Australia's capacity to build the LHD ships

Department of Innovation, Industry and Regional Development (Victoria) Department of State Development (Queensland) Department of Industry and Resources (Western Australia)

Australia’s capacity to build the LHD ships

Deloitte Touche Tohmatsu ABN 74 490 121 060 180 Lonsdale Street Melbourne VIC 3000 GPO Box 78 Melbourne VIC 3001 Australia DX 111 Tel: +61 (0) 3 9208 7000 Fax: +61 (0) 3 9208 7001 www.deloitte.com.au

Major General Peter Haddad Director, Defence Development 121 Exhibition Street, Melbourne VIC 3000 Via email: [email protected] 18 April 2007 Dear Major General Haddad Re: Assessment of Australia’s ability to build the Landing Ships, Helicopter Dock This report has been prepared in large part to address the issues raised by the Department of Defence regarding potential supply constraints in the Australian labour market for shipbuilding. Specifically, Defence has articulated concerns relating to the industry’s capacity to build both the AWDs and the LHDs within the same time frame. The following report by Deloitte’s Insight Economics concludes first that there would be considerable economic benefits were Australian industry to provide significant local content, in a cost-effective way, in the construction of the LHDs. We also conclude that there are sufficient skilled labour resources available to undertake both projects, particularly in a situation where relevant manufacturing industries are experiencing a decline. Yours sincerely Dr David Charles Jon Stanford Chairman, Insight Economics Partner, Insight Economics Deloitte Touche Tohmatsu Deloitte Touche Tohmatsu

Contents Executive summary and conclusions 4

Executive summary 4 Conclusions 9

1 Building the LHDs 11 1.1 The LHD acquisition 11 1.2 Naval shipbuilding industry policy 12 1.3 Manufacturing industry context 14

2 Economic impacts 17 2.1 Costs and benefits of local acquisition 17 2.2 Economic modelling 18 2.3 Implications of the modelling 20

3 Labour force issues 23 3.1 The AWD and LHD resource requirements 23 3.2 Employment in the Australian shipbuilding industry 24 3.3 Total pool of skilled labour 28 3.4 Supply of new apprentices, trainees and graduates 29 3.5 Labour demand and competition 31

4 Availability of labour to build the LHDs 35 4.1 Overall approach 35 4.2 Skilled labour demand and supply 37 4.3 Australia’s labour potential: report findings 39 4.4 Managing LHD project risks 42

Appendix A 45 A.1 Methodology for skills availability estimates 45 A.2 State labour market analysis 49 A.3 Relaxing growth and migration assumptions 78

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Executive summary and conclusions

Executive summary and conclusions Executive summary Objectives of the report The Royal Australian Navy (RAN) is in the process of acquiring five large warships. These consist of three Air Warfare Destroyers (AWDs), of an advanced design, and two much larger ships of over 20,000 tonnes displacement designated Landing Ships, Helicopter Dock (LHDs). The focus of this report is on whether the LHDs should be built with a significant local content or whether they should be fully imported.

There is a short list of two designs for the LHDs, one French and one Spanish. If the French ship is selected, Thales will be the prime contractor and, if there is significant local content, Thales has proposed that the work will largely be carried out in NSW and Queensland. If the Spanish ship is chosen, Tenix will be the prime and has proposed that the local content work would be largely carried out in Victoria, NSW and Queensland.

Since the 1980s, Australia has constructed most of its major warship acquisitions in-country, notably six Collins class submarines and ten ANZAC frigates (including two for the Royal New Zealand Navy). It has already been decided that the three AWDs will be built in Australia, with ASC as the prime contractor and consolidation of the destroyers occurring at its shipyard in Adelaide. In regard to the LHDs, neither tenderer is proposing that the whole ship will be built in Australia.

There are two important elements for Defence to consider when choosing between an overseas build for the LHDs or significant local content. The first element is value for money, or whether the higher local content option can be accommodated within the budget envelope for this project and would be seen to deliver benefits in terms of wealth creation and capability. In announcing the project the then Minister for Defence, Senator Robert Hill said that:

The Government’s preference is to see the ships built in Australia, however Australian industry will need to demonstrate it can deliver the project at a competitive price.

Minister for Defence, Media Release, 11 August 2005

More recently, however, the Defence Materiel Organisation has expressed concern regarding the second element, namely the availability of the necessary skills required to build both the AWDs and part of the LHDs in a rapidly growing economy with labour shortages becoming evident in certain trades.

This report addresses both of these issues. Specifically we analyse:

• on the assumption that significant local content can be incorporated in the LHDs without a significant cost penalty, what the economic impact of that scenario would be relative to a fully imported solution; and

Australia’s capacity to build the LHD ships 4


• whether it is reasonable to expect there would be sufficient availability of suitably skilled persons in Australia to undertake locally a significant proportion of the LHD project in parallel to the AWD program.

Defence industry context Despite Defence’s concerns about the availability of skilled labour, in the overall context of defence industry policy and the present condition of manufacturing industry in Australia, there are several reasons why a cost effective proposal to undertake significant work on the LHDs locally might be welcomed:

• in support of its goal of self-reliance, Defence has spent twenty years developing naval shipbuilding capability in Australia and the industry has a capacity significantly greater than the present and projected workload (including the AWDs);

• Defence has already commissioned work, from ACIL Tasman, analysing the local availability of skills to undertake the LHD project but appears unconvinced by the consultants’ finding that the necessary skills would be available;

• Econtech has also undertaken work on skills availability to undertake part of the LHD project in-country and reached a similar conclusion to ACIL-Tasman;

• even if a cost-effective defence project does ‘crowd out’ a resource project, for example, that is not necessarily a bad thing — the defence investment may be a high value adding, high productivity project and it also may give rise to significant positive externalities in terms of building valuable defence industry capabilities;

• in stark contrast to the rest of the economy, some manufacturing industries in Australia are experiencing declining employment and it would be thought that government agencies would seek to redress this where possible by at least supporting local industry’s ability to bid cost-effectively for major defence projects;

• a number of State governments have the strategic goal of supporting the expansion of their defence industries, and are willing to provide funding for some facilities and support training programs; and

• the international shipbuilding industry is experiencing severe labour shortages and cost inflation, and it is not at all evident that the risk of cost blow-outs or delays would be reduced were the project to be wholly contracted overseas.

In any case, despite Defence’s concerns, the market will play an important part in determining whether the industry has the capacity to undertake significant work on the LHDs in Australia. It is up to those contractors bidding on the basis of significant local content to determine whether, within their bid, they can obtain the skilled labour resources they need at a competitive cost and convince Defence that their bid is realistic. Essentially the contractor bears a major share of the risk of failure. Defence can impose penalties in the contract for late delivery so that it will be in the contractor’s commercial interest to complete the job on time even if local labour is not available and skilled people have to be brought in from elsewhere.

Economic impact The economic benefits of local, as opposed to overseas, procurement of major defence assets, fall into two categories:



• Where there is no cost disadvantage in local procurement, the defence project will have a similar positive impact on the economy as any internationally competitive investment project. It will contribute to increasing GDP and enhancing the community’s living standards. If the project is not internationally competitive, however, it will be likely to lead to living standards being lower than they otherwise would be because it will ‘crowd out’ other more efficient projects.

• Procuring defence assets in Australia can provide significant benefits in terms of enhancing the defence capability of local industry. This can reduce the through life support costs of the assets and contribute to meeting the government’s strategic objective of self-reliance.

The benefits of the second category may mean that it is worth paying some premium to procure assets in Australia rather than overseas. In this project, however, we have not been able to quantify any possible benefits from local procurement of the LHDs because of a lack of information. On the basis of their recent evidence to the Parliamentary Inquiry into Naval Shipbuilding, however, Defence considers that any such benefits that might flow from a local LHD acquisition are likely to be small. This would depend, of course, on the nature of the work that was undertaken locally and the effect on the businesses concerned.

Our approach to assessing the benefits of undertaking significant local work in building the LHDs was to model the impact on the Australian economy using the MONASH computable general equilibrium (CGE) model. This allows the direct and indirect impacts of the project to be estimated as well as giving some indication of the likely ‘crowding out’ effects of the project. We did not model either the Navantia or the Armaris ship specifically or the locations within Australia where the work would occur. The information we would have required to do this are highly confidential during the bidding process and we were not able to gain access to the necessary data. Rather we modelled a notional, composite LHD with the following characteristics:

• total project cost (under both the fully imported and the high local content scenarios) is $1.9billion;

• local content of $800 million, or over 40 per cent;

• capital expenditure of $25 million in 2008-11, of which around $15 million would be applicable to other projects down the track;

• local expenditure divided between design (10 per cent), metal fabrication (50 per cent) and systems (40 per cent); and

• expenditure on labour would represent 100 per cent of the total in design, 60 per cent in metal fabrication and 70 per cent in systems.

Consultation with industry suggests that these are not unreasonable assumptions to make about one plausible scenario that is at the high end of the scale for local, content. We understand that the bidders are offering a number of scenarios incorporating different levels of local content.

The results from the economic modelling of this scenario paint a favourable picture of the impact of undertaking a significant share of the LHD construction in Australia. Compared to fully importing the two ships, an acquisition with a local content of $800 million would:

• contribute an additional $130 million to GDP (NPV of $110 million), over the six year construction period 2008-2013;



• boost consumption by the Australian community (a measure of the impact on economic welfare) by $119 million (NPV of $99 million) in the period 2008-2013;

• increase aggregate investment by $112 million (NPV of $96 million),

• increase federal tax revenue by $36 million (NPV of $30 million in 2008-13); and

• provide a boost to the manufacturing sector, particularly in the metals and machinery and equipment industries.

Therefore, the first conclusion is that, provided there is no cost premium incurred by local procurement, there would be significant economic benefits in undertaking a substantial part of the project in Australia, as compared with the alternative of a full overseas acquisition. It should also be noted that this conclusion is reached without taking account of any capability benefits accruing from local procurement. These could be expected to reduce the costs of through life support of the ships in Australia during the operational phase of the LHD project and enhance the overall benefits of the local content option.

The model can also provide useful insights into labour market issues, and there is value in considering the ‘macro’ information provided by the model as well as the ‘micro’ analysis that follows. The model results show that net employment in the Australian economy would be marginally higher under the local content scenario than in the business-as-usual case. The peak of this higher employment effect is in 2009 and 2010 when about 90 more persons would be employed nationwide than would otherwise have been the case. (To some degree, this very low number represents nothing more than ‘noise’ in the system; in a labour market the size of Australia’s it is not significantly different from zero.)

Given that the direct and indirect labour requirements of the LHD project are clearly much higher than this very low figure, the implications are that some other activities, projected to occur in the business-as-usual case, will be crowded out by the LHD project. But this is very unlikely to be a ‘bad thing’. The modelling shows that the LHD project gives rise to a higher level of GDP than in the business-as-usual case. According to the modelling, for example, an additional $36 million of GDP is generated by the LHD project in 2010 when total employment is only higher by 89 persons than it otherwise would have been. At the margin, this translates into a very high rate of labour productivity.

Overall, this is a high value, high productivity project that will have some crowding out impact on lower value activities. This represents a beneficial impact on the Australian labour market albeit a very small one. Both labour productivity and average real wages will be (albeit almost imperceptibly) higher than they would otherwise have been.

Skills availability Our approach to the ‘micro’ analysis of the labour market issues endeavours to build upon other recent work examining the availability of skills for the defence sector. Previous analyses have focused on trends in national industries and have shown that there is sufficient labour available to undertake both the AWD and LHD projects without undesirablecrowding out effects..1

The ability to rely on this line of argument, however, depends on assumptions of labour force mobility within Australia’s State labour markets. It also depends on the assumption that

1 ACIL Tasman (2005), Skills Shortages and the Amphibious ships project and EconTech (2006), The

Economic Contribution of the Landing Helicopter Dock Program During the Construction Phase of the Project.



other growing industries, particularly the resources sector, will not significantly compete for labour that might otherwise be employed on Defence projects.

In order to address Defence’s concerns for skills availability, in this study we undertake a detailed analysis of labour markets on a State-by-State basis using conservative assumptions about the potential labour market growth and the implications for the LHD project. Our analysis has been conducted using Monash University’s Centre of Policy Studies’ MONASH model’s assessment of demand for different occupations by ASCO category in each State and territory. The MONASH analysis is also informed by considerations of existing capability in the State, including the size of the existing workforce but more particularly by detailed information on net new entrants to the labour market in each relevant jurisdiction.

The analysis considers:

• all sources of new supply by State, including the availability of new labour from vocational and university programs;

• changes in demand for labour, based on industry growth projections and the estimated impact of existing worker retirement;

• the existing capacity of State markets to undertake the work, based on the volume of naval shipbuilding that has already been undertaken in a particular market, which is assumed to increase the ability of companies within that market to attract skilled labour, holding all else constant; and

• the potential threat from future major projects in industries that compete for labour with the shipbuilding industry.

The labour force required to undertake the work on both the AWDs and LHDs from 2009 is estimated at around 2,050, of which 1600 would be tradespersons and 450 engineers, designers and managerial staff. Our estimates of labour market availability are shown in Table ES 1.

TABLE ES.1: AVAILABLE SKILLED LABOUR FOR THE LHDS BY 2009

NSW Vic Qld WA SA Total Peak AWD and LHD labour

requirements

Labour pool potential for tradespersons and labourers

13,500 persons

16,300 persons

10,700 persons

(400) persons

5,650 persons

45,750 persons

1,600 skilled tradespersons and labourers

Labour pool potential for engineers

7,000 persons

5,800 persons

3,800 persons

2,200 persons

1,700 persons

20,500 persons

Labour pool potential for managers and associate professionals

58,500 persons

47,900 persons

33,000 persons

14,100 persons

17,200 persons

170,700 persons

450 management,

design and engineering

skilled persons

Appendix A provides significant detail regarding the State by State labour market analysis used to develop these conclusions.



In the analysis presented in Table ES.1, the numbers against each of the three categories are confined to skill groups that are considered to be relevant to the LHD construction, systems and fitting out tasks. Growth in new recruits to the workforce in these skill groups is assumed to be the same in the future as in the recent past, and potential interstate migration is not taken into account. These are conservative assumptions. It should also be noted that the numbers of people identified in the Table are unlikely to be unemployed if the LHD project does not go ahead. The positive numbers merely represent new labour coming on stream that will be available for a range of new projects, including the LHDs, which presently remain uncommitted.

Overall, based on our analysis, our judgement supports that of the two tenderers for the LHDs project, namely that sufficient skilled resources are available to undertake the project in most States. The project would not be expected to drive up labour costs in other projects, or cause any significant crowding out of other potential new investments.

When looking at the size of the naval shipbuilding skills demand in relation to the skilled workforce likely to be available in the Australian States and territories, we have reached the following conclusions:

• In New South Wales and Victoria, where much of the Australian production of the LHDs is likely to be based, the skilled workforce required is unlikely to place strains on the available skilled labour pools available in those two States. There is an ample supply of labour expected to be available to be contracted ahead of the LHD project commencement, plus a substantial existing naval shipbuilding capability that would be expected to be able to ramp up rapidly its workforce from current levels.

• In Queensland, the impact of the resources boom is ameliorated by the size of the skills pool in the State and the greater output of apprentices coming through the State’s training system. Against this background, placing significant elements of the LHD project within the State, especially in Brisbane, constitutes a relatively low risk option from a skills availability perspective.

• In Western Australia, which is the economy most affected by the resources boom, obviously skills availability poses a greater risk. However, Western Australia has invested both in an accelerated skills development program and a temporary migration program aimed at topping up labour needs to ensure that targeted defence projects can be undertaken in the State in parallel to the resources boom. If potential temporary international migration combined with an increase in the supply of trained workers is considered (both plausible assumptions) then there is no reason why work on the LHDs could not occur in Western Australia.

• In South Australia, which has no record of building surface ships, the main priority for the relatively small labour market is to provide the skilled labour required for the AWD project. Although it has a positive labour potential for all occupational categories, including the critical tradespersons and labourers category, committing a significant part of the LHD project to this State is likely to constitute a larger risk than locating the work within other jurisdictions.

Conclusions If substantial local content can be incorporated in the LHD’s at a competitive cost (value for money), there would be substantial benefits to the economy and the Australian community from undertaking the work here. Compared to a business-as-usual scenario where the ships are fully imported, economic modelling suggests that GDP would be higher than it would otherwise have been by $110 million (NPV) over the construction phase of the project.



Given that the business-as-usual case assumes full employment, it is obvious that the modelling will show some crowding out of other projects if the local content option for the LHDs goes ahead. Since this crowding out in favour of the LHDs is associated with higher GDP than under business-as-usual, it is a ‘good thing’. The LHD project gives rise to higher productivity and higher value outcomes than would have occurred otherwise.

There is nothing to suggest that the LHD project is in any way ‘inferior’ to alternative investments that it may crowd out; indeed, the opposite appears to be true. Australian governments have had a consistent policy objective in recent decades of promoting more value adding in Australia. If it can be delivered in Australia at a competitive cost, this is a sophisticated manufacturing project that will bring additional skills and capability to a manufacturing sector that has not prospered in the current economic boom and is presently shedding labour.

Our detailed micro analysis of the labour market supports the findings of the modelling. An evaluation of the projected labour market situation in the mainland States suggests there will be sufficient labour available to deliver the LHDs according to the assumptions presently being made by the tenderers for the project. This leads to the conclusion that, if significant work on the LHDs were undertaken in Australia, there are not likely to be major skills availability issues or risks of project cost increases or delays above the normal risks inherent to any major project.

Finally, it needs to be understood that the ‘fully imported’ scenario carries risks that are substantial and, in our view, may well be higher than under the ‘high local content’ option. European shipyards, wholly or partly owned by government, do not necessarily match world’s best practice in technology, productivity and industrial relations. They also face tight labour markets, and have experienced labour cost increases of up to 20 per cent since the budget for the LHDs was determined in 2005.


Building the LHDs

1 Building the LHDs 1.1 The LHD acquisition The Landing Ships, Helicopter Dock (LHDs) will constitute major new force projection assets for the Royal Australian Navy (RAN) and will be the largest warships ever operated by the RAN. The Government has not yet decided whether or not the LHDs will be built in Australia or overseas. As stated in the Government’s media release in 2005:

Australian shipbuilders will be invited to tender for either or both of two designs:

• the Spanish Navantia ship at approximately 27,000 tonne;

• the French Armaris Mistral ship with additional troop carrying capability at approximately 22,000 tonne.

"Each ship will preferably have the ability to transport up to 1000 personnel, have six helicopter landing spots and provision for a mix of troop lift and armed reconnaissance helicopters. It will also be able to transport up to 150 vehicles including the new M1A1 Abrams tanks and armoured vehicles," Senator Hill said.

The Government’s preference is to see the ships built in Australia, however Australian industry will need to demonstrate it can deliver the project at a competitive price.

