Posted on September 17, 2021
Canberra has signaled for months it was seeking to walk away over cost blowouts and delays.
SYDNEY — “A stab in the back” is how French Foreign Minister Jean-Yves Le Drian described Australia’s move to tear up a submarine deal worth more than €50 billion to instead acquire nuclear-powered subs from the United States.
France could have seen it coming.
Canberra signaled in June it was looking for a way out of the contract, signed in 2016 with French company DCNS (now known as Naval Group) to build 12 Barracuda submarines.
Questioned by a Senate committee about issues with the project, Australia’s Defense Secretary Greg Moriarty said: “It became clear to me we were having challenges … over the last 15 to 12 months.” He said his government had been considering its options, including what it could do if it was “unable to proceed” with the French deal.
Moriarty’s admission came after his government in April refused to sign a contract for the next phase of the French submarine project, giving Naval Group until this month to comply with its demands. There were reports dating back to the beginning of this year that Canberra was seeking to walk away.
Here’s why Australia wanted out of the contract — and what could happen next.
Cybersecurity
Trouble began brewing almost immediately after Canberra chose the French bid ahead of alternate designs from Germany and Japan in April 2016.
That August, before the Australian deal was formally signed but after it had been announced, the company DCNS admitted it had been hacked after 22,000 documents relating to the combat capacity of its Scorpene submarines being built in India were leaked, raising concerns about the security of its Australian project.
The Australian defense department warned the submarine-builder it wanted top-level protection for its project.
And while politicians from Australia’s ruling center-right Liberal Party sought to downplay the implications of the hack on the Barracuda subs, opposition figures jumped on the revelations, with some calling for negotiations with the French firm to be suspended.
Budget blowout
Despite that, Australia later that year signed its largest-ever defense deal with DCNS for 12 Shortfin Barracuda Block 1A conventional diesel submarines.
Canberra was reportedly particularly keen on the French bid because of the ability to switch the Barracudas from diesel to nuclear power — technology that was deemed political poison so recently after the Fukushima disaster in Japan, but that the government believed could become more palatable in time.
The project was meant to cost 50 billion Australian dollars (€31 billion). But that figure has since almost doubled.
At last count, the Barracudas were going to cost around 90 billion Australian dollars (€56 billion). And that’s before the government factored in the cost of maintenance — which in November 2019, the department of defense told a Senate committee would set Canberra back a further 145 billion Australian dollars (€90.1 billion) over the life of the subs.
And that wasn’t all.
Australia urgently needed new subs to replace its six aging Collins-class submarines, which were slated for retirement in 2026. Without subs, Australia would be left vulnerable at a time of increasing tensions with China. But the first Barracuda couldn’t be delivered until 2035 or later, with construction extending into the 2050s.
To avoid a gap, the Australian government announced earlier this year that it would completely rebuild all six of its Collins-class submarines, at a cost of billions.
Timeline
Delays also plagued the submarine project, with the Australian defense department and Naval Group having to extend multiple major contract milestones.
In 2018, the Australian government was so angry about a hold-up in signing a crucial strategic partnering agreement over disputes about warranties and technology transfer that then-Defense Minister Christopher Pyne reportedly refused to meet with French Armed Forces Minister Florence Parly and Naval Group executives when they visited Australia. The agreement was eventually signed in February 2019.
Jobs
But perhaps the main sticking point in the doomed deal was the dispute over local industry involvement.
When he announced the deal in 2016, then-Prime Minister Malcolm Turnbull stressed the Barracudas would be built in Australia, with 90 percent local input, sustaining 2,800 local jobs — viewed as a bid to shore up support for his government ahead of an election, which was then just weeks away.
Few thought it a coincidence that the subs would be built in Adelaide, home to the seat held by the defense minister, Pyne — and once considered the headquarters of Australia’s car manufacturing industry, which his party had effectively killed.
But the promise of thousands of Australian jobs and a boon for local industry soon faded, too.
By 2020, Naval Group had revised the 90 percent local input figure down to 60 percent. By 2021, the French firm was pushing back against even that, saying Australian industry wasn’t up to scratch.
Pulling the plug
It’s clear the deal was troubled for years. So what made Canberra pull the plug now?
Simply put, it needed a viable alternative. Or as Defense Secretary Moriarty coyly put it to the Senate in June: “I wouldn’t refer to it as Plan B — I’d say prudent contingency planning.”
Enter AUKUS, a new alliance between Canberra, London and Washington, which will make it easier for the three countries to share information and technology, and pave the way for Australia to get its first nuclear-powered submarines. Australian Prime Minister Scott Morrison said Thursday that the new subs would still be built in Adelaide, “in close cooperation with the United Kingdom and the United States.”
It’s clear that while Paris is upset with Australia, it is particularly furious with the part the U.S. played in the switcheroo.
France’s Le Drian said the move was reminiscent of U.S. President Joe Biden’s predecessor in office, Donald Trump: “What concerns me as well is the American behavior,” he told Franceinfo on Thursday morning. “This brutal, unilateral, unpredictable decision looks very much like what Mr. Trump used to do … Allies don’t do this to each other … It’s rather insufferable.”
What happens next
South Australian Senator Rex Patrick, a fierce critic of the French project, told local media that Canberra had already spent about 2 billion Australian dollars (around €1.24 billion) on the project.
“There will be an exit fee,” Patrick told the ABC Thursday. “But the cost of doing that [walking away] is substantially less than continuing in my view.”
Le Drian indicated Paris would fight the move. “This is not over,” he said. “We have contracts. The Australians need to tell us how they’re getting out of it. We’re going to need [an] explanation. We have an intergovernmental deal that we signed with great fanfare in 2019, with precise commitments, with clauses; how are they getting out of it?”
In 2017, the Australian government revealed the terms of one of its contracts with Naval Group, under which either Canberra or the French firm could terminate unilaterally “where a Party’s ability to implement the Agreement is ‘fundamentally impacted by exceptional events, circumstances or matters.’”
Whether the delays, cost overruns and broken promises amount to “exceptional events” seems destined to be a question for the courts.
If Canberra does decide to pull out, the contract stipulates “the Parties will consult to determine if common ground can be found to allow continuation of the Agreement. If no common ground is found within 12 months, the termination will take effect 24 months after receipt of the original notice to terminate.”
That timing seems to gel with the announcement of the AUKUS alliance: The leaders said they would work over the next 18 months to figure out how best to deliver the technology for Australia’s new nuclear submarines, which the U.S. traditionally has shared with only the U.K.
