-Books).

E.  Opportunity costs - for:
-  jobs and regional development (outside Adelaide)
-  money that could have been spent on sorely needed hospitals, schools, "green" energy and mass
    transport 
-  other Airforce, Army and Naval programs (eg. highly developed, future AUVs).

Setting, recording and publishing huge budgets is more a public relations art form than an accounting science.

Pete

1 comment:

Pete said...

Along the same lines as this SubMatts article Popular Mechanics has published, June 5, 2018 https://www.popularmechanics.com/military/weapons/a21071503/pentagon-budget-audit-f-35-nuclear-weapons/

"Why the Pentagon Doesn't Know How Much Anything Costs, The F-35 cost a trillion dollars. Nobody really knows how much America's next nuke will cost. What's wrong?"

"...We Don’t Know What Things Cost - Suppose you're making a grocery list and want to estimate your food expenses.

You might list the cost of each item in a column and then add them up. But now imagine you are guessing at the prices of each item, taking into account fluctuating data like the cost of industrial supplies and the rate of monetary inflation.

Plus, the recipe you’re shopping for may change, and the ingredients may require some extra test batches in the kitchen. Now you're starting to shop like the Pentagon."

"...There’s even more room for error in the way people account for spent money.

There is something called “data normalization” that is supposed to make comparisons and estimates more consistent so that budget projections are comparing apples to apples.

“Cost data are adjusted in a process called normalization, stripping out the effect of certain external influences,” the report says..."

Basically the higher the weapon's system cost and longer the period of the program the easier it is to obscure massive cost overruns and missed deadlines.

Pete