Minister for Defence, Media Release, 11 August 2005

Two contractors, Tenix (with Navantia) and Thales (with Armaris) have tendered to deliver the two ships with a range of options. Under the proposed local content alternatives, it is understood that the majority of the ship would be constructed overseas, with Australian companies completing the construction and consolidation of various modules at one or more sites within Australia. There is the potential, however, for local content in the LHDs to be as high as 45 per cent.

Understandably, Defence will base its decision on value for money, that is, it will select the option that maximises the benefits in terms of operational capability within the budget. On this basis, Defence could opt for an overseas build, with most of the systems also being installed overseas. This reflects an apparent concern on the part of Defence that:

• shortages of skills in Australia would inhibit undertaking the project in country; and

• in any case, the relative cost of in-country acquisition would be prohibitive.

This report focuses on the potential economic impact of local acquisition and on whether the skills are likely to be available in the Australian labour market to enable the project to be undertaken efficiently. In this Chapter, however, we examine these issues within the wider framework of defence industry policy and manufacturing industry policy more generally. 2

2 It should be noted that while the term ‘skills shortages’ is applied to generally discuss the lack of suitable

labour and general difficulties associated with recruiting appropriately skilled persons, Government has tended to adopt formal definitions for ‘skills shortages’ vs ‘skills gaps’. Skills shortages are defined as being present when employers are unable to fill or have considerable difficulty filling, vacancies for an occupation at the current levels of remuneration and conditions of employment, and reasonably


Building the LHDs

1.2 Naval shipbuilding industry policy Following a period in the 1960s and 1970s where the RAN acquired its major warships ‘off the shelf’ from the US (namely three Charles F. Adams class destroyers and four Oliver Hazard Perry class FFGs), a radical change in procurement policy occurred. Since the mid-1980s, new acquisitions for the fleet have been built or fitted out in Australia. The rationale for this was that, provided the work could be undertaken locally for only a modest cost premium, there were benefits to the Australian community in terms of building up defence industry capability in the interests of moving further towards self-reliance. There were also wider benefits in developing high end manufacturing competencies.

Over the last two decades the building program has included:

• the fleet replenishment ship, HMAS Success;

• two Oliver Hazard Perry class FFGs;

• ten ANZAC frigates (including two for New Zealand);

• six Collins class submarines;

• six Huon class minehunters;

• the refurbishment and fitting out of two ex-US Navy ships as HMAS Manoora and HMAS Kanimbla;

• fourteen Armidale class patrol boats; and

• the modification of MV Delos to the fleet replenishment ship, HMAS Sirius.

This major naval shipbuilding program is generally regarded as having been successful in terms of value for money. Any price premium involved in local construction does not appear to have been large, while Defence has frequently acknowledged that a local build provides benefits in terms of:

• the costs and timeliness of the through life support of these assets; and

• developing and sustaining the industrial capability required to deliver the defence objective of self-reliance.

In this context, the Defence Matériel Organisation (DMO) has proposed several reasons in favour of the policy of local procurement of warships, where feasible:

a. Local construction significantly enhances the ability to tailor overseas designs to meet any unique requirements of the ADF and to maximise commonality of systems and equipment across classes.

accessible location. Skills gaps are defined as being present where there are existing employees who do not have the required qualifications, experience and/or specialized skills to meet the firm’s skills needs for an occupation. This includes new employees, where employers are unable to find suitable applicants for an occupation, and in turn provide further training to reduce this gap. Without a targeted survey it is difficult to precisely define where skills ‘shortages’ versus ‘gaps’ exist. This report therefore does not distinguish between the two and assumes that most labour required for the LHD and AWD projects will require training, which would imply a skills gap for the defence industry in the order of 2,000 persons. It is also assumed there is the potential for a ‘skills shortage’ in some highly specialized positions where there may be terms of difficulties recruiting occupations with a particular experience profile, such as managers with sufficient industry experience and knowledge to efficiently run the project.


Building the LHDs

b. As argued in recent economic evaluation, the potential to deliver significant economic benefit to the nation as a whole.

c. Having built the platforms in Australia, the shipbuilder and sub-contractors have a first hand knowledge of the vessel’s design and assembly which facilitates cost-effective whole-of-life support and access to required intellectual property (IP).

d. Enhancement of the repair and maintenance skill-sets base, as a result of the transfer of people and skills from the build phase to the whole-of-life support phase.

e. Technology transfer resulting from local construction has substantially upgraded the nation’s technological base and provided significant advantage beyond shipbuilding and Defence related production.

f. It promotes the establishment of an in-country production design, re-design and upgrade capability, leading to the assumption of “parent navy” responsibilities.

g. It provides protection against the disruption of overseas supply. In-country construction leads to the establishment of local supply chains which are more responsive to Navy’s urgent requirements.

h. A capable and cost-effective construction capability provides a sound base for promoting the export of similar products, especially within the near region. It may thus strengthen Defence cooperation with Australia’s regional neighbours.

i. It assists our balance of payments and retains investment within Australia.

Defence Matériel Organisation (2002), The Australian Naval Shipbuilding and Repair Sector Strategic Plan, Canberra, page 46.

As a consequence of this approach, Australia now possesses a naval shipbuilding industry with advanced capabilities ranging from platform design, through metal fabrication (in steel and aluminium) to systems design and integration.

The industry’s capability is a valuable asset, both in terms of defence self-reliance and because of the benefits it brings to Australia’s manufacturing sector by virtue of its high end design, engineering and systems skills. The industry’s workload has also attracted significant investment in capability in Australia by important overseas companies in the defence electronics sector, such as Raytheon, thereby further enhancing capability.

The decision has already been taken to build the RAN’s advanced AWDs in Australia. This is despite the fact that only three ships will be acquired, while two yards in the US, for example, have each built more than twenty Arleigh Burke class destroyers and thus have the benefit of being able to exploit significant scale economies. In this case, where the price premium attached to a local build may be substantial, Defence clearly believes that the capability benefits of local acquisition exceed the additional costs.

It is difficult to argue that the skills are not available in Australia’s naval shipbuilding to undertake both the AWD build and the ‘high local content’ option for the LHDs. On the other hand, there is not a strong case for constructing the LHD hulls locally. Large scale steel fabrication for shipbuilding is no longer undertaken to any significant degree in Australia, and the local industry has not invested in such technologies as robotic welding which have increased productivity in the most efficient shipyards overseas. The local industry already has the ability to repair damage to steel ships and would derive few benefits in terms of additional capabilities in fabricating all the modules of the LHDs.


Building the LHDs

Nevertheless, there is plenty of scope to provide significant local content to the LHDs. Taken together with the parallel build of the AWDs, that would not constitute a greater workload than occurred in the 1990s when the ANZAC and Collins programs were running in parallel. Indeed, in some respects the industry’s capacity has increased since then, with the development of the Australian Marine Complex at Henderson, Western Australia, the growth of heavy engineering facilities and the defence industry generally in Queensland and the expansion of facilities at Osborne in South Australia.

In short, the Australian community has made a substantial investment in increasing capability in the naval shipbuilding and repair sector. This capability is not merely employed in metal fabrication — the ability to design, integrate and maintain complex naval platforms and systems is of critical importance. The fact that leading edge defence electronics companies, such as Raytheon, Honeywell, BAE Systems and Boeing, have located significant operations here has led to the transfer of very advanced technologies to Australia.

Having made this investment, it would appear sensible to sustain it in a cost-effective way. Sustaining this capability would be assisted by undertaking value adding work on the LHDs in Australia, provided this is cost-effective. Despite Defence’s concerns, the market will play an important part in determining whether the industry has the capacity to achieve this. The tenderers will bid a fixed price for the LHDs, and any escalation clauses are unlikely to allow for predictable labour cost increases. It is up to the contractors, therefore, to determine whether, within their bid, they can obtain the skilled labour resources they need at a competitive cost. Essentially the contractor bears the risk of failure. Defence can impose penalties in the contract for late delivery so that it will be in the contractor’s commercial interest to complete the job on time even if local labour is not available and skilled people have to be brought in from elsewhere.

That said, it might be suggested that Defence has a legitimate interest in ensuring that labour is available for both the AWD and LHD projects because, despite penalty clauses being inserted into contracts, delays to acquisition programs still commonly occur. The difficulty with this argument, however, is that there are no grounds to assume that overseas acquisitions have a better record of on-time delivery than local procurement. The case of the Seasprite helicopters illustrates this point. As regards the LHDs, European shipyards are now facing severe labour shortages with construction costs having risen by around 20 per cent in the last two years since the budget for the LHDs was determined. There would appear to be no reason for government to believe that the risk of cost blow-outs or delays in delivery would be any less with a fully imported ship.

1.3 Manufacturing industry context The second important consideration relates to manufacturing industry policy more generally. Governments of all persuasions constantly assert the need for Australia to have a healthy manufacturing sector providing high value jobs and the skills required more generally in a wealthy nation’s economy. Yet Australia’s manufacturing sector has not shared equally in Australia’s current sustained period of economic growth. Increased competition from firms in lower cost economies, such as China and India, has reduced profitability and constrained growth. These effects have also been exacerbated by the resources boom which has led to the exchange rate for the Australian dollar and real wages being higher than they otherwise would have been.

Since the 1960s, manufacturing’s share of Australia’s economy has been in constant decline. On its own, this is not a major cause for concern: a slow relative decline in manufacturing’s share is a feature of most developed economies. In Australia in recent years, however, this relative decline has been accompanied by an absolute decline in some manufacturing indicators (Figure 1.1).


Building the LHDs

FIGURE 1.1: EMPLOYMENT TRENDS IN MANUFACTURING

Source: ABS Cat 6291.0.55.003

The data in Figure 1.1 suggest that manufacturing employment has been in slow decline over the last decade, a period when employment in the economy as a whole has grown very strongly. In the seven years to February 2007, for example, employment in the economy as a whole, but excluding manufacturing, increased by over 19 per cent. Yet over the same seven year period, manufacturing employment fell by nearly six per cent. In Chapter 3 of this report, we report work by the Australian Industry Group suggesting this decline will continue.

The defence industry plays an important role in Australia’s manufacturing sector. In 2004-05, the Australian defence industry provided approximately 19,000 jobs, of which 16,400 were located in prime contractors and their immediate sub-contractors. There are about 250-300 companies involved in the defence industry. Most of these, of course, are SMEs. The large prime contractors account for at least 60 per cent of industry turnover. 3 The ten large primes are shown in Table 1.1 below. Most of these companies are major players in the global defence industry that bring very important skills to the Australian manufacturing sector. They also play a vital role in the development of innovative SMEs.

It should also be noted that, despite the concerns of Defence, State governments generally see value in building up the defence industry within their jurisdictions. This is because the industry is generally innovative and provides high value, highly skilled jobs. Western Australia and Queensland, for example, see merit in diversifying their economies away from a near total reliance on resources and tourism and have invested in facilities to underpin the development of a strong defence industry. In its latest Strategic Plan, South Australia aims to increase employment in the defence industry by 75 per cent by 2013.4 Some State governments ensure that courses tailored to the defence industry are included in their TAFE curricula. 3 Defence Industry Policy Review, 2006 Discussion Paper, Department of Defence, Canberra, 2006, page

42. 4 Government of South Australia, South Australia’s Strategic Plan 2007, page 46.


Building the LHDs

TABLE 1.1: LEADING AUSTRALIAN DEFENCE ‘PRIMES’, TURNOVER AND EMPLOYMENT, 2005

Company Turnover ($m) Employment

ADI Limited (now Thales) 656 2,513

Tenix Defence Pty Ltd 650 2,800

BAE Systems Australia 525 2,600

Boeing Australia 375 3,400

Raytheon 390 1,090

Australian Aerospace Ltd 390 342

ASC 229 1,020

Saab Systems 177 300

Qantas Defence Services 88 400

Thales Underwater Systems 80 222

Source: Defence Industry Policy Review, 2006 Discussion Paper, Canberra, 2006, page 42.

In the context of the importance of the defence industry to manufacturing and the decline of manufacturing industry generally, it seems rather odd that Defence should be concerned about placing work, on a competitive basis, with Australian industry because of a perception of possible skills shortages down the track. Defence industry projects are no less important than other investment projects and they bring high value jobs to the manufacturing sector generally. The government should not concern itself with seeking to influence the industries in which jobs are created. They should instead put defence work packages out for tender and wait and see whether local industry can put in a competitive bid. The bids, of course, will take full account of the availability and cost of the labour required for the task.


Economic impacts

2 Economic impacts 2.1 Costs and benefits of local acquisition Defence is currently faced with a choice between acquiring the LHDs wholly from overseas (that is, from shipyards in France or Spain) or whether they should be wholly or partly built in Australia. What economic considerations underlie this choice?

One of the benefits of a local acquisition that may seem obvious is that it creates jobs in Australia rather than overseas. Since Australian taxpayers are paying for the ships, is it not therefore obvious that the significant funds involved should, as far as possible, go to the Australian shipbuilding industry so as to create local rather than foreign jobs?

In fact the answer to this question is not as simple as it seems. Australia has only relatively emerged from a period when its industry development was built on a policy of protection, whereby local businesses were provided with tariff protection against cheaper imports with the objective of creating jobs in Australia. This policy not only led to additional costs for export industries but it implied that scarce productive resources of labour and capital were not employed in their most efficient use, thereby retarding economic growth. It is notable that Australia’s economic performance has improved very substantially since the end of the high protection policy.

A government purchasing policy that favours local acquisition even if the cost is higher is analogous to an import tariff. Other things being equal, if the cost of domestic acquisition is higher than purchasing the LHDs off the shelf overseas, then it is likely that there will be no net benefits to the Australian community from a local build. In a period of virtually full employment, such as we currently are experiencing, the more expensive local shipbuilding program will merely ‘crowd out’ other investment projects that would use the resources of skilled labour more efficiently and economic growth will be lower than it otherwise would have been.

Relaxing the ‘other things being equal’ assumption, however, and it may be possible to justify a more expensive local acquisition in terms of associated defence industry benefits. Building warships in Australia creates a capability that can:

• enable through life support of the assets to be undertaken more efficiently in Australia, reducing costs and maximising the ships’ availability for service; and

• assist in meeting the government’s defence objective of self-reliance.

If these benefits outweigh any additional cost of local acquisition, then Australian procurement may be justified.

In its evidence to the recent Parliamentary inquiry into naval shipbuilding, Defence suggested that in the case of the LHDs these potential benefits would not be substantial. The industry already has the capability to maintain and repair steel hulls and most of the systems carried by the ships are likely to be less complex than those featured in other Australian warships such as the ANZAC and Collins classes and the new AWDs. On the other hand, however, there are some benefits and cost savings to be derived from maintaining ships that are equipped with Australian standard fittings that can be more readily replaced or repaired locally.


Economic impacts

In the case of the LHDs, however, the defence benefits of local construction are unlikely to be substantial and, if so, would not justify paying a significant premium for local construction.

In this Chapter, where we assess the benefits of local construction, we therefore make two important assumptions, namely that:

• the hull will be largely built overseas but there will be significant local content; and

• there will be no price premium involved in the local construction that does occur.

2.2 Economic modelling The economic modelling analysis is designed to show the impact on the Australian economy of acquiring the two LHDs with a significant local content. In analysing this scenario, we compare it to a base case where the ships are fully imported and the Australian economy grows in the future according to a business-as-usual assumption.

2.2.1 The MONASH model A simple analysis of the LHD local content project would show a level of investment by the contractors and then, as the project got under way, increases in direct job creation and economic activity. However, the project will also have an impact on a wide range of businesses that supply goods and services to the contractors. Many of these impacts are likely to be positive. But there may also be some negative impacts, in that the fact that this project has gone ahead will mean that some other project[s] elsewhere in the economy that might otherwise have occurred now will not and that some industries may face additional costs. It is this possible ‘crowding out’ that has been a concern for the DMO.

These wider economic impacts cannot be estimated with any accuracy without the use of a complex computable general equilibrium (CGE) model. CGE modelling enables the impact of an investment project to be traced through the economy via the various linkages between the project proponent and the companies that supply inputs to it. CGE modelling is superior to input-output modelling because it takes account of the economy’s constraints in resourcing new projects and allows for ‘crowding out’. Conventionally, the effect of these ‘shocks’ on the economy are modelled over a period of around twenty-five years or over the expected life of the project. The MONASH suite of CGE models developed and operated by the Centre of Policy Studies (CoPS) at Monash University are recognised by industry and government as highly credible tools for economic impact assessment. They are dynamic models that have the capacity to provide results for over 100 industries represented in the data base. They are highly transparent models, in that they have given rise to a large number of publications in academic journals, and have been subject to rigorous peer review. In this instance, the MMRF-Green model, a disaggregated version of the MONASH model, has been employed.

It should also be noted that most major investment projects have a construction phase and an operational phase. In a major resource project such as the Olympic Dam expansion or the proposed Pluto LNG investment, for example, most of the economic benefits accrue during the operational phase of the project. The LHD project is different from this and so cannot be expected to show the same level of economic benefits. In this analysis we model only the construction phase of the project. In the operational phase of the project the LHDs will provide defence services, which we do not attempt to quantify. This is not important, however, because we are only comparing a local build with an imported ship, meaning that only the construction phase provides a point of comparison. Both a locally built ship and a


Economic impacts

similar imported one would presumably provide similar defence services in the operational phase.

2.2.2 Data and assumptions The modelling has not been based on data specifically derived from either the specific Navantia/Tenix or the Armaris/Thales versions of the LHD. Rather it has been based on a conceptual LHD ship. The difficulty was that both Tenix and Thales are bound by the rules of the DMO tender and are not allowed to reveal, even on a commercial in confidence basis, the details of their bids. The consultants have therefore put together an estimate, based on a very good understanding of the naval shipbuilding industry, of the relevant data required to model the shipbuilding task. Discussions with the industry have confirmed that the data are not unreasonable. Our example represents just one possible scenario, however, and we understand that the bidders are offering a number of options incorporating different levels of local content.

The main elements of the input data that were modelled are as follows:

• total project cost (under both the fully imported and the high local content scenarios) is $1.9billion;

• local content of $800 million, or over 40 per cent;

• capital expenditure of $25 million in 2008-11, of which around $15 million is not dedicated to the LHDs would be applicable to other projects down the track;

• local expenditure divided between design (10 per cent), metal fabrication (50 per cent) and systems (40 per cent); and

• expenditure on labour would represent 100 per cent of the total in design, 60 per cent in metal fabrication and 70 per cent in systems.

The profile of shipbuilding activity assumed a mesa structure with a rapid build up in 2009, maximum annual work occurring in 2010, 2011 and 2012 and a steep wind down of activity in 2013. It was assumed that the design work would all occur in 2008-9.

Finally and importantly, the locations for building the ships were not specified. The local content is modelled as an ‘Australian’ project.

2.2.3 Modelling results As discussed above, unlike most major investment projects, we are modelling only the construction phase of the LHD acquisition. Again unlike most projects, we are not comparing the impact of the project with a simple business as usual base case but rather with a scenario which incorporates business-as-usual assumptions for the economy as a whole and where similar ships are imported fully from Europe.

The headline modelling results are shown in Table 2.1 below.


Economic impacts

TABLE 2.1: ECONOMIC IMPACT OF THE LHD LOCAL CONTENT PROJECT, 2008-13

Year GDP

($million)

Consumption

($million)a

Investment

($million)

Federal Tax

($million)

Employment

(Full Time Equivalents)

2008 2.5 2.5 17.0 0.7 12

2009 28.2 21.3 23.2 7.5 93

2010 35.9 29.3 22.4 9.7 89

2011 30.3 27.7 17.6 8.4 38

2012 26.1 25.8 14.2 7.3 4

2013 7.3 12.6 17.9 2.4 0

Total 130.3 119.2 112.3 36.0 Average = 39

NPV in 2008b

109.8 99.4 95.6 30.3 na

Notes: a: consumption includes private and government consumption; b: NPVs were calculated using a real discount rate of 5 per cent.

Source: Centre of Policy Studies, Monash University.

As well as ‘macro’ level results, such as those shown in Table 2.1, the model also shows the impacts on individual industries. In the main, these impacts are very small. The five main industries to be positively affected by the LHD local content project would be:

• Other Machinery and Equipment ($52m increase in output in 2012);

• Metal Products ($46m increase in output in 2012);

• Construction Services ($17m increase in output in 2012);

• Non-Ferrous Metals ($14m increase in output in 2012);

• Business Services ($5m increase in output in 2012).

This shows that most of the increased activity would be concentrated in the manufacturing sector. The model shows insignificant negative impacts on other industries.

2.3 Implications of the modelling There are two major implications from the economic modelling work, namely the impact of the project on the Australian economy and community, and also the impact on the labour market.


Economic impacts

2.3.1 Impact on the Australian economy First, the economic modelling paints a very favourable picture on the impact of undertaking a significant share of the LHD construction in Australia. Compared to fully importing the two ships, an acquisition with a local content of $800 million would:

• contribute an additional $130 million to GDP (NPV of $110 million), over the six year construction period 2008-2013;

• boost consumption by the Australian community (a measure of the impact on economic welfare) by $119 million (NPV of $99 million) in the period 2008-2013;

• increase aggregate investment by $112 million (NPV of $96 million),

• increase federal tax revenue by $36 million (NPV of $30 million in 2008-13); and

• provide a boost to the manufacturing sector, particularly in the metals and machinery and equipment industries.

Therefore, the first conclusion is that, provided there is no cost premium incurred by local procurement, there would be significant economic benefits in undertaking a substantial part of the project in Australia, as compared with the alternative of a full overseas acquisition.

It should also be noted that this conclusion is reached without taking account of any capability benefits accruing from local procurement. These could be expected to reduce the costs of through life support of the ships in Australia during the operational phase of the LHD project. The degree to which local capability was enhanced would depend on the local content option that was selected and the precise nature of the work and the industries involved. Since we had no robust information on these benefits we did not attempt to model them, but they are likely to be positive and therefore would strengthen the conclusions on the net economic benefits of the local content procurement option.

2.3.2 Impact on the labour market The second conclusion is that the modelling gives us a ‘macro’ view (as opposed to the ‘micro’ analysis contained in the following chapters) of the likely impact of the project on the labour market and that this does not reveal any negative effects.

In order to understand the ‘macro’ labour market analysis it is first necessary to explain how the model works in this respect. The high LHD local content scenario has been compared in the modelling with what would occur in the future in a business-as-usual case (with the ships being fully imported). The business-as-usual case is based on a projection of trends in the economy into the future, informed by whatever information is available on future major projects and other possible developments. It is assumed that growth continues in the economy at a similar average rate as in the recent past and that the labour market clears in a situation of full employment.5

Under the local content scenario, net employment in the Australian economy is marginally higher than in the business-as-usual case. The peak of this higher employment effect is in 2009 and 2010 when about 90 more persons are employed nationwide than would otherwise have been the case. Overall, this very low number represents nothing more than ‘noise’ in

5. Technically the model assumes the labour market clears at NAIRU, or the non-accelerating inflation rate

of unemployment.


Economic impacts

the system; in a labour market the size of Australia’s it is not significantly different from zero.

Given that the direct and indirect labour requirements of the LHD project are clearly higher than this, the implications here are that some other activities, projected to occur in the business-as-usual case, will be crowded out by the LHD project. But this is very unlikely to be a ‘bad thing’. The modelling shows that the LHD project gives rise to a higher level of GDP than in the business-as-usual case. According to the modelling, for example, an additional $36 million of GDP is generated by the LHD project in 2010 when total employment is only higher by 89 persons than it otherwise would have been.

The conclusion is that this is a high value, high productivity project that will have some crowding out impact on lower value activities. Overall, this represents a beneficial impact on the Australian labour market albeit a very small one. Both labour productivity and average real wages will be (almost imperceptibly) higher than they would otherwise have been.


Labour force issues

3 Labour force issues 3.1 The AWD and LHD resource requirements LHD warships are not as complex to build as some other warships. For example, they incorporate less advanced technology than the AWDs, which require the installation of the highly complex Aegis combat system, and they are largely built to merchant ship tolerances rather than the more demanding requirements of most fighting ships.6 Nevertheless, the construction and consolidation of some ship modules in Australia would involve the undertaking of a number of activities that could enhance domestic industrial capability. These activities could include:

• complex project management;

• design of certain assemblies and systems;

• supply chain and quality management for systems and materials;

• metal fabrication;

• systems integration;

• installation of internal and external ship systems and equipment, including the provision of plumbing and electrical systems;

• module transport;

• painting and application of materials to prevent hull erosion; and

• sea trials.

If selected to participate in the build of the LHD ships, Australian companies would need to scale up their core operations through either the hiring or contracting of persons with the necessary skills to bring the project in on time and on budget. The LHD workforce would draw upon skills in

• design engineering;

• metal trades (including welding capabilities);

• electrical trades, electronics and systems specialists; and

• plumbers and painters.

Currently, the Department of Defence is committed to a number of naval projects in Australia. As well as upgrades to the Collins submarines, the FFGs and the ANZAC frigates, these include the construction of three large air warfare destroyers in Adelaide, possibly to an original design. Defence is clearly concerned that, in a booming economy, the resources may not be available to allow any significant local content in the acquisition of the two LHDs. If it were to undertake all possible projects, the Department of Defence has estimated

6 See Senate Foreign Affairs, Defence and Trade Reference Committee (2006), Public Hearing with the

Department of Defence, Responses to Questions taken on Notice and during the Hearing, 18 March: ‘For a low to moderate technology basic platform like the Amphibious LHD (as differentiated from a high technology AWD/Aegis or a Collins class submarine)’; Department of Industry Tourism and Resources (2006), Submission to the Senate Inquire into Naval Shipbuilding: ‘DITR suggests that a rough first order calculation of the relative complexity of different ships couple simply be the cost per tonne. … In this admittedly simplistic approach the AWDs are 7-9 times as complex as the Amphibious Ships’.


Labour force issues

that its workforce requirement would increase from around 1,200 workers currently to a peak of around 3,250 workers in 2011.

If local construction of some proportion of the LHDs were undertaken, it is expected that this work would occur in the period from 2009-2014, allowing approximately two to three years for companies to scale up operations through the employment of subcontractors or training of existing/new permanent workers. Distributing the project workload across Australia is expected to allow for the optimisation of industrial capacity, including the usage of specialist industrial capabilities for particular aspects of the ship that are later consolidated:7

• The AWD project is assumed to require around 1,440 workers, or 44 per cent of the increase in workforce requirements in 2011. Although ASC is located in South Australia, some elements of the contract will be put out for tender and will take place in other locations: it is expected that only around 30 per cent of the module construction work will occur in South Australia.’8

• The LHD project is estimated to account for approximately an additional 1,000 workers (around half of the remaining peak workforce requirements in 2011). It is likely that the work will be spread across multiple State locations.

Although these are the ‘peak’ workforce requirements this report adopts these figures as the required target for employment. We then consider the task required to contract this number of persons in the lead up to the construction phase of the LHD and AWD projects.

Thus the AWD and LHD projects together would be expected to increase employment in the shipbuilding industry by around 2,050 workers, with the AWD project accounting for 1,300 additional persons and the LHD project around 750 additional persons. Of this, 1,600 were assumed to be tradespersons and labourers and 450 were assumed to be managers, associate professionals and engineers.9 No breakdown was provided of the engineering requirements relative to the managerial requirements.

3.2 Employment in the Australian shipbuilding industry Australia’s shipbuilding industry is comprised of three broad product sectors: defence-related activity, commercial shipbuilding and commercial repair and maintenance. As shown in Figure 3.1, in 2004-05, industry turnover was approximately $2.1 billion.10 Together Tenix, Austal, ASC and ADI accounted for more than 65 per cent of total industry turnover in that same year.

7 Department of Defence (2006), Defence Submission to the Senate Inquiry into Naval Shipbuilding, p 8:

‘Such a decentralised production method can also be useful in combination with a procurement approach that seeks to minimise risk and control costs through the award of multiple tenders for a particular project.’

8 See Slater, M. (2006), Air Warfare Destroyer Industry Capability Survey for the Manufacture of Ship Modules

9 ACIL Tasman (2005), op cit., p 44. 10 IBISWorld, 2007, Shipbuilding in Australia, p 4.


Labour force issues

FIGURE 3.1 – INDUSTRY TURNOVER FOR FISCAL YEARS 2001 TO 2005

$0

$500

$1,000

$1,500

$2,000

$2,500

2001 2002 2003 2004 2005

Rev

enue

($20

05, m

illio

ns)

Source: IBISWorld, 2007, Shipbuilding in Australia, p 4.

Compared to major shipbuilding nations, such as China, Korea and Japan, Australia’s ship building industry is small and sensitive to spending on domestic defence programs.

• IBISWorld Report estimates that defence-related shipbuilding accounts for approximately 65 per cent of industry turnover. Examples of defence-related shipbuilding include not only construction of vessels for Australia’s own fleets but also ships for export, such as the construction of ANZAC frigates and Project Protector for the New Zealand Navy.

• The commercial shipbuilding sector relates mainly to aluminium fast ferries and is concentrated in Western Australia and Tasmania. This sector accounts for approximately 25 per cent of total industry revenue and is reported to be the fastest growing segment of the industry, with Australian companies leveraging a global competitive advantage in the production and export of fast aluminium ships.

• Commercial repair and maintenance accounts for the remaining 10 per cent of industry turnover.11 The companies concerned are generally small to medium sized enterprises located nationally, with a large proportion in the Eastern States.

There has been a general decline in the number of persons employed since the 1970s due to a substantial restructuring of the industry. Moreover, in contrast to the shipbuilding industry of the 1970s, today the naval shipbuilding business model is generally comprised of a core number of prime companies that work closely with a range of sub-contractors. Subcontractors provide non-core management, metal fabrication, systems integration and other skills involved in the construction of ships. Prime contractors bring core skills in the management of complex supply chains, in which modules and sub-assemblies can be sourced from a number of locations.

It is estimated that approximately 7,580 persons were employed by the industry in 2004-05. The major employers were:

• Austal ships (Western Australia);

• ASC (South Australia and Western Australia);

• Forgacs (NSW and Queensland);

• Tenix Marine (Victoria and Western Australia); and

• Thales (NSW and Western Australia).12 11 Ibid.


Labour force issues

This provides an indication of the States in which major shipbuilding has been completed to date. While Austal ships is heavily focused on aluminium shipbuilding it is also moving into the warship sector with the design and construction of the Armidale class naval patrol boats in Australia and the prototype Littoral Combat Ship in the USA. Tenix, ASC and Thales remain mainly focused on warship building and repair.

In addition to this, however, it should be recognised that the definitions of ‘defence industry’ or ‘naval ship building industry’ have lost some of their meaning these days. This is because the nature of the industry has changed since the time when a warship was built from the keel up in one location. Nowadays, with the advent of modular construction, there are a number of locations around the country with the heavy engineering capability to build modules. In many cases, these businesses would not necessarily consider themselves primarily to be part of the defence or naval shipbuilding industries. They may, however, enter and leave the industry from time to time on an opportunistic basis. This is in line with the DMO view, as expressed in its defence industry sector strategic plans, that in view of the lumpy nature of the defence workload it is preferable for businesses not to rely on defence work.

In addition, modern warships are built around their electronic systems. Defence systems businesses can provide the required service to their clients from any location in Australia. For example, the Australian company, CEA Technologies, which has developed a world class active phased array radar (APAR) for naval applications, is located in Canberra, far from both the nation’s shipyards and the sea itself. In addition, electronics companies generally can play in the naval systems industry without having to be dedicated to the defence business.

BOX 3.1 — EXISTING NAVAL SHIPBUILDING CAPABILITY: IMPLICATIONS FOR ATTRACTING SKILLED PEOPLE

Naval shipbuilding capability tends to be focused in four States: Victoria, New South Wales and, more recently, Western Australia and South Australia. There is also some naval shipbuilding capability in Queensland. The leading companies are ASC, Tenix and Thales, with Austal also undertaking aluminium warship building in WA..

The size and nature of the naval shipbuilders located in particular States is in our view relevant to the issue being considered in this study, namely, the ability of the Australian naval shipbuilding industry to access the skilled people it needs to carry out successfully the LHD and other related projects for the Department of Defence.

Our discussions with both Tenix and Thales have underlined the fact that both companies, in order to operate efficiently and effectively in the current economic environment must ensure that their workforces closely match the work to be carried out. The days of being able to carry the cost of workforces excessive to short term needs against the contingency of winning major contracts in the future have passed. Accordingly, they maintain “core” workforces and have the capability to rapidly “top-up” their workforces to meet the needs of major new projects.

One of the ways they can do this is to maintain data bases of previous employees who worked with the company during times in the past when peak production levels had to be met. For example, in the case of Tenix this means the employees they had on their books when the ANZAC ships project was at its peak. When a new peak load is identified, the companies are then able to quickly approach their previous workforce members to see if they wish to be rejoin them. Through good human relations systems and a good reputation as employers, the larger companies hold an advantage over new entrants and smaller companies in being able to quickly build up their workforces.

Other things being equal, from a risk minimization point of view the presence of larger naval shipbuilding contractors gives greater confidence that the top-up of workforces they need to build-up for new major projects can be brought about more readily than would be the case with either smaller contractors or contractors with little or no previous experience in naval shipbuilding.

12 Ibid.


Labour force issues

Box 3.1 provides an indication of the ability of different contractors, and therefore, different State regions, to scale up labour forces and production for new projects.

It is notable that workers with relevant skills for shipbuilding are also generally characterised as being older compared to workers in other industries. This is broadly supported by an age analysis of skills in the Australian metals trades, undertaken by Monash University in 2005. The average age of workers in metal fitting and machining has been increasing, and older workers are generally assumed to be less willing to re-locate than younger workers (Figure 3.2).

FIGURE 3.2 – AGE PROFILE FOR AUSTRALIAN METAL FITTERS AND MACHINISTS

Source: Based on unpublished ABS Labour Force data for 1999 and 2004, (ABS Cat. no. 6203.0), produced in Shah, C., R. Clooney, M. Long and G. Burke (2005), Availability of skilled labour in selected occupations in Western Australia, Monash University, 2005.

It has been shown that, on average, approximately 32 per cent of males above the age 45 are retired.13 No data are available on the retirement rate of persons from the shipbuilding industry. If it was assumed that the retirement rate for all occupations relevant to the shipbuilding industry roughly approximated that of the metal fitting and machining occupation, then the following conditions would hold:

• of the number of persons currently aged 45-50 (~11 per cent), in 5 years approximately 10 per cent would be retired;




• of the number of persons currently aged 65 (~1 per cent) in 5 years approximately 100 per cent would be retired.

If the above assumptions held, then this would imply that the ageing of the population could reduce the number of skilled tradespersons and labourers available to work on the LHD and AWD projects and increase competition for new skilled labour. 13 ABS (2006), Cat. No. 3201.0, Population by Age and Sex, Australian States and Territories


Labour force issues

3.3 Total pool of skilled labour In addition to the shipbuilding industry’s own resources, it is generally agreed there is a significant pool of workers in other industries that either have the required skills or the ability to be rapidly trained for the LHD project.

ACIL Tasman’s 2005 analysis of the potential for a skills shortage identified the range of industries that compete with the shipbuilding industry for skilled workers, including Structural Steel & Welding Trades, Metal Fitters and Machinists, Electricians and Plumbers.14 The ACIL Tasman analysis showed that metal trades are employed in a range of industries other than the shipbuilding sector including the iron and steel industries, the building sector and the automotive industry. Electrical trades are used in the electricity support industry as well as retail installation businesses and the building sector. Therefore it is appropriate to consider the range of core skills available in all industries in Australia as opposed to solely focusing on the shipbuilding labour force.

Although it was argued that the resources sector does not compete with the shipbuilding industry for labour, during the construction phases of major projects in the resources sector there will be some competition. For example, the AMC at Henderson in Western Australia regularly undertakes construction work on offshore platforms for oil and gas projects. This is by no means a bad thing: it enables the AMC to retain capacity during the downturns in the naval shipbuilding cycle.

Nationally, there is estimated to be a labour pool of approximately:

• 93,000 metal fitters and machinists, 10,000 precision metal tradespersons, 1,500 general fabrication tradespersons, 72,000 welders, 14,000 general metal working tradespersons, and 12,000 structural steel construction workers — implying a potential labour pool of at least 202,000 persons with core metal working skills;

• 110,000 electricians and electrical tradespersons;

• 55,000 plumbers; and

• 45,000 managers in building and construction and 10,000 in engineering.15

Previous analyses have underscored how small the LHD and AWD workforce requirements are relative to these national labour pools. Indeed, the LHD and AWD workstreams would require approximately:

• 550 electrical trades and electronics workers (0.5 per cent of the total pool of labour with electrical skills);

• 875 metal workers (0.4 per cent of the total pool of labour with metal skills);

• 300 plumbers (0.5 per cent of the total pool of plumbers); and

• 450 design/engineers/professionals (0.8 per cent of the above, estimated building, construction and engineering labour force).

14 ACIL Tasman (2005), op cit. 15 MONASH Employment forecasting (2006-07)


Labour force issues

3.4 Supply of new apprentices, trainees and graduates 3.4.1 Apprentices and trainees In addition to the existing workforce of skilled persons currently being employed by both the shipbuilding and other industries, new apprentices are trained every year. In each State market, a key determinant of whether the labour market is in a potential labour surplus or deficit is the supply of new workers. New entrants not only increase the supply of skilled workers for that State, but also the likelihood for migration of young new workers to other States with smaller population bases, including Western Australia and South Australia. Public provision for increased training programs is usually justified in terms of efficiency and equity arguments: since economic performance is negatively affected by skills gaps, more training can often result in a more adaptable workforce.

Data published by the National Centre for Vocational Education Research (NCVER) show that even if there were no growth in the number of completions, over the three years from 2006 a further:16

• 115,800 apprentices and trainees would enter the workforce in NSW;

• 136,200 apprentices and trainees would enter the workforce in Victoria;

• 85,500 apprentices and trainees would enter the workforce in Queensland;

• 33,000 apprentices and trainees would enter the workforce in Western Australia; and;

• 31,200 apprentices and trainees would enter the workforce in South Australia.

Of these new graduates, on average 75 per cent are expected to be ‘new’ entrants into the workforce, with a wide range of qualifications from managerial and associate professional qualifications to tradespersons and labourers. 17 In the State labour market analysis that is shown in detail in Appendix A, the number of assumed new entrants into the labour market with different types of qualifications is scaled by the assumed percentage of tradespersons that would be expected to have skills relevant to the shipbuilding industry. Control for persons without skills relevant to the shipbuilding industry is completed by examining the percentage of tradespersons working in occupations (according to ASCO qualifications) that are relevant to the shipbuilding industry. In this way, we do not include food or agricultural tradespersons, for example, within the pool of potential skilled labour for the LHD and AWD projects. Control for persons without skills relevant to the shipbuilding industry is also completed for persons with managerial qualifications. In this way we do not consider persons, for example, that may have been trained to be human resources managers. This analysis has been necessary because NCVER data do not provide an indication of the precise occupations that new graduates will seek (or for which they have been trained).

The State labour market analysis also assumes no growth in the number of completions from 2006. This is generally very conservative: the number of completions in Australia over the past five years has increased on average by 13 per cent in NSW, 15 per cent in Victoria, 7 per cent in Queensland and 9 per cent in Western Australia. South Australia is the only State that has not observed any growth in the number of apprenticeships over the past five years. 16 NCVER (2006), Australian vocational education and training statistics: Apprentices and trainees, June

quarter 2006. 17 An ‘existing’ worker is defined as a person who has been employed by the employer, who is party to the

training contract, continuously for more than three months full-time or twelve months casual or part-time or a combination of both, immediately prior to commencement of the training contract.


Labour force issues

South Australia has also faced a net population emigration to other States and territories over the past decade.18

Moreover, a substantial focus has been placed on the need for new apprentices and trainees in reaction to skills shortages that have emerged from 2002. For example, the National Skills Shortages Strategy, administered by the Department of Education Science and Training at a cost of $130 million, is expected to deliver an extra 31,000 places over the next four years. Similarly some States, such as Western Australia, are investing significant funding into targeted training programs to ensure that it can sustain the necessary skills base for its economic growth.19

Efforts to increase the supply of skilled labour through vocational training programs would appear to have had some effect: if the number of trainees and apprenticeships that were assumed to have commenced in 2006 were to be completed over the next three years, this would imply:

• 224,000 apprentices and trainees would enter the workforce each year in NSW (94 per cent increase over number of completions in 2006);

• 241,000 apprentices and trainees would enter the workforce each year in Victoria (77 per cent increase over number of completions in 2006);

• 164,700 apprentices and trainees would enter the workforce each year in Queensland (92 per cent increase over number of completions in 2006);

• 64,000 apprentices and trainees would enter the workforce each year in Western Australia (93 per cent increase over number of completions in 2006); and

• 62,000 apprentices and trainees would enter the workforce each year in South Australia (100 per cent increase over number of completions in 2006).

Clearly, not all of these apprentices and trainees will complete their courses, but there is a potentially large pool of workers that could begin to enter the market from 2008.

In terms of funding related to the defence industry and impacting on the supply of skilled labour for the LHD and AWD projects, the Skilling Australia’s Defence Industry (SADI) initiative will provide funding for the training and up-skilling of new and existing defence industry employees from 2005-06 of 0.5 per cent of the total money spent on capital equipment projects.

Therefore, the assumption of no growth in the number of completions, as is done in the State labour market analysis, is highly conservative.

3.4.2 University graduates Managers and engineers will account for approximately 20 per cent the labour requirements for the LHD and AWD project (~450 persons). Some of these persons would reasonably be recruited from the university sector. In 2005 in Australia approximately 297,000 students graduated from NSW universities, 243,000 from Victorian universities, 186,000 from

18 See South Australia’s Strategic Plan (2004), now updated (2007). 19 A scheme to produce 400 trainees and apprentices has been launched with the aim of cementing WA's

position as the nation's premier naval shipbuilder and luring more work west. The Defence Industry Skills Unit has been formed to provide most of the 627 workers needed over the next three years, with227 professionals to be sourced from universities. The naval industry employs about 3000 people directly and 20,000 indirectly, and generates about $1.1 billion for the WA economy. (The West Australian, 4 April 2007, page 48 )


Labour force issues

Queensland universities, 97,000 from Western Australian universities and 66,000 from South Australian universities.20 On average nationally:

• 75 per cent were Australian citizens and could be expected to enter the local labour market;

• six per cent graduated with engineering degrees; and

• 27 per cent graduated with management degrees.

Not all of the engineering and management graduates would have been expected to have skills that would be demanded by the shipbuilding industry. The State labour market analysis includes the evaluation of different engineering and managerial occupations (by ASCO code), with the percentages of the number of persons working in an industry assumed to dictate the stratification of engineering and management graduates by discipline. In this way engineers such as civil engineers were not included as potential supply of new labour but electrical engineers were; similarly, managers with human resource training were not included while graduates with ‘production manager’ skills were.

3.5 Labour demand and competition It appears that the Department of Defence is concerned that attempting to build both the AWDs and LHD ships in parallel would create unnecessary cost and time risks for both projects (and the ADF’s investment plan more generally), particularly in light of a major ‘boom’ of new investment in the resources sector that might compete for labour that could have otherwise been employed by the Defence sector.

FIGURE 3.3 – WAGE PRICE INDEX (WPI) ANNUAL CHANGE, DECEMBER 2006

Source: ABS Cat No 6345.

The resources sector has been booming as a result of faster-than-expected growth in demand for primary materials from Australia, largely to fuel the growth of the Chinese economy. This has driven concerns for skills shortages in these sectors. Competition for skilled labour has intensified as the resource sector strives to expand its capital stock and production rates

20 See DEST (2007), Number of Student completions by higher education provider, available at

http://www.dest.gov.au/NR/rdonlyres/1C28C3C9-3E0A-4F7F-A483-77058420804C/14684/iSummaryof2005FullYearStudentNumbers1.xls


Labour force issues

to match global growth.21 ABS data show that nationally wages in the mining, electricity and construction sectors (excluding bonuses) have grown slightly faster than the average wage rate (Figure 3.3). As many new major projects become committed, this will continue to drive sustained demand for labour in the resources sector and in industries supplying to the resources sector over the medium term.

The ABS does not publish data ‘by occupation and by industry sector’, mainly due to the increasing uncertainty in the results. This makes it difficult to analyse whether all occupations are experiencing similar growth in wages within industries or whether particular occupations are driving actual and perceived wage growth. Anecdotal evidence would suggest there may be substantial tightness in particular skill categories, such as welding, but there may be less pressure in other skill categories in some of these fast growing industries.

ABS data published on national wages (excluding bonuses) by occupation show that occupations exhibiting the greatest wage growth (excluding bonuses) in the year to December 2006 were ‘managers’, ‘associate professionals’ and ‘clerical/service workers’, which experienced wage growth (excluding bonuses) of 3.6, 3.8 and 3.6 per cent respectively. ‘Tradespersons and related workers’ in the private sector (excluding bonuses) were shown to have the lowest increase in wages (excluding bonuses) in the year to December 2006. Wages for tradespersons grew by 3.1 per cent on average nationally in the last year. This seems to run counter to ‘conventional wisdom’ or anecdotal evidence on skills shortages, and implies that while some industries in some States are perhaps growing quite strongly (with some occupations within these industries perhaps growing very strongly), it is not necessarily appropriate to extend this concern to entire occupations or to all industries in all States.22

The patterns of wage growth by sector are being driven by the emergence of a ‘two-speed’ economy in Australia. While some resources and construction industries in Western Australia and Queensland are growing strongly, industries in other States have been reported to be contracting, including in particular the manufacturing sector in Victoria and NSW (Figure 3.4).

FIGURE 3.4 – TWO-SPEED ECONOMY

Source: ABS data reproduced in Kunnen, H. (2006), Coping with the Resources Boom, Colonial First State, November.

21 It should be noted that skills concerns are not limited to Australia and in some industries, such as the

petroleum industry there has been a reported global shortage in qualified workers. 22 Clearly it may also imply that tradespersons are receiving additional salary in the form of a bonus. No data

was found to support or refute this possibility.


Labour force issues

Indeed, as shown in the ABS WPI data (above), wages in the manufacturing industry grew more slowly than the national average. According to an Australian Industry Group (AiG) analysis published in 2007, the manufacturing sector is expected to continue in a period of relative market stagnation and employment decline:

Employment in manufacturing is forecast to fall by 1.4 per cent in 2007, continuing the trend of the past two years. In 2005-06, employment fell by 1.2 per cent in manufacturing (ABS). The forecast reduction reflects both the softness in anticipated sales growth, as well as the restructuring process in response to heightened global competition. The forecast implies that the rate of decline has broadly steadied.

The largest forecast reductions in employment are in paper, printing & publishing and fabricated metal products, all of which are anticipating employment to fall by over 4 per cent.23

The large size of the manufacturing labour pool compared with other industry sectors in terms of employment has served to drag down growth in the national average wage reported by the ABS.

Given the declining profitability and low growth outlook for the manufacturing sector, it would be expected that there would be reduced competition for labour from manufacturing industries (including the defence industries), with the release of existing skilled workers from this industry into State and national labour pools over the next several years.

This projected change in demand for manufacturing skills is supported by research undertaken by Monash University in 2005, which examined skills needs in Western Australia. This analysis also shows that demand for metal fitters and machinists Australia-wide is generally projected to decline over the next several years (Figure 3.5).

FIGURE 3.5 – HISTORICAL AND PROJECTED EMPLOYMENT OF METAL FITTERS AND MACHINISTS (ASCO 4112) IN AUSTRALIA

Source: Shah, C., R. Clooney, M. Long and G. Burke (2005), Availability of skilled labour in selected occupations in Western Australia, Monash University.

Considering future trends in demand from the resources sector, Monash research suggests there will also be a comparative slowdown in demand growth for welders and metal fitters/machinists in Australia. Therefore, although demand from the resources sector in Australia is expected to remain strong, the level of additional resources required above the existing workforce already in employment is expected to grow at a slower rate (Figure 3.6).

23 Australian Industry Group (2007), Business Prospects for Australian Manufacturing in 2007.


Labour force issues

FIGURE 3.6 – HISTORICAL AND PROJECTED EMPLOYMENT OF STRUCTURAL STEEL AND WELDING TRADESPERSONS (ASCO 4122) IN AUSTRALIA

Source: Shah, C., R. Clooney, M. Long and G. Burke (2005), Availability of skilled labour in selected occupations in Western Australia, Monash University.


Availability of labour to build the LHDs

4 Availability of labour to build the LHDs

4.1 Overall approach In contrast to previous reports on this issue, this report examines the labour market on a State by State basis to determine the availability of labour to build both the AWDs and the LHDs. This Chapter provides a summary of the results. Full details of the State by State analysis are presented in Appendix A.

Prima facie, it would appear that there is a very large national labour market that would support the LHD project, with the LHD and AWD project demands together representing a very small percentage of total labour supply. The LHD project by itself does not have a large demand for workers. It is estimated to account for an additional 1,000 workers at its peak workforce requirements with the project spread over roughly five years.

Nevertheless, a number of factors may potentially limit the availability of this labour to move between projects.

Multiple analyses have shown that Australia’s labour force is comparatively less geographically mobile than that of most other developed nations. Many have cited ABS statistics that show that of the people that were considered ‘job mobile’ in 2003, only about 17 per cent of workers changed localities.24 Labour immobility helps to explain why the Australian Government has proposed to offer people $5,000 grants to provide incentives for employees to move to Western Australia to work. It also may lie behind reported offers of wage increases of 40 per cent to entice shipbuilding workers to South Australia.

Moreover, against the background of the current buoyant economic conditions, which have see unemployment fall to a thirty year low, there is a question whether the skills are available in Australia (including from training and immigration) to ensure the LHD and other naval shipbuilding and related projects can proceed as planned and without potentially higher costs as scarce skills are significantly bid up in price.

Previous analyses25 have focused on trends in national industries and have generally turned on the following logic:

• the national pool of labour, comprised of all industries where the required skilled labour would be expected to reside, is very large compared to the expected additional requirements of the LHD project;

• the LHD project would constitute only a very small demand on this national pool of labour;

• other industries that compete for labour (with the required LHD skills i.e. manufacturing and not the resources sector) are expected to decline;

24 ABS Cat No. 6209.0 25 ACIL Tasman (2005), Skills Shortages and the Amphibious ships project and EconTech (2006), The

Economic Contribution of the Landing Helicopter Dock Program During the Construction Phase of the Project.



• there is a long lead time ahead of the potential project’s commencement, with substantial recruitment and training programs either in existence or in development;

• therefore, there should be sufficient skills available; and

• the potential, maximum additional cost of attracting labour to the LHD program, if there were some potential labour market constraints or distortions, would represent only a very minor increase in the cost of the program (less than one tenth of one per cent).26

While the methodology used by previous studies was on its face reasonable, the ability to rely on this line of argument depends on the following assumptions holding:

• there is labour force mobility within Australia’s State labour markets; and

• other growing industries, particularly those employed by the resources sector, will not significantly compete for labour that might otherwise be employed on Defence projects.

Given that there are valid concerns that labour is geographically immobile and that there will continue to be at least some continued competition for skilled labour by industries employed in the resources sector, we have focused on the implications of the assumption that skilled people are not highly mobile across States and in practice (in the short to medium term at least) are likely to be attached to their present locations. This means that instead of a national pool of skills there is in effect a series of State and Territory skilled labour markets. This study considers the labour potential of each of these State labour pools and then the national labour pool based on a bottom-up analysis of the State labour markets (Scenario 1 – see Appendix A, Section A.2). The report then also considers the impact of maximum interstate migration among skilled workers relevant to the shipbuilding industry (and industries that will compete with the LHDs and AWDs for labour) (Scenario 2 – See Appendix A, Section A.3), and the impact of alternative growth in the number of new entrants (Scenario 3 – see Appendix A, Section A.3).

Thus, this analysis builds on the previous studies to:

• consider the current location of skilled persons, thereby estimating the potential of State labour markets as well as the national labour market and enabling the analysis to address Defence’s concern for labour immobility;

• analyse the potential competition by other industries for persons within occupations that have the skills relevant to the shipbuilding industry using a the MONASH Employment Forecasting model, which is used by Commonwealth and State employment and training departments to project demand for different occupations;

• incorporate the impact of new entrants from vocational and university courses;

• explicitly factor in the capacity for a State labour market to build some proportion of the AWDs in parallel to the LHDs; and

• calculate what is the maximum interstate migration potential among workers demanded by the shipbuilding and other relevant industries.

Considering changes in supply and demand of skilled workers by the LHD and AWD projects’ commencement by State in these three scenarios, we are able to draw credible conclusions about whether there is sufficient labour available to undertake the LHDs’ construction in parallel to the AWD project without materially larger risks to wage increases 26 ACIL Tasman, 2005, Skills shortages and the Amphibious ships project: An assessment of the prospects

for a skills squeeze, public version of a report prepared for an industry/government committee, March.



or project delays above the risks inherent to major projects. In each scenario, for each labour market, we analyse:

• the demand side of the market, including competition from other industries for skilled labour, declining needs for skilled labour by some enterprises, the impact of workforce retirement on demand, and the needs of the LHD and AWD projects;

• the supply side of the market, including new entrants from vocational and university courses, the potential availability of skilled labour from other industries that might be reducing employment levels, and the impact of workforce retirement on total skills availability; and

• the non-quantifiable impact of existing industry in terms of its ability to identify and engage skilled labour as new contracts become available.

The following sections provide more detail about the broad framework and methodology that was applied to examine supply and demand of skilled workers by State and then nationally.

4.2 Skilled labour demand and supply 4.2.1 Demand for skilled labour from other industries This report takes as given that the skills required to build the LHDs and AWDs reside in multiple industries (See Section 3.3). Indeed, that skills are transferable between industries is implicitly acknowledged by the Department of Defence in its concerns that the ‘resources sector’ might be successful in competing for labour that may otherwise have been employed on the LHD and AWD projects.

An in-depth analysis of expected demand for skilled persons was conducted using Monash University’s Centre of Policy Studies’ (CoPS) MONASH Employment Forecasting model’s assessment of demand for different occupations by ASCO category. The MONASH model is a comprehensive computable general equilibrium (CGE) model of the Australian economy, with the ability to project economic and employment growth in 112 industries, 56 regions and 340 occupations.27

The model has been updated with all known, committed major projects in Australia as of March 2007. The MONASH employment forecasting data are considered to be the most comprehensive and up-to-date available to assess the supply of and demand for particular skills on an Australia-wide and State basis. Employment data forecast by the MONASH model are publicly available and distributed to subscribers, which include State and Federal government departments focused on education and training for the specific purposes of understanding changes in demand for different occupations and skills in Australia.

Using the MONASH model, employment needs can be assessed at a State level, on either an ANZIC industry basis or on an ASCO occupational basis. Employment needs by State and occupation are determined by projections of industry demand and profitability, which, in turn, determine the amount of labour demanded by an industry. As demand for a particular industry’s product or output declines, so does its profitability and the marginal return on labour. The MONASH model assumes that as the marginal product of labour falls, so does

27 Estimating the change for labour by occupation requires the use of a computable general equilibrium

(CGE) model. CGE models are very large models of the economy, which show long run economic relationships between different industry sectors, industry employment, household spending and governments spending using extensive data published by credible sources, including for example the ABS. CGE models have replaced simple input-output models as the most credible method for estimating economic impacts, including changes in employment. The reason is that simple input-output models lacked granularity in terms of cross-industry impacts and also lacked necessary constraints on labour and capital availability. More explanation about the MONASH model methodology is provided in Appendix A.



employment.28 This assumption is consistent with ‘real world’ observation, with the AiG’s projected changes in demand for labour in the manufacturing sector, for example, resulting from stagnating profitability in that industry.

For this report, MONASH data forecasted to 2014 were analysed for occupations that had skills relevant to the naval shipbuilding industry. Occupations were assessed in terms of whether they would be in greater or lesser demand as a result of the commencement of the AWD and LHD shipbuilding projects. To provide an example, if the manufacturing industry output is expected to decline over the next three years (as it is) and reduce employment in that sector (again, as it is), the MONASH model allows us to estimate the number of workers from that industry that would potentially be available to be hired to work on either the LHD and/or the AWD projects. This enables the report to directly address the Department of Defence’s chief concern about competition from other industries, including the potential for crowding out of other projects or wage price increases above budget for the LHD and AWD projects.

Changes in demand are considered, in addition to the impact of worker retirement and the development of new skills through vocational and university programs, for the following occupations:

ASCO Code Occupation 1191 Building & Construction Managers 1221 Engineering Managers 2125 Electrical/Electronics Engineers 2542 Sea Transport Professionals 3123 Electrical Engineering Associate Professionals 3124 Electronic Engineering Associate Professionals 3125 Mechanical Engineering Associate Professionals 4111 General Mechanical Engineering Tradespersons 4112 Metal Fitters & Machinists 4113 Toolmakers 4114 Aircraft Maintenance Engineers 4115 Precision Metal Trades 4121 General Fabrication Engineering Tradespersons 4122 Structural Steel & Welding Tradespersons 4123 Forging Tradespersons 4124 Sheet metal Tradespersons 4125 Metal Casting Tradespersons 4126 Metal Finishing Tradesperson 4211 Motor Mechanics 4212 Automotive Electricians 4213 Panel Beaters 4214 Vehicle Painters 4215 Vehicle Body Makers 4216 Vehicle Trimmers 4311 Electricians 7913 Structural Steel Construction Workers 7914 Insulation & Home Improvement Installation Tradespersons 7991 Motor Vehicle Parts Fitters 7994 Seafarers & Fishing Hands

28 This is determined by changes in the number of hours worked in the model. The total change in the

number of hours worked is then calculated to be a function of both changes in the productivity of the workforce and changes in the number of people employed.



Given the Department of Defence’s concern for competition with other industries that might be employed by the resources sector in the construction phase of new projects, this list has included occupations that might not be directly relevant to shipbuilding, but where individuals can be assumed to have a core level of competency that would indicate a high ability to be trained into the industry (or indeed out of the industry). It is assumed that businesses will compete for core skills from these industries and from new entrants into the workforce with similar skills.

The MONASH model projected changes in demand for these occupations for each year from 2005 to 2014. To understand changes in demand, the average number of persons demanded for each occupation from FY2007-FY2009 in each State was compared with the average number of persons demanded for each occupation from FY2010-FY2014 in each State. Changes in demand indicated whether more or fewer persons with relevant skills would be expected to be available to be contracted to work on the LHD or AWD projects. Occupations were grouped into larger categories relevant to the project: tradespersons and labourers; engineers; and managers and associate professionals. Appendix A provides data disaggregated by State and by occupation and further methodological detail.

4.2.2 Accounting for new supply To understand changes in the supply side of the market, the report considered all available new workers from vocational and university institutes, plus changes in the number of existing workers.

The supply of new entrants relevant to the shipbuilding industry from vocational and university institutions (as opposed to considering all completions from vocational and university institutions) was calculated using available ASCO data on industry employment for 2006. It was assumed that proportion of new labour market entrants would roughly approximate the current industry profile. In addition, the rate of completions was varied between scenarios: Scenario 1 assumed no growth in the number of new entrants, whereas Scenario 3 assumed average historic rates of growth would be observed. Both of these are likely to be conservative assumptions given the increased focus on the number of places for new apprentices by States and the Commonwealth (see Section 3.4).

The impact of workforce retirement was also considered, with workers in demand by the shipbuilding industry assumed to have the same age profile and retirement rates as calculated for the metal fitters and machinists occupation. Appendix A provides further detail about the assumptions of retirement rates for the industry by State.

4.2.3 Accounting for existing capability Finally, for each labour market, the MONASH analysis is qualified with considerations of existing capability in the relevant State, in particular the size of the existing workforce of the relevant prime, if there is one, within the State. Clearly the capacity to undertake a naval shipbuilding project depends on more than the number of people with relevant skills or potential to be trained to undertake work for the project. Experience is also critical. The ability to recruit highly specialised labour for particular occupations (such as production managers with industry experience), to appropriately engage subcontractors, and to identify new entrants with the ability to undertake the work is dependent on a firm’s track record and experience in naval shipbuilding and defence systems.

4.3 Australia’s labour potential: report findings Appendix A provides step-by-step detail of the analysis conducted for each State and national labour market for each scenario using the framework outlined above.



Drawing together analysis of supply and demand by State suggests there is sufficient labour available, with either the skills or the ability to be quickly trained into the industry, to allow both the AWD and LHD projects to be undertaken in Australia.

While some risk is inherent to all major projects, overall it would appear that the risk of project cost increases is low if all or the majority of the LHD work were to be undertaken in New South Wales, Victoria and Queensland. The analysis in this chapter has shown high labour potential in these States, even with the application of a number of conservative assumptions. Both South Australia and Western Australia have tighter labour market profiles, with comparatively fewer new entrants compared to the Eastern States and a higher threat of labour competition from future major projects. In NSW, Queensland, Victoria and South Australia, it is expected that there would be no crowding out of other projects with the labour potential of each of these labour markets having an excess labour potential above the requirements of the AWD and LHD projects.

Table 4.l shows the net number of new persons or existing workers that that will be entering the labour market between now and the AWD and LHD commencement period by broad occupational category (tradespersons/labourers, managers/associate professionals, engineers).

TABLE 4.1: AVAILABLE SKILLED LABOUR FOR THE LHDS BY 2009 (ALLOWING FOR GROWTH IN THE NUMBER OF NEW ENTRANTS)

NSW Vic Qld WA SA Total Peak AWD and LHD labour

requirements


13,500 persons

16,300 persons

10,700 persons

(400) persons

5,650 persons

45,750 persons

1,600 skilled tradespersons and labourers


7,000 persons

5,800 persons

3,800 persons

2,200 persons

1,700 persons

20,500 persons


58,500 persons

47,900 persons

33,000 persons

14,100 persons

17,200 persons

170,700 persons

450 management,


skilled persons

Appendix A provides significant detail regarding the State by State labour market analysis used to develop these conclusions.

Overall, based on our analysis, our judgement supports that of the two tenderers for the LHDs project, namely that sufficient skilled resources are available to undertake the project in most States. The project would not be expected to drive up labour costs in other projects, or cause any significant crowding out of other potential new investments.

When looking at the size of the naval shipbuilding skills demand in relation to the skills pools in the Australian States and Territories, we have reached to the following conclusions:

• In New South Wales and Victoria, where much of the Australian production of the LHDs is likely to be based, the skilled workforce sought is unlikely to place strains on the available skilled labour pools available in those two States. There is an ample supply of labour expected to be available to be contracted ahead of the LHD project



commencement, plus a substantial existing naval shipbuilding capability that would be expected to be able to rapidly ramp up workforce from current levels. The major presence of Tenix and Thales in Victoria and NSW is, in this light, a factor that strengthens our confidence in the robustness of the conclusion that has been reached based on the labour market data presented above. The presence of a prime will serve to mitigate any potential information gaps in the labour market and improve the ability for workers to be recruited into the project, particularly given the long lead times available ahead of the LHD and AWD project commencements.

• In Queensland, the impact of the resources boom is ameliorated by the size of the skills pool in the State and the greater output of apprentices coming through the State’s training system. Against this background, placing significant elements of the LHD project within the State, especially in Brisbane, constitutes a relatively low risk option from a skills availability point of view. While Queensland lacks companies like Thales and Tenix with deep experience as prime contractors in naval shipbuilding and also past involvement with managing significant swings in naval shipbuilding projects, Forgacs has an operation in Brisbane that is well suited to building modules. On balance we consider that if significant parts of both the LHD and AWD projects were to be sub-contracted in Queensland, and those parts matched existing skill sets, the required labour would be available and the risks of project delays and increased costs would be comparatively small.

• In Western Australia, which is the economy most affected by the resources boom, unemployment has (in April 2007) reached a historical low of 2.7 per cent and obviously skills availability poses a greater risk. However, Western Australia has invested both in an accelerated skills development program and a temporary migration program aimed at topping up labour needs to ensure that targeted defence projects can be undertaken in the State in parallel to the resources boom. If potential temporary international migration is considered, combined with an increase in the supply of trained workers (both plausible assumptions) then there is no reason why some work on the LHDs could not occur in Western Australia. It should be noted that there is currently spare capacity at the Australian Marine Complex at Henderson. Strong contractual arrangements would also serve to limit the Government’s exposure to potential wage price increases in this State if some targeted work were undertaken here.

• In South Australia, which has no record of building surface ships, the main priority for the relatively small labour market is to provide the skilled labour required for the AWD project. Although it has a positive labour potential for all occupational categories, including the critical tradespersons and labourers category, committing a significant part of the LHD project to this State is likely to constitute a larger risk than locating the work within other jurisdictions due to labour immobility and the potential impact of larger projects, such as the prospective Olympic Dam project, which tend to create larger risks of crowding out for the South Australian economy due to its comparatively smaller size. South Australia has also effectively used temporary skilled migration, however, and this could be useful for ensuring that the AWDs can be constructed on time and should be pursued to mitigate overall risk for the State.

This leads to the conclusion that, if significant work on the LHDs were undertaken in Australia, there are not likely to be major skills availability issues or risks of project cost increases or delays above the normal risks inherent to any major project.

This conclusion is strengthened when allowance is made for the following factors:



• the capacity of the training system to increase the supply of needed skills for the LHDs project, particularly given the time available to train workers; and

• the ability, where necessary, to use the immigration system to source special skills needed for the LHD and AWD projects, particularly for some occupations that will be in demand Australia-wide.

Both the tenderers for the LHDs support the findings we have reached and believe that the strategies they have put in place to manage any remaining skills availability issues will be more than adequate to meet the likely future situation when the project is underway.

The final point that should be made is that the ability of the two tenderers to operate distributed production and supply systems is of central importance to the success of the LHDs project. The experience with the ANZAC ships project with its complex supply systems in meeting production timetables and keeping within budgets strongly supports the view of the tenderers that their project management systems are more than adequate to the task associated with the LHDs project and should mean that they are able to avoid any cost penalties that would be associated with overextended and overly complex distributed production systems.

4.4 Managing LHD project risks Analysis of the MONASH data suggests there should be a sufficient supply of skilled existing workers or skilled persons able to be trained in all State markets for all labour categories, assuming at least historical rates of growth in the number of tradesperson and labourer completions.

In terms of the LHD project in particular, the naval ships are less complex to build, which implies that this project in particular would be able to rely on a strategy to train new entrants and existing workers (leaving other declining industry sectors) over the 2007-2009 period for the construction of the LHD ships which would contain any risks of rising cost pressures.

Because the LHD project is less complex to build, with the ability to train persons into the project in a short period of time, any wage increases that might arise during the construction of the AWD project are likely to be the result of difficulties recruiting a smaller number of particular occupations (such as managers with industry experience) that are in demand Australia-wide or into other States, such as South Australia — or both.

However, although the aggregate number of workers implies there will be sufficient skills to meet the needs of the LHD and AWD projects, some occupations are in demand in all States, including in particular;

• General Managers;

• Engineering Managers;

• Production Managers;

• General Fabrication Engineering Trades;

• Structural Steel & Welding Trades;

• Structural Steel Construction Workers; and

• Insulation & Ancillary Trades.

Some industry stakeholders have reported wage increases of 40 per cent on pre-AWD rates to attract labour into South Australia to undertake the AWD project. This may in part reflect the high level of labour immobility, or it may also reflect the fact that while there may be many persons with core skills available to be trained, some occupations including managers



with specific industry experience and process knowledge, will be difficult to recruit. To the extent that highly skilled individuals or structural steel welders and construction workers are required for both the AWD and LHD projects, it is likely that the project will face rising wage costs for these employees. Nevertheless for many of these occupations that will all be increasingly in demand in all States it should be possible for businesses to train new entrants to fit their organisational needs, including the AWD and LHD projects.

Therefore while at the margin the LHD project might impact on some occupations, it is very unlikely to be the major determinant in any change from the AWD budget and far more likely to be the result of labour immobility between States. Given the range of occupations that would be involved, the existing capabilities of industry in NSW and Victoria, and the labour potential of these two States, it is difficult to mount a case that the LHD projects should not be undertaken in these States with involvement of other States according to an optimised distributed production plan (use of specialised contractors for particular modules).

In terms of project risks for the LHD (and AWD) project, Government and industry need to focus on the occupations that are expected to see growing demand in all of the five States considered. Of these, the occupations that require long periods of training (welders) or highly specialised knowledge (engineering and production managers) are the greatest risk to on-time and on-budget project completion. In addition to the continued strong provision of publicly funded training places and apprenticeships by Commonwealth and State programs, special strategies focused on these occupations to secure sufficient labour should be implemented.

The Skilling Australia’s Defence Industry (SADI) program is relevant in this respect. The Commonwealth Government is investing $215 million over ten years to address the significant shortfall in the quantity and quality of defence workforce skills available to the defence industry.

The SADI program provides industry with support to meet three program outcomes:

• the generation of additional skilled positions;

• up-skilling existing employees; and

• improving the quality and quantity of skills training in defence industry.

Defence primes and small to medium enterprises working on defence acquisition and sustainment contracts are encouraged to apply for funding to increase the quality of their existing workforce and the quantity of skilled people in their workforce. Micro-companies with shortages in the targeted skills sets can also seek assistance under the SADI program. Amongst other things, proposals for consideration under the SADI program are required to:

• target growth in those professional and technical trades categories where current and future shortages are identified;

• attract new employees, both experienced and entry level, into defence industries; and

• encourage skilled employees to remain in industry longer.

Other strategies that should be used to maximise the availability of skills for the LHD and AWD projects include:

• Increasing linkages between industry and new workers ― The Western Australian Government has established a new career development centre in Perth to help facilitate the understanding and entrance of new workers into the defence industry. In addition, it is recommended that industry and Government consider reducing transaction costs for new labour by making presentations to university and vocational students near graduation to highlight the opportunities in the defence



industry. There is clearly a catch-22 in this process, with the ability for industry to make an attractive pitch to new workers contingent on the expectation of new work to be awarded in Australia.

• Allow for distributed production ― Experience with defence and other large engineering products suggests that production can be cost-effectively distributed across a small number of major sites, say, three. Beyond a certain point, the number of separate production locations does carry a risk of cost increases. However, a number of projects have been successfully managed using modern management approaches, combined with excellent communications and computing systems. Allowing for distributed production will ensure that organisations with the greatest capacity and expertise are engaged in the construction of the project.

• Increase temporary international migration for trades and labourer occupations ― Immigration can be used as a policy instrument to solve skilled and unskilled labour shortage problems for particular occupations. Temporary migration, particularly where training can be undertaken in a short period of time, represents a very attractive strategy for covering small proportions of the workforce that are difficult to fill from the Australian workforce, but enable more Australians to be employed Skilled temporary migration under the 457 visa program only allows persons to work for companies as identified prior to their move, so this enables the Government to target particular job categories. Processing of applications for temporary working permits can be a matter of weeks if experienced persons help potential migrants understand which visa is appropriate for their circumstances and gather all required documentation. Given the long lead times associated with the LHD project, partnership with the Commonwealth Department of Immigration and Multicultural and Indigenous Affairs and the State Governments will help to ensure that adequate resources are available for the LHD and AWD projects. For example the Western Australian Government has committed $1.5 million over three years to enhance temporary migration into the State; South Australia has also been successful with temporary migration strategies. The effectiveness of the temporary migration strategy for the shipbuilding industry could be enhanced through Industry and/or Government partnerships to identify appropriate candidates for 457 temporary migration from overseas.

This will maximise the availability of labour in the States where the projects will be undertaken. It will then be the responsibility of industry to plan appropriately for the training of workers for the project. Introducing contract requirements for the primes to manage the risks of labour cost increases will also ensure the project is brought in to budget.


Appendix A A.1 Methodology for skills availability estimates In order to estimate the availability of skilled labour in Australia that could be contracted for the LHD project, it was necessary to consider changes in the supply of and demand for relevant workers by State.

A.1.1 Estimating changes in demand It was assumed that changes in demand for labour would be derived from changes in industry growth. Businesses in industries that are growing are assumed to broadly require more labour to support their growth. Businesses in industries that are declining are generally assumed to require less labour.29

Estimating the change for labour based on changes in industry growth is challenging and requires the use of a computable general equilibrium (CGE) model. CGE models are very large models of the economy, which show long run economic relationships between different industry sectors, households and governments using extensive data published by credible sources, including for example the ABS. CGE models have replaced simple input-output models as the most credible method for estimating economic impacts, including changes in employment. The reason is that simple input-output models lacked granularity in terms of cross-industry impacts and also lacked necessary constraints on labour and capital availability.

The MONASH model

The MONASH model, a CGE model developed and operated by the Centre of Policy Studies (CoPS) at Monash University, is the most credible and comprehensive model available in Australia. The MONASH model is a full model of the Australian economy, able to forecast economic and employment growth in 112 industries, 56 regions and 340 occupations. The model has been updated with all known, committed major projects in Australia as of March 2007. The MONASH employment forecasting data used in this report are therefore the most comprehensive and up-to-date data available to assess the supply of and demand for particular skills on an Australia-wide and State basis. The model also provides the data that are relied upon by State and Federal Governments, as the employment forecasting data are distributed quarterly to 10 State and Commonwealth Education and Training departments.

Employment needs can be assessed at a State level, on either an ANZIC industry basis or on an ASCO occupational basis. For this study the analysis is conducted using the MONASH model’s assessment of demand for different occupations by ASCO category. This enables us to consider changes in demand by occupation, as determined by broad economic growth patterns. Occupational data serve as a broad proxy for skills.

Employment needs by State and occupation are determined by the MONASH model through projections of industry demand and profitability (industry output). Changes in industry output, in turn, determine the amount of labour demanded by an industry. Generally speaking, businesses that are expected to see an increase output are also expected to demand more labour. Conversely, businesses that are expected to see a decrease output are also expected to demand less labour. The reason is because as demand for a particular industry’s

29 Clearly, the extent to which more or less labour is required is dependent on the firm’s optimal combination

of labour and capital inputs; this appendix attempts to simplify the description of the economic relationships that are assumed in a computable general equilibrium model.


product or output declines, so does its profitability and the marginal return on its labour. The MONASH model assumes that as the marginal product of labour falls, so does employment.30 This assumption is consistent with ‘real world’ observation, with the AiG’s projected changes in demand for labour in the manufacturing sector, for example, resulting from stagnating profitability in that industry.

For this study we compare:

• average demand for different occupations during the lead up to the AWD and LHD ships being built (2007-2009) to

• average demand for different occupations during the construction phase of the AWD and LHD ships being built (2009-2014).

The reason that we take the average is because our understanding of industry demand would be highly sensitive to the years selected otherwise. Because of the oscillations in yearly demand, selecting a single year could over- or under-estimate the actual average change in demand (See for example Figures 2.5 and 2.6 of this report, reproduced from Shah, et al, to see the variability in year on year employment forecasts). Averaging the number of persons demanded smoothes these variations, and provides a better picture of the trend in demand.

We were concerned with whether occupations that had skills relevant to the naval shipbuilding industry would be in more or less demand in the lead up to the AWD and LHD shipbuilding projects. To provide an example, if the manufacturing industry is expected to decline over the next three years (as it is) and reduce employment (again, as it is), the MONASH model allows us to estimate the number of workers from that industry that would potentially be available to be hired to work on either the LHD and/or the AWD projects.

The occupations that we considered were the following:

ASCO Code Occupation 1191 Building & Construction Managers 1221 Engineering Managers 2125 Electrical/Electronics Engineers 2542 Sea Transport Professionals 3123 Electrical Engineering Associate Professionals 3124 Electronic Engineering Associate Professionals 3125 Mechanical Engineering Associate Professionals 4111 General Mechanical Engineering Tradespersons 4112 Metal Fitters & Machinists 4113 Toolmakers 4114 Aircraft Maintenance Engineers 4115 Precision Metal Trades 4121 General Fabrication Engineering Tradespersons 4122 Structural Steel & Welding Tradespersons 4123 Forging Tradespersons 4124 Sheet metal Tradespersons 4125 Metal Casting Tradespersons 4126 Metal Finishing Tradesperson 4211 Motor Mechanics 4212 Automotive Electricians 4213 Panel Beaters 4214 Vehicle Painters

30 This is determined by changes in the number of hours worked in the model. The total change in the

number of hours worked is then calculated to be a function of both changes in the productivity of the workforce and changes in the number of people employed.


ASCO Code Occupation 4215 Vehicle Body Makers 4216 Vehicle Trimmers 4311 Electricians 7913 Structural Steel Construction Workers 7914 Insulation & Home Improvement Installation Tradespersons 7991 Motor Vehicle Parts Fitters 7994 Seafarers & Fishing Hands

These were considered to be occupations that had skills that could be employed in the LHD and AWD projects. Thus, the MONASH model captures competition for skilled labour from other industries, including for example businesses that might be hired by the resources sector.

The MONASH model projected changes in demand for these occupations for each year from 2005 to 2014. We averaged the number of persons demanded for each occupation from FY2007-FY2009 in each State and then the number of persons demanded for each occupation from FY2010-FY2014 in each State. Changes in demand indicated that more or fewer persons with relevant skills would be available to work on the LHD or AWD projects. Occupations were grouped into larger categories relevant to the project: tradespersons and labourers; engineers; and managers and associate professionals.

A.1.2 Estimating changes in labour supply Considering only the change in demand for different occupations does not provide an estimate of the number of people that may exiting the existing labour force or the number of people that may be entering the labour force.

To understand the change in the number of existing workers by occupation, we estimated the number of persons expected to retire from the ‘shipbuilding sector’ by analysing the age profile of persons employed in the metal fitting and machining industry. The reason for this was that industry consultations indicated the age profile of the ‘shipbuilding industry’ was older and no data was available for workers within the shipbuilding industry.

If it was assumed that the retirement rate for all occupations relevant to the shipbuilding industry roughly approximated that of the metal fitting and machining occupation,31 then the following conditions would hold:

• approximately 11 per cent of workers would be currently aged 45-50, and in 5 years approximately 10 per cent would be retired;



• approximately 4 per cent of workers would be currently aged 60-65, and in 5 years approximately 80 per cent would be retired; and

• approximately 1 per cent of workers would be currently aged 65 or older, and in 5 years approximately 100 per cent would be retired.

31 Based on unpublished ABS Labour Force data for 1999 and 2004, (ABS Cat. no. 6203.0), produced in

Shah, C., R. Clooney, M. Long and G. Burke (2005), Availability of skilled labour in selected occupations in Western Australia, Monash University, 2005.


If the above assumptions held, then this would imply that the ageing of the population could reduce the number of skilled tradespersons and labourers available to work on the LHD and AWD projects and increase competition for new skilled labour among all industries.

This ‘retirement rate calculator’ was used for all occupations considered to be demanded by the shipbuilding industry. It was expected that this would be conservative: clearly not all labour categories would be expected to have the same age profile, and therefore assuming an ‘older’ age profile adds to the conservatism of this analysis.

In terms of new entrants, we considered the latest data available from the National Centre for Vocational Education Research (NCVER, latest data was June 2006) and the Commonwealth Department of Education Science and Training (DEST, latest data was 2005) to estimate the supply of new managers, associate professionals, engineers, tradespersons and labourers.

In both cases data was analysed to narrow the flow of new labour entrants only to persons that might have skills relevant to the shipbuilding industry.

For tradespersons and labourers, because NCVER data was highly aggregated, we analysed MONASH data by ASCO category by State. The methodology involved examining the percentage of all tradespersons and labourers employed in a State economy that were working in an occupation that would be demanded by the shipbuilding industry and assuming the same percentage would apply to tradespersons and labourer graduates. Thus it was assumed that the number of persons completing trade and apprenticeship courses with skills relevant to the shipbuilding industry would roughly approximate existing workforce characteristics.

For university graduates new entrants needed to be scaled by the number of persons that were actually Australians (approximately 75 per cent), and then the number of persons with relevant skills. It was assumed that in all States approximately 6 per cent of all graduates were engineers and 27 per cent were management grads. Of this, we analysed ASCO data by State to determine of all engineers and management professionals, what percentage were in occupations relevant to the shipbuilding industry. These percentages were then used to scale down the number of engineer and management completions at university to the expected number of persons entering the market with skills relevant to the shipbuilding industry.

In Section A.2, no growth in the number of vocational and university graduates was assumed.

A.1.3 Putting supply and demand together to determine labour market potential To determine total labour availability in a State that would be expected to become available in the lead up to the AWD and LHD construction, we synthesised the demand and supply side analysis. We considered the following by broad labour category (tradespersons/labourers, managers/associate professionals and engineers):

• the number of new entrants from vocational and university courses over the next three years (NCVER and DEST data analysis);

• minus the number of persons expected to retire from the existing workforce over the next three years (retirement analysis based on unpublished 2004 ABS data published by Monash university);

• minus the number of persons that would be expected to be employed by other businesses due to expected industry growth (MONASH data analysis);

• minus the requirements of both the LHD and AWD ships.


This provided a ‘net labour potential’ for each State labour market after accounting for the Defence shipbuilding programs by broad labour category: tradespersons/labourers, managers/associate professionals and engineers.

Overall the analysis suggested there would be sufficient new entrants to meet both increasing demand from industry growth and expected workforce retirement and the needs of the AWD and LHD projects.

A.2 State labour market analysis This section analyses labour markets on a State-by-State basis to determine whether capacity exists to build both the AWDs and the LHDs. This analysis assumes that there is total labour immobility between States and no growth in the skilled workforce over time. (These, of course, are extremely conservative assumptions and are relaxed in Section A.3.) In this way the available pool of labour for each State is examined by building up an understanding of industry trends within that State and the number of new and existing workers expected to be available.32

A.2.1 NSW’s labour capacity33

If either Tenix or Thales were to be awarded the LHD contract, it is expected that part of the work would be undertaken in NSW.

If no labour mobility is assumed, then the supply of labour within a State (in this case NSW) turns on the fortunes of businesses within that State. Businesses will reduce employment where demand and profitability has stagnated or is falling (i.e. marginal product of labour is declining). Businesses will increase investment in labour and capital where demand is strong.

Changing industry demand

Using MONASH model projections for employment demand trends by State, it is possible to consider which occupations will become in greater or lesser demand over the lead up to the LHD and AWD projects’ construction (Table A.1). Occupations that are expected to see a decline in demand are highlighted in red (or a lighter shade in black and white copies). This shows that between ‘now’ and when the ships are constructed how many people may be available from the existing labour force to be contracted on the LHD and AWD projects.

32 In the following section, a further assumption is imposed: namely that there is a maximum migration of

labour out of the proposed LHD States into Western Australia and South Australia to meet future major project needs.

33 Overall MONASH projects an average increase in demand for all occupations in NSW of approximately 132,000 from the average demanded during the lead up to the defence projects (2007-2009) to the construction phase of the projects (2009-2014). Not all of this growth would be expected to be met through the apprentices and traineeship programs; part would also be met by new entrants from the university sector. In 2005, 297,000 students graduated from NSW higher education institutions; applying the Australian average for number of domestic completions (75 per cent) this represents 222,000 Australian university graduates. Over the next three years, assuming no growth in the number of completions, this would imply 666,000 new graduates entering the NSW labour market. Similarly, in the next three years, assuming no growth in the number of completions, approximately 86,000 new trainees and apprentices would also enter the labour market. From a ‘whole-of-economy’ perspective, there should be an adequate supply of labour to meet demand growth.


TABLE A.1 – CHANGES IN DEMAND FOR SELECTED OCCUPATIONS IN NSW RELEVANT TO THE SHIPBUILDING INDUSTRY

Occupation Lead up to LHD, AWD construction

programs

(Avg absolute employment FY07-

FY09, Jobs)

Construction phase of LHD, AWD programs

(Avg absolute employment FY09-FY14,

Jobs)

Absolute Change in

Employment demanded

(Jobs)

General Mangers 39,200 46,160 6,960

Building & Construction Managers 20,600 19,880 -720

Engineering Managers 3,533 4,000 467

Production Managers 15,533 17,360 1,826

Electrical/Electronics Engineers 11,100 10,720 -380

Sea Transport Professionals 1,967 1,620 -347

Electrical Engineering Associate Professionals 1,900 1,720 -180

Electronic Engineering Associate Professionals 2,900 2,540 -360

Mechanical Engineering Associate Professionals 800 700 -100

General Mechanical Engineering Tradespersons 1,467 1,740 273

Metal Fitters & Machinists 27,933 27,460 -473

Toolmakers 2,067 2,020 -47

Aircraft Maintenance Engineers 4,267 4,520 253

Precision Metal Trades 2,567 2,460 -107

General Fabrication Engineering Tradespersons 567 680 113

Structural Steel & Welding Tradespersons 19,267 20,860 1,593

Forging Tradespersons 700 560 -140

Sheet metal Tradespersons 2,400 2,280 -120

Metal Casting Tradespersons 0 0 0

Metal Finishing Tradesperson 300 300 0

Motor Mechanics 31,233 30,900 -333

Automotive Electricians 2,500 2,760 260

Panel Beaters 6,767 6,580 -187

Vehicle Painters 4,200 4,640 440

Vehicle Body Makers 800 840 40

Vehicle Trimmers 300 300 0

Electricians 34,367 33,740 -627


Occupation Lead up to LHD, Construction Absolute AWD construction

programs


FY09, Jobs)

phase of LHD, Change in AWD programs Employment

demanded (Avg absolute employment (Jobs) FY09-FY14,

Jobs)

Structural Steel Construction Workers 4,000 4,460 460

Insulation & Home Improvement Installation Tradespersons 7,000 7,800 800

Motor Vehicle Parts Fitters 3,533 3,640 107

Seafarers & Fishing Hands 1,133 1,000 -133

Change in the number of managers, associate professionals demanded with skills relevant to the shipbuilding industry

86,433 93,980 7,500 persons

Change in the number of engineers demanded with skills relevant to the shipbuilding industry

15,367 15,240 -130 persons

Change in the number of tradespersons and labourers demanded

153,100 155,020 1,920 persons

Total demand change 254,900 264,240 9,340 persons

Source: MONASHEF March 2007.

There will be strong demand for managers and associate professionals with 7,600 additional managers and associate professionals demanded during the ships’ construction phase compared to the precedent period. Similarly there will be growing demand for tradespersons and labourers, with overall demand increasing by approximately 1,900 in the ships’ construction phase on average compared to the lead up phase.

The MONASH model suggests that within NSW, demand will decline for labour in the following occupations:

• Building & Construction Managers

• Electrical/Electronics Engineers

• Sea Transport Professionals

• Electrical Engineering Associate Professionals

• Electronic Engineering Associate Professionals

• Mechanical Engineering Associate Professionals

• Metal Fitters & Machinists

• Toolmakers

• Precision Metal Trades


• Forging Tradespersons

• Sheet metal Tradespersons

• Motor Mechanics

• Panel Beaters

• Electricians

• Seafarers & Fishing Hands

All of these occupations are of direct relevance to the shipbuilding industry.

The reduced demand for these occupations is expected to be driven in the main by the expected decline in the manufacturing sector generally. This is reflected in projected slow or negative growth in the fabricated metal products, sheet metal products, industrial machinery and equipment production, motor vehicles and parts production, and structural metal products industries. This aligns with anecdotal evidence and some stakeholder views that the second and third tier suppliers to the shipbuilding industry are not currently facing supply constraints, and given the projected growth for manufacturing in NSW, this was unlikely to change. Moreover, NSW is also not expected to see a major boom in commercial property development in the short to medium term compared with other States such as Queensland and Western Australia. This would also tend not to increase competition for workers within the building structure and construction industries.

Other occupations that would also demand tradespersons and labourers, but which are not directly relevant to the shipbuilding industry — including refrigeration and air-conditioning mechanics, electrical distribution trades, electronic/office equipment trades, communications tradespersons, carpentry and joinery trades, fibrous plasterers, roof slaters and tilers, bricklayers, solid plasterers, tilers and stonemasons, painters & decorators, sign writers, floor finishers and plumbers — would see an average decrease in demand of 2,200 persons for these occupations. To the extent that some of these persons could re-train to metal and electrical trades, this would reduce demand for tradespersons and labourers. Overall the decline in demand for other tradespersons suggests that competition from other industries that employ tradespersons and labourers will not be high in NSW.

Existing worker retirement

Added to this change in demand would be a change in the number of existing workers. It has been argued that tradespersons and other employees of the shipbuilding industry are generally older in age on average than most other industries. Using the metals fitters and machinists occupational profile as a proxy for the occupational groups that are employed by the shipbuilding sector implies that:

• of the number of persons currently aged 45-50 (~11 per cent of the total number of persons currently employed), in 3 years approximately 6 per cent would be retired;





• of the number of persons currently aged 65 (~1 per cent of the total number of persons currently employed) in 3 years approximately 100 per cent would be retired.34

In NSW, this would reduce the number of tradespersons and labourers available during the lead up to the ships’ construction by around 11,600 persons. Added to growth in demand of 1,900 jobs for tradespersons and labourers, this would increase the number of new tradespersons demanded in the lead up to the ships’ construction to approximately skilled 13,500 persons.

No data were available on the age profile or rate of retirement for managers and engineers. If this same age distribution held for these positions as well, this would imply that in the lead up to the ships’ construction (2007-2009), 6,500 skilled managers would retire and 1,200 skilled engineers would also retire. This would increase the total requirements for skilled managers and engineers to approximately 14,100 persons and 1,100 persons, respectively.

New entrants into the NSW labour market in between now and the LHD project commencement

On the supply side from the perspective of new entrants, there will be completions of apprentice, trainee and university courses.

• The supply of apprentices and trainees — Considering the NCVER data for NSW, if there was no growth in the number of trainees and apprentices from 2006, then approximately 29,000 new workers (i.e. ‘non-existing’) would complete an apprentice program each year in 2007, 2008 and 2009.35 Approximately 7,300 of these completions would be new tradespersons each year, with approximately 70 per cent of these tradespersons having skills relevant to industries that compete for skilled labour with the shipbuilding industry (~5,100 persons). 36 Approximately 160 new managers with skills relevant to the shipbuilding industry,37 3,200 new associate professionals and 1,900 new labourers would also complete their training in 2007-2009, assuming no growth in the number of completions.

Therefore from 2007 to 2009, approximately 15,300 persons would enter the workforce equipped with relevant trades skills, 480 persons with managerial skills, 9,600 with associate professional skills and 5,700 with labouring skills.

34 Note it has been assumed in the interests of conservatism that all workers retire at 65. 35 NCVER data is published on a calendar year basis. MONASH data is considered on a fiscal year basis.

No adjustment has been made to account for the six month difference as this would imply a level of precision in labour force estimation that is not possible. Due to the ability of workers to enter and leave the workforce, train into industries and so on, it is only possible to provide indicative estimations of skills capacities.

36 It is noted that ‘tradespersons’ may cover a broad range of skills. ASCO taxonomy divides trades into the following categories: ‘Mech/Fab Engineering Trades’, ‘Automotive Trades’, ‘Elec. Trades’, ‘Construction Trades’, ‘Food Trades’, ‘Skilled Ag/Horticultural’, and ‘Other Trades’. Of tradespersons employed in 2005-06 in NSW, approximately 17 per cent of all tradespersons were Mech/Fab Engineering tradespersons; 11 per cent were Automotive tradespersons; 15 per cent were Electrical tradespersons; 27per cent were Construction tradespersons; 7 per cent were Food tradespersons; 7 per cent were Skilled Agricultural/Horticultural tradespersons, and 16 per cent were ‘Other trades’. This implies that at least 70 per cent of all tradespersons (excluding Food, Ag, and Other trades) would have had skills directly relevant to the shipbuilding projects. All tradespersons completions have also been scaled down to account for the number of persons that might otherwise have graduated from a vocational course with skills entirely irrelevant to the shipbuilding industry and other industries that would compete for the same labour as the shipbuilding industry.

37 Note that a range of managers are trained through vocational courses, not all of which are relevant to the shipbuilding industry. Using ASCO data on types of managers it was calculated that approximately 30 per cent of all managers in NSW were either General Managers, Building & Construction Managers, Engineering Managers, or Production Managers. This same percentage was applied to the number of trainees and apprentices.


It should be underscored that while this assumes no growth in the number of completions, in fact NSW has seen the number of trainee and apprenticeship completions in the past five years (to 2006) grow by 13 per cent on average annually.

• The supply of university graduates — Additionally, students with university degrees in engineering and management would also be expected to graduate. In 2005, approximately 222,000 Australian students graduated from NSW universities. Applying the national average percentage of engineering graduates to this total (approximately 6 per cent) would result in 13,300 engineering graduates in NSW. If only 20 per cent of these graduates had skills relevant to the shipbuilding industry (as was calculated examining ASCO data for 2005-06), this would imply that 2,700 engineering graduates would enter the Australian market with relevant skills each year.

Similarly, applying the national average percentage of management graduates to this total (approximately 27 per cent) would result in 60,000 management graduates in NSW. If only 33 per cent of these graduates had skills relevant to the shipbuilding industry (as was calculated examining ASCO data for 2005-06), this would imply that 19,800 management graduates would enter the Australian market each year.

Assuming no growth in the number of university graduates and that all students enter the labour market following graduation, this would result in approximately 8,100 engineering students and 59,500 management graduates entering the labour market between 2007 and 2009.

This implies that while demand for labour with transferable skills into the shipbuilding industry would increase in the period leading up to the ships’ construction phase, there would also be a significant number of new entrants into the market with either the necessary skills or the ability to be trained into a shipbuilding program.38

Net labour potential in NSW

With demand for labour declining in key related occupations, and with the strong increase in apprenticeship and university completions projected, it is expected that even if all the work for the AWD and LHDs could be undertaken in NSW, there would be an expected additional pool of available skilled labour to be trained for the projects (assuming no labour mobility). This conclusion takes account of:

• net demand from other relevant industries requiring a further 9,300 persons on average during the construction phase of the prospective ships projects to support projected industry growth, comprised of an increase in demand for managers and associate professionals (+7,600 persons demanded), a decline in demand for engineers (-130 persons) and a net increase in demand for tradespersons and labourers (+1,900 persons demanded);

• a reduction in the number of existing skilled tradespersons (11,600 persons), skilled managers (6,500 persons) and skilled engineers (1,200 persons) over the next three years;

• the number of university, trainee and apprenticeship completions expected over the next three years with relevant managerial, engineering, trades and labourer

38 During the ships’ construction phase (2009-2014), there would continue to be a migration out of the

industry by aged workers. Over the five year construction phase, a further 17,500 tradespersons and labourers would leave the industry. However, this would be more than offset by the net increase in the number of trainee and apprentice completions. Again, if a no growth scenario held, then a further 62,000 trainees and labourers with relevant skills would enter the market following a vocational education.


qualifications, assuming no growth in the number of completions and the potential for a majority of these persons to be trained into the shipbuilding industry.

This would leave, after accounting for the full potential labour impact of the LHD and AWD projects:

• an approximate additional pool of 7,500 tradespersons and labourers with skills relevant to the shipbuilding industry in the lead up to the ships’ construction phase;

• an approximate additional pool of 55,600 persons with managerial and associate professional qualifications relevant to the shipbuilding industry in the lead up to the ships’ construction phase;

• an approximate additional pool of 7,000 persons with engineering skills relevant to the shipbuilding industry in the lead up to the ships’ construction phase.

Again, this ignores potential growth in the number of completions among vocational and university courses expected beyond 2006. Conversely, it does not include any major projects that were not committed as of March 2007.

The total labour requirement for the AWD and LHD project would be 1,600 tradespersons and labourers and approximately 450 managers and associate professionals. On balance, given the long lead time involved and the large potential pool of persons with core skills that can be appropriately trained for the LHD project, it is difficult to make a case that there will be substantial skills shortages in the NSW market to undertake the whole LHD project, let alone a part of it.

Existing naval shipbuilding capability in New South Wales

This analysis on its own would suggest there is sufficient labour available with either the skills or the ability to be quickly trained into the industry for the AWD and LHD projects. However, clearly, the ability to undertake a project on time and on budget, which means to have the ability to recruit, train and manage all required workers, is more than just the sum of metal workers and electricians in a labour market. Also mitigating this would be information gaps, which could prevent skilled persons from identifying job opportunities with employers, and conversely, preventing employers from recruiting persons with sufficient skills for the project.

The presence of existing shipbuilding capacity in a region is therefore a significant factor determining the availability of labour. We believe it is reasonable to assume that existing contractors with deep experience in naval shipbuilding will, other things being equal, find it relatively easier to expand their workforces to meet the needs of major new contracts than new or relatively small naval shipbuilding contractors. This is particularly likely to be the case where existing contractors are already large employers and have been through employment peaks in the not too distant past which are well beyond their current levels of employment and not too different from the levels they need to achieve to meet prospective large new projects. Such companies are likely to have well developed human resources systems, a core workforce and a valuable knowledge of how to locate previous employees who are now working elsewhere in the New South Wales economy.

One of the major naval shipbuilding contractors, Thales, has significant operations in New South Wales and has built up systems to allow it to deal with the ups and downs in the flow of work, and hence the size of the workforce, associated with naval shipbuilding contracts.

Moreover, Thales’ major existing project in NSW, the FFG upgrades, would suggest that there is a solid core of skills already employed and potentially able to undertake significant work on the AWD and LHDs if it were assigned to NSW. A significant workforce is currently employed by Thales at Garden Island to undertake the major upgrades to four of the RAN’s Oliver Hazard Perry class FFGs. If Thales were awarded the LHD contract, this


workforce would become available to work on the LHDs as the FFG contracts were completed. The number of employees at Thales exceeds the peak additional labour requirements for the proposed shipbuilding programs.

In addition, Forgacs has a facility at Newcastle which, formerly the Carrington shipyard, has a long history of shipbuilding. HMAS Tobruk was built in the yard. Forgacs also has the ability to identify previous members of its workforce and gear up production if necessary.

These observations regarding the established shipbuilding workforce strengthen our confidence in the robustness of the conclusion that has been reached about NSW based on the broad MONASH labour market data presented above. It is difficult to imagine that if some part of the LHDs were undertaken in NSW, given the existing number of people employed at Thales relative to the LHD work requirements and given the pool of potential labour available to ‘top up’ existing workforce requirements, that there would be a material risk of wage price increases or project delays. This is particularly difficult given the combination of skills required for the LHD project, which is comparatively less complex than the AWD build.

We conclude that sufficient skills would be available for the LHD project if it were all, or in part, undertaken in NSW.

A.2.2 Victoria’s labour capacity39

If Tenix/Navantia were to be awarded the LHD contract, it is expected that a substantial part of the work would be undertaken in Victoria.

Changing industry demand

Similar to NSW, the MONASH model suggests that in Victoria, demand for many occupations with skills that are transferable into the shipbuilding industry will be in decline (Table A.2). Occupations that are expected to see a decline in demand over the short to medium term are highlighted in red (or the lighter shade). As in NSW, industries such as the motor vehicles and parts production, electricity supply, metals production, sheet metal production, and other transport equipment production industries are all expected to decline or stagnate in terms of profitability, leading to negative or no growth in employment. Also similar to NSW, the demand for managers in Victoria is expected to increase.

39 MONASH projects an average increase in demand for all occupations in Victoria of approximately 93,000

from the average demanded during the lead up to the construction phase of the naval shipbuilding projects. Not all of this growth would be expected to be met through the apprentices and traineeship programs; part would also be met by new entrants from the university sector. In 2005, 243,000 students graduated from Victorian higher education institutions; applying the Australian average for number of domestic completions (75 per cent) this represents around 182,000 Australian university graduates. However, in the next three years, assuming no growth in the number of completions, approximately 102,000 new trainees and apprentices would complete their respective courses. This would supply approximately 110 per cent of projected total growth in demand for all occupations in Victoria.


TABLE A.2 – CHANGES IN DEMAND FOR SELECTED OCCUPATIONS IN VICTORIA RELEVANT TO THE SHIPBUILDING INDUSTRY

Occupation Lead up to LHD, AWD

construction programs

(Avg absolute employment

FY07-FY09, Jobs)


(Avg absolute employment FY09-FY14)

Absolute Change in

Employment demanded

(Jobs)

General Managers 24,266 28,420 4,153



Production Managers 14,500 16,140 1,640


Sea Transport Professionals 833 700 -133

Electrical Engineering Associate Professionals

2,133 1,920 -213

Electronic Engineering Associate Professionals

3,200 2,800 -400

Mechanical Engineering Associate Professionals

1,967 1,700 -267

General Mechanical Engineering Tradespersons

933 1,080 147


Toolmakers 3,133 3,080 -53


Precision Metal Trades 1,433 1,360 -73

General Fabrication Engineering Tradespersons

300 400 100

Structural Steel & Welding Tradespersons

17,200 18,540 1,340



Metal Casting Tradespersons 100 80 -20







Vehicle Trimmers 300 300 0


Occupation Lead up to LHD, Construction Absolute AWD

construction programs

(Avg absolute employment

FY07-FY09, Jobs)


demanded (Avg absolute employment (Jobs) FY09-FY14)

Electricians 25,133 24,600 -533


Insulation & Home Improvement Installation Tradespersons

3,600 4,000 400


Seafarers & Fishing Hands 600 560 -40


64,300 69,240 4,940 jobs


11,467 11,320 -147 jobs


114,500 115,920 1,420 jobs

Total demand change 151,500 151,920 6,213 jobs

Source: MONASHEF March 2007

The MONASH model projects that demand will decline for many occupations relevant to the shipbuilding industry, including:


• Toolmakers




• Metal Casting Tradespersons

• Motor Mechanics

• Panel Beaters

• Electricians

All of these occupations have skills directly relevant to the shipbuilding industry.

Other occupations that would also demand tradespersons and labourers — including refrigeration and air-conditioning mechanics, electrical distribution trades, electronic instrument trades, electronic/office equipment trades, communications tradespersons,


carpentry and joinery trades, fibrous plasterers, roof slaters and tilers, bricklayers, solid plasterers, tilers and stonemasons, painters & decorators, sign writers, floor finishers and plumbers — would see an average decrease in demand of 2,600 persons. This suggests that competition from other industries that employ tradespersons and labourers will not be high in Victoria and the threat of skills migration to other occupations is not great.


Potentially increased demand for new entrants, despite slowing demand by industry, would be a change in the number of existing workers. Applying the same age profile assumptions to the existing pool of Victorian tradespersons and labourers, would result in the leaving of 8,700 existing tradespersons and labourers, 4,900 existing managers and associate professionals and 900 existing engineers. Added to growth in demand for tradespersons and labourers, this would increase demand for skilled tradespersons and labourers to 10,100 persons. Similarly it would also increase demand for skilled managers and associate professionals to 9,900 persons, and demand for engineers to 750 persons.

New entrants into the labour market in between now and the LHD project commencement

From the new entrants perspective, there will also be continuing university, apprentice and trainee completions.

• The supply of apprenticeships and trainees — Considering the NCVER data for Victoria, if there was no growth in the number of trainees and apprentices from 2006, then approximately 34,000 new workers (i.e. non existing) would complete an apprentice program each year from 2007 to 2009. Approximately 6,800 of these completions would be new tradespersons in Victoria each year, with approximately 70 per cent having relevant skills to shipbuilding and other relevant industries (4,800 persons). Similarly, approximately 380 managers (with approximately 30 per cent having skills relevant to the shipbuilding industry, or 114 persons), 2,200 associate professionals and 2,200 labourers would also complete their training from 2007-2009, assuming no growth in the number of completions.

While we have assumed no growth in the number of trainee completions, in fact Victoria has seen the number of trainee and apprenticeship completions in the past five years (to 2006) grow by 15 per cent on average annually.

Therefore from 2007-2009, even with the conservative assumption of no growth in the number of completions, a significant number of workers with relevant skills would enter the workforce. Of these, around 14,400 persons would be equipped with relevant trades skills, 340 with managerial skills, 6,600 with associate professional qualifications, and 5,800 with labouring qualifications.

• The supply of university graduates — Additionally, students with university degrees in engineering and management would also be expected to graduate. In 2005, approximately 182,000 Australian students graduated from Victorian universities. Applying the national average percentage of engineering graduates to this total (approximately 6 per cent) would result in 10,600 engineering graduates in Victoria. If only 20 per cent of these graduates had skills relevant to the shipbuilding industry (as was calculated examining ASCO data for 2005-06), this would imply that 2,200 engineering graduates would enter the Victorian labour market with relevant skills each year.

Similarly, applying the national average percentage of management graduates to this total (approximately 27 per cent) would result in 49,000 management graduates in Victoria. If only 33 per cent of these graduates had skills relevant to the shipbuilding industry (as was calculated examining ASCO data for 2005-06), this would imply


that 16,200 management graduates with potentially relevant skills would enter the Victorian labour market each year.

Assuming no growth in the number of university graduates and that all students enter the labour market following graduation, this would result in approximately 6,500 engineering students and 48,600 management graduates into the labour market between 2007 and 2009.40

Net labour potential in Victoria

Assuming no labour migration and that both the AWD and LHD projects together would be expected to increase employment in the shipbuilding industry by around 2,050 workers (noting this is the peak requirement projected), it would appear that the Victorian labour market would have sufficient labour to undertake the projects.

Subtracting demand of 1,600 from the total pool of tradespersons and labourers, and 450 from the managerial and associate professional skills pool, and accounting for demand shifts within the Victorian market in these job categories, it is expected in net terms that there would be:

• an approximate additional pool of 10,100 tradespersons and labourers with skills relevant to the shipbuilding industry;

• an approximate additional pool of 45,700 persons with managerial and associate professional qualifications; and

• an approximate additional pool of 5,800 persons with engineering skills.

This ignores potential growth in the number of completions expected beyond 2006. This could lead to an understatement of the potential additional labour pool. However, demand for employment by occupation is based only on all known committed projects as of March 2007. Changes in the number of committed projects may also impact on the projected additional labour pool of jobs.

With total labour requirements for the LHD and AWD projects requiring approximately 1,600 tradespersons and labourers and approximately 450 managers and associate professionals, given the long lead time involved and the large potential pool of persons with core skills, it is difficult to make a case that there will be substantial skills shortages in the Victorian labour market, even on the extreme assumption that both the AWD and LHD projects were wholly undertaken in the State of Victoria.

Moreover, while no labour mobility between States has been assumed, if there were labour mobility between NSW and Victoria this would imply a potential labour supply pool of:

• approximately 17,600 tradespersons and labourers;

• approximately 12,800 persons with relevant engineering skills; and

• approximately 101,200 persons with relevant managerial and associate professional qualifications.

Existing naval shipbuilding capability in Victoria

One the leading naval shipbuilding contractors, Tenix, has significant operations in Victoria and in the recent past has had the experience of having to build up its workforce to meet the

40 During the construction phase there would continue to be a migration out of the industry by aged workers.

Over the five year construction phase, a further 13,000 tradespersons and labourers would leave the industry. However this would be more than offset by the net increase in the number of trainee and apprentice completions. Again, if a no growth scenario held, then a further 60,600 trainees and labourers with relevant skills would enter the market following a vocational education, which would create a net increase in supply of 47,500 tradespersons and labourers.


peak demands of the ANZAC ships project. Tenix also has smaller operations in Western Australia.

Like Thales in NSW, Tenix has a strong core workforce in Victoria of approximately 650 persons. The company, because of the relatively high peak employment level reached with the ANZAC ships project (when about four times as many persons were employed), has also been able to build a very valuable data base of previous employees who are potential recruits should they need to increase their workforce to meet the needs of major new naval shipbuilding projects in the future. The company believes they have a strong ability to “top-up” their workforce to meet future needs. In this context, it should also be noted that Tenix is well-placed to win significant work on the AWDs in terms of module construction.

Also relevant is Tenix’s experience with its Western Australian operations, where the company was able, when the need arose, to draw at relatively short notice upon resources employed elsewhere in Tenix’s operations to meet peak naval shipbuilding needs.

The presence of Tenix is, in this light, a factor which strengthens our confidence in the robustness of the conclusion that has been reached about Victoria based on the labour market data presented above. The presence of a prime will serve to mitigate any potential information gaps in the labour market and improve the ability for workers to be recruited into the project.

A.2.3 Queensland’s labour capacity41

Under both of the competing bids, some of the work will be undertaken in Queensland. If the Thales bid succeeds, the value of this work is expected to be greater.

It is important to take account of the State’s Government’s strategic objectives in any analysis of the availability of labour in Queensland for manufacturing projects. Reflecting a concern that it is overly reliant on the resources and tourism industries, the Queensland Government has an objective of diversifying its economy into high end manufacturing operations (‘Smart State’). In recent years, Queensland has seen significant employment growth in the defence industries, with companies such as Boeing, Honeywell and Australian Aerospace committing considerable resources to operations in the State.

The MONASH model projects a somewhat different picture for Queensland to NSW and Victoria. Due to ‘sea change’ migration patterns and a growing resource economy, which creates demand for building construction and other structural steel manufacturing, demand for employment is expected to be much stronger in the northern resource-rich State.

Changes in industry demand

The labour market relevant to the shipbuilding industry in Queensland for skills related to the shipbuilding industry is expected to be tighter than in NSW and Victoria. Using MONASH model projections for employment demand trends by State, it is possible to consider which occupations will be in greater or lesser demand in the lead up to the LHD and AWD projects’ construction (Table A.3). Occupations that are expected to see a decline in

41 The MONASH model projects an average increase in demand for all occupations in Queensland of

approximately 171,000 jobs from the average demanded during the lead up to the construction phase of the projects. Not all of this growth would be expected to be met through the apprentices and traineeship programs; part would also be met by new entrants from the university sector. In 2005, 186,000 students graduated from Queensland higher education institutions; applying the Australian average for number of domestic completions (75 per cent) this represents 139,000 Australian university graduates from Queensland universities. If there were no growth in the number of completions at universities and in vocational courses, then approximately 417,000 university students would graduate (potentially entering the Queensland labour market) and 64,000 new trainees and apprentices would complete their respective courses. This would imply it should be possible for the labour market to meet industry demand over the next three years.


demand over the short to medium term are highlighted in red (or a lighter shade in black and white copies).

TABLE A.3 – CHANGES IN DEMAND FOR SELECTED OCCUPATIONS IN QUEENSLAND RELEVANT TO THE SHIPBUILDING INDUSTRY


programs


FY09, Jobs)



Absolute Change in

Employment demanded

(Jobs)


Building & Construction Managers 11,053 11,122 69


Production Mangers 11,120 12,980 1,860

Electrical/Electronics Engineers 5,347 5,388 41

Sea Transport Professionals 2,870 2,498 -372


2,550 2,414 -136


2,120 1,948 -172


757 688 -69


1,307 1,620 313

Metal Fitters & Machinists 25,697 26,314 617

Toolmakers 360 372 12


Precision Metal Trades 1,293 1,302 9


230 292 62


16,870 19,056 2,186





Motor Mechanics 19,977 20,604 627


Panel Beaters 3,680 3,708 28


Vehicle Body Makers 970 1,042 72



programs


FY09, Jobs)



Vehicle Trimmers 1,063 1,014 -49

Electricians 24,723 25,294 571



5,323 6,210 887




49,103 54,410 5,307 jobs


9,233 9,688 455 jobs


120,083 127,102 7,019 jobs

Total demand change 178,419 191,200 12,781 jobs


In Queensland the largest growth in demand would be for tradespersons and labourers and managers, which is expected to significantly outpace demand growth in NSW and Victoria. Some labour categories that are of direct relevance to the shipbuilding industry are not expected to be in decline in Queensland as in NSW and Victoria.

Moreover, unlike NSW and Victoria, other occupations that would also demand tradespersons and labourers — including refrigeration and air-conditioning mechanics, electrical distribution trades, electronic instrument trades, electronic/office equipment trades, communications tradespersons, carpentry and joinery trades, fibrous plasterers, roof slaters and tilers, bricklayers, solid plasterers, tilers and stonemasons, painters & decorators, sign writers, floor finishers and plumbers — would see an average increase of 2,200 persons demanded to meet expected industry growth.

Existing workforce retirement

Also impacting on the labour market in Queensland would be a change in the number of existing workers. Applying the national age profile assumptions to the Queensland market shows that the number of tradespersons and labourers potentially exiting the industry during the lead up to the ships’ construction would be roughly 9,100 persons. Added to growth in demand of 7,000 jobs for tradespersons and labourers, this would increase the required number of new tradespersons to be trained for the ships’ construction to approximately skilled 16,100 persons. In terms of engineers, managers and associate professionals,


assuming the same age profile held, 3,700 managers and associate professionals would be expected to leave the workforce in over the 2007-2009 period and 700 engineers. This would increase demand for new entrants to 9,100 for managers and associate professionals and 1,200 engineers.

New entrants into the labour market in between now and the LHD project commencement

Offsetting this is a larger growth in demand for skilled workers that might otherwise be employed by the shipbuilding industry is the number of vocational and university completions in Queensland.

• The supply of new apprentices and trainees — Considering NCVER data for Queensland, if there was no growth in the number of trainees and apprentices from 2006, then approximately 21,400 new workers (i.e., non-existing) would complete an apprentice or traineeship program each year in 2007-2009. Approximately 3,675 of these completions would be tradespersons with skills relevant to the shipbuilding industry (or to industries that might compete with the shipbuilding industry for labour), 330 would be managers with skills relevant to the shipbuilding industry (or to industries that might compete with the shipbuilding industry for labour), 1,050 would be associate professionals, and 3,600 would be labourers.

While it has been assumed that there would be no growth in the number of trainee completions, Queensland has seen the number of trainee and apprenticeship completions in the past five years (to 2006) grow by seven per cent on average annually.

If no growth is assumed then between 2007 and 2009 approximately 11,000 persons would be equipped with relevant trades qualifications would enter the labour market, 1,000 persons would be equipped with managerial qualifications, 3,100 persons would be equipped with associate professional qualifications and 10,800 with labouring qualifications.

• The supply of university graduates — Students with university degrees in engineering and management would also be expected to graduate in the lead up to the construction phase of the defence ships. In 2005, approximately 139,000 Australian students graduated from Queensland universities. Applying the national average percentage of engineering graduates to this total (approximately 6 per cent) would result in 8,400 engineering graduates in Queensland. If only 20 per cent of these graduates had skills relevant to the shipbuilding industry (as was calculated examining ASCO data for 2005-06), this would imply that 1,700 engineering graduates would enter the Queensland market with relevant skills each year.

Similarly, applying the national average percentage of management graduates to this total (approximately 27 per cent) would result in 37,700 management graduates in Queensland. If only 33 per cent of these graduates had skills relevant to the shipbuilding industry (as was calculated examining ASCO data for 2005-06), this would imply that 12,400 management graduates with potentially relevant skills would enter the Queensland labour market each year.

Assuming no growth in the number of university graduates and that all students enter the labour market following graduation, this would result in approximately 5,000 engineering students and 37,300 management graduates into the labour market between 2007 and 2009.

Net labour potential in the Queensland market

The AWD and LHD projects would require approximately 1,600 tradespersons and other staff. Assuming that all of the AWD and LHD project work is undertaken in Queensland,


this would draw on the approximately 21,800 new tradespersons and labourers entering the Queensland labour market in the lead up phase to the ships project (after accounting for existing worker retirement). This new pool of labour would meet increased demand for tradespersons and labourers outside the shipbuilding industry (approximately 7,000 jobs) and demand created by an exit of existing workers from the industry (9,100 jobs), which would leave a potential labour pool of 5,700 tradespersons and labourers available to be trained for the LHD and AWD projects. Given the LHD and AWD projects together would require 1,600 tradespersons and labourers, it is highly likely that Queensland market would be able to undertake parts of the LHD project.

If we apply the further assumption that this labour could be attracted into other trades occupations where demand was also increasing, such as refrigeration and air-conditioning mechanics, electrical distribution trades, electronic instrument trades and so on (approximately 2,200 jobs), this would still leave a pool of 3,500 workers with the potential to be skilled into shipbuilding trades.42

This would be more than sufficient to meet the likely demands of the LHD project. Nevertheless, given the expected increase in demand for metal and electrical trade occupations in Queensland generated by industry growth projections (unlike NSW and Victoria where demand for these occupations is declining), the risk of labour shortages would be relatively higher in Queensland.

In terms of managers and associate professionals, approximately 4,100 new apprentices and trainees with relevant skills would be expected to enter the market over the next three years. This on its own would not be sufficient to meet the demands of the market for relevant managers and associate professionals (approximately 5,300 persons). This would rely on persons coming from the university graduate pool of 37,300 persons. This is a very large pool of graduates and it is not unreasonable to think that this should be an ample supply of labour from which relevant industries might draw without seeing material increases in wage costs. In terms of engineers, 455 additional engineers would be required in the Queensland market, which should be amply met by the new engineering entrants (5,000 persons) from the university sector. This would be more than sufficient to meet the likely demands of the LHD project, with the requirements for the AWD and LHD projects being approximately 450 persons in total.

Existing naval shipbuilding capability in Queensland

The above analysis suggests that there is a large potential number of skilled workers in Queensland. Unlike the situation in New South Wales and Victoria, however, where major naval shipbuilding contractors are based in these States, the situation is rather different in Queensland. While Queensland lacks companies like Thales and Tenix with deep experience as prime contractors in naval shipbuilding and also past involvement with managing significant swings in naval shipbuilding projects, Forgacs has an operation in Brisbane that is well suited to building modules.

The analysis has shown there is a substantial additional pool of labour likely to be available, even applying the very conservative assumptions of no growth in the number of new entrants (apprentices and university grads). On balance we consider that if significant parts of both the LHD and AWD projects were to be sub-contracted in Queensland, and those parts matched existing skill sets, the required labour would be available and the risks of project delays and increased costs would be comparatively small.

42 Note this was not done for NSW or Victoria, in particular because demand for these occupations was

declining and because it was assumed that several years of training would be required to move from relevant shipbuilding trades into these occupations.


A.2.4 Western Australia’s labour capacity The Western Australian Government has developed, and is continuing to invest in, a sophisticated facility for ship construction and maintenance, namely the Australian Marine Complex at Henderson. This facility is adjacent to Fleet Base West and has attracted major investments in capacity by Tenix and Raytheon, with other players, such as ASC and Thales, also establishing a presence there. Neither Tenix nor Thales if successful, however, appear likely to locate significant work on the LHDs in Western Australia. Nevertheless, policy makers in WA still believe they have an opportunity here. If the ships were to be consolidated in the West, the State Government has committed to increasing the size of the floating dock facility so as to be able to accommodate the biggest ships in the RAN.

Western Australia plays host to a substantial part of the resources boom and has been enjoying a sustained rate of economic growth over the last few years that is unprecedented in developed economies. The Western Australian labour force could best be described as ‘tight’, with unemployment in April 2007 falling to 2.7 per cent. However, no boom lasts for ever. If no labour mobility is assumed, there is projected to be continued pressure on wages in some labour categories over the short to medium term, although this is expected to reduce somewhat over the next several years compared to recent years.

MONASH projects an average increase in demand for all occupations in Western Australia of approximately 81,000 from the average demanded during the lead up to the defence projects to the construction phase. Not all of this growth would be expected to be met through the apprentices and traineeship programs; part would also be met by new entrants from the university sector. In 2005, approximately 97,000 students graduated from Western Australia higher education institutions; applying the Australian average for number of domestic completions (75 per cent) this represents 73,000 Australian university graduates, implying approximately 220,000 new labour market entrants over the next three years assuming no growth in the number of completions. There would also be a 25,000 new trainees and apprentices (all qualifications) would complete their respective courses over the period from 2007-2009.

Changes in industry demand

Similar to Queensland and in keeping with other economic data showing a ‘two-speed economy’, Western Australia is expected to continue to see strong economic growth. In Table A.4 below, occupations for which demand is expected to increase during the ships’ construction phase relative to the lead up phase are shown in black; conversely, occupations for which demand is expected to decrease during the ships’ construction phase relative to the lead up phase are shown in red.

TABLE A.5 – CHANGES IN DEMAND FOR SELECTED OCCUPATIONS IN WESTERN AUSTRALIA RELEVANT TO THE SHIPBUILDING INDUSTRY


programs


FY09, Jobs)



Absolute Change in

Employment demanded

(Jobs)


Building & Construction Managers 3,200 3,212 12




programs


FY09, Jobs)



Production Managers 6,007 6,990 983

Electrical/Electronics Engineers 3,233 3,246 13

Sea Transport Professionals 1,083 950 -133


840 792 -48


1,587 1,448 -139


1,260 1,140 -120


1,570 1,940 370

Metal Fitters & Machinists 17,940 18,306 366

Toolmakers 250 260 10


Precision Metal Trades 600 600 0


63 80 17


15,500 17,438 1,938


Sheet metal Tradespersons 767 750 -17

Metal Casting Tradespersons 0 0 0


Motor Mechanics 9,180 9,434 254


Panel Beaters 1,157 1,160 3



Vehicle Trimmers 110 106 -4

Electricians 11,953 12,182 229



2,073 2,412 339





programs


FY09, Jobs)




27,133 30,486 3,353


4,393 4,516 123


71,520 76,138 4,618

Total demand change 103,047 111,140 8,093


Western Australia is expected to see a decline in demand for occupations directly related to the shipbuilding project in the following categories:







• Vehicle Trimmers


All other occupations are expected to see rising demand for their skills. This is largely due to the resources boom, which creates demand for building construction labour during the construction phases of major projects in particular, and to broader flow-on impacts created by the booming economy, with growth in housing and other related industries resulting from strong economic growth.

Other industries that may compete with the shipbuilding sector in especially tight labour markets (and other industries that compete for shipbuilding labour) — including refrigeration and air-conditioning mechanics, electrical distribution trades, electronic instrument trades, electronic/office equipment trades, communications tradespersons, carpentry and joinery trades, fibrous plasterers, roof slaters and tilers, bricklayers, solid plasterers, tilers and stonemasons, painters & decorators, sign writers, floor finishers and plumbers — would be expected to increase demand for skilled workers (by approximately 650 jobs).



Exacerbating this growth in demand would be a change in the number of existing workers in Western Australia. Applying the national age profile assumptions to the Western Australian market shows that the number of tradespersons and labourers potentially exiting the industry during the lead up to the ships’ construction would be roughly 5,400 persons, the number of managers and associate professionals potentially exiting the industry during the lead up to the ships’ construction would be roughly 2,100 persons, and the number of engineers potentially exiting the industry during the lead up to the ships’ construction would be roughly 300 persons.

New entrants into the industry from between now and the LHD project commencement

Western Australia is slightly different from Queensland, however, in that it is not expected to see as large an increase in the number of apprentices or trainees if no growth in new completions is assumed. This is primarily due to its lower population base compared to the Eastern States. In the past five years, however, Western Australia has seen the number of apprentice completions grow by 9 per cent and the State is pursuing a number of strategies to increase skilled labour within the State.

• The supply of apprentices and trainees —The supply of apprentices and trainees According to NCVER, if the same number of completions occurred each year as occurred in 2006 then there would be approximately 1,700 new tradespersons, 900 new labourers, 80 new managers with skills relevant to the shipbuilding industry, and 300 new associate professionals. This would imply a total of 7,800 new tradespersons and labourers entering the market from 2007-2009; and 1,140 new managers and associate professionals.

• The supply of university graduates — In 2005, approximately 73,000 Australian students graduated from Western Australian universities. Applying the national average percentage of engineering graduates to this total (approximately 6 per cent) would result in 4,400 engineering graduates in Western Australia. If only 20 per cent of these graduates had skills relevant to the shipbuilding industry (as was calculated examining ASCO data for 2005-06), this would imply that 875 engineering graduates would enter the Western Australian market with relevant skills each year.

Similarly, applying the national average percentage of management graduates to this total (approximately 27 per cent) would result in 19,700 management graduates in Western Australia. If only 33 per cent of these graduates had skills relevant to the shipbuilding industry (as was calculated examining ASCO data for 2005-06), this would imply that 6,500 management graduates with potentially relevant skills would enter the Western Australian labour market each year.


Net labour potential in Western Australia

Holding all else constant and considering changes in supply and demand of skilled labour, this would imply that on net:

• If the assumption of no growth in the number of completions from 2006 held, there would be a skills shortage of tradesperson and labours available during the construction phase of the ships project of approximately 2,200 tradespersons and labourers in the State. However, given the investment in vocational courses in Western Australia, such an outcome is highly unlikely. In the past five years


Western Australia has averaged nine per cent average annual growth in the number of completions. This implies that while the labour market is likely to remain tight in Western Australia for skilled tradespersons and labourers, there should be sufficient numbers of persons to be trained. To the extent that more Australians living on the east coast migrate to Western Australia or to the extent that the reduction in the number of existing workers is less in Western Australia, this labour tightness could be ameliorated. In the next section the growth assumptions are relaxed.

• There would be a sufficient supply of managers and associate professionals (assuming, conservatively, no growth in the number of completions, which given the substantial investment in skills being made by the State is unlikely to hold) of 15,100 persons.

• There would also be a sufficient supply of engineers entering the market from the university sector (2,200 persons), exceeding the needs of the LHD and AWD projects.

It is important to stress that the MONASH employment forecasts include all known committed projects as of March 2007. However, clearly the possibility of new major projects capturing new labour market entrants is significant in Western Australia and creates greater risks than in other Australian States. Stakeholders have indicated that the shipbuilding industry in Western Australia has been affected by the resources boom, although this has tended to be younger workers who are more willing to work in remote places. This point was also made by John Rothwell, Executive Chairman of Austal Ships, in his evidence to the Senate Inquiry.

Nevertheless, there is projected to be a slow down in demand growth for most occupational categories in Western Australia.43 The key factor driving the slow down in demand growth for labour is that many projects that were undertaken near the beginning of the resources boom have begun to complete their construction phases and are entering into their operational phases of production. This labour can clearly be employed in new major projects, with the key increase in demand for labour coming through during construction phases that typically last between 2 to 5 years depending on the size of the project.

The largest potential major projects in Western Australia, which are currently uncommitted include in the main new petroleum (LNG) projects. The Western Australian Department of Industry and Resources published in June 200644 an estimate of the construction workforce requirements for known projects under consideration but uncommitted. New LNG projects accounted for approximately 40 per cent of the construction workforce requirements. As a result some analyses have added all the LNG projects together to show the potential risks to the Department of Defence if all LNG projects were to go ahead. However, it is highly unlikely that all of these projects would go ahead in parallel.

The labour market in Western Australia is the tightest of all State markets and therefore carries the most risk for the Department of Defence.

Existing naval shipbuilding capability in Western Australia

As indicated in Section 3.2, the shipbuilder located in Perth which operates the largest facility is Austal Ships which is primarily a builder of aluminium ships. Austal Ships made clear to the Senate Inquiry into naval shipbuilding that they were already feeling the competitive pressure from the resource sector in terms of retaining and attracting skilled people.

43 See Shah, et al (2005), op cit. 44 Department of Industry and Resources (2006), Prospect, June.


Tenix, which is a naval shipbuilder, has a facility in Western Australia. According to that company, the fact that Tenix had other parts of its operations in Western Australia was important to it in terms of getting access to the workforce it needed to carry out existing projects.

In the circumstances, the size and nature of the naval and commercial shipbuilding capabilities already present in Western Australia mean that there would be some risks if a substantial part of the LHD project were undertaken in that State. However, given the accelerated training programs now in place and in view of the fact that the AMC has spare capacity, these risks may not be great.

A.2.5 South Australia’s labour capacity Changes in industry demand

We assume that, if successful, neither Tenix nor Thales plan to sub-contract significant work for the LHDs to South Australia. It is considered that South Australia’s defence industry will need to focus much of its resource base on the AWD project over the next decade. This analysis is conducted to understand the dynamics of the South Australian labour market and does not suggest that all of the work would be undertaken here.

The MONASH model projects South Australia’s manufacturing sector to decline over the period from 2009-2014. In particular its motor vehicle and metal manufacturing sectors are expected to see negative or no growth in the short to medium term with demand for occupations that have historically worked in these sectors declining.

It is important to note that these projections do not include the impact of the AWD project, nor the Olympic Dam expansion, which is still under consideration but could create demand for thousands of jobs (including for the construction of a desalination plant in South Australia). The Olympic Dam project is potentially one of the most significant projects in Australia, with a possible requirement for around 3,000 workers.

Using MONASH model projections for employment demand trends by State, it is possible to consider which occupations will be in greater or lesser demand in the lead up to the LHD and AWD projects’ construction in South Australia (Table A.5). Occupations that are expected to see a decline in demand over the short to medium term are highlighted in red (or a lighter shade in black and white copies).

TABLE A.5 – CHANGES IN DEMAND FOR SELECTED OCCUPATIONS IN SOUTH AUSTRALIA RELEVANT TO THE SHIPBUILDING INDUSTRY


programs


FY09, Jobs)



Absolute Change in

Employment demanded

(Jobs)




Sea Transport Professionals 437 362 -75


567 504 -63



programs


FY09, Jobs)




907 780 -127


580 494 -86


533 618 85


Toolmakers 2,083 2,006 -77

Aircraft Maintenance Engineers 710 732 22

Precision Metal Trades 500 472 -28


240 288 48


6,333 6,708 375


Sheet metal Tradespersons 657 602 -55


Metal Finishing Tradesperson 207 202 -5


Automotive Electricians 537 580 43


Vehicle Painters 690 746 56


Vehicle Trimmers 270 242 -28

Electricians 7,347 7,060 -287

Structural Steel Construction Workers 690 754 64


1,907 2,082 175


Seafarers & Fishing Hands 800 724 -76


5,860 5,508 -352 jobs

Change in the number of engineers demanded with skills relevant to the

3,027 2,924 -103 jobs



programs


FY09, Jobs)



shipbuilding industry


40,967 40,630 -337 jobs

Total demand change 49,853 49,062 -791 jobs


The MONASH model suggests that within South Australia demand for the pool of existing workers will decrease for most relevant occupations, including:

• Building & Construction Managers

• Electrical/Electronics Engineers






• Toolmakers




• Metal Casting Tradespersons

• Metal Finishing Tradesperson

• Motor Mechanics

• Panel Beaters

• Vehicle Trimmers

• Electricians


The MONASH model also projects declining demand for other occupations — including refrigeration and air-conditioning mechanics, electrical distribution trades, electronic/office equipment trades, communications tradespersons, carpentry and joinery trades, fibrous plasterers, roof slaters and tilers, bricklayers, solid plasterers, tilers and stonemasons, painters & decorators, sign writers, floor finishers and plumbers — of approximately 1,000 jobs in the ships’ construction phase on average compared to the lead up phase.



Offsetting apparent declines in demand would be a change in the number of existing workers in South Australia. Applying the national age profile assumptions to the South Australian market shows that the number of tradespersons and labourers potentially exiting the industry during the lead up to the ships’ construction would be roughly 3,100 persons. This would lead to an increase in demand (2,800 jobs) for tradespersons and labourers, in spite of declining industry demand for employment. Similarly, there would be a decline in managers (440 persons) and engineers (230 persons) that would lead to a net increase in workers demanded of approximately 90 persons and 130 persons, respectively.

New entrants into the labour market from between now and the LHD project commencement

There is also expected to be additional growth in the number of vocational and university completions.

• The supply of apprentices and trainees — South Australia has not seen growth in the number of completions in the last five years, so this assumption is not as conservative in this case. Nevertheless, assuming no growth in the number of completions, according to NCVER data, there would be approximately 7,700 completions by ‘non-existing’ workers each year from 2007-2009, of which 45 would be new managers with relevant qualifications for the shipbuilding industries (or the industries that compete for labour with the shipbuilding sector), 1,200 new associate professionals, 1,500 new tradespersons with skills relevant to the shipbuilding sector and 900 new labourers.

If no growth is assumed, which has been the case for South Australia on average over the past five years, then between 2007 and 2009 approximately 4,500 persons would enter the South Australian labour force equipped with relevant trades qualifications, 135 persons would be equipped with managerial qualifications, 3,600 persons would be equipped with associate professional qualifications and 2,700 with labouring qualifications.

• The supply of university graduates — Students with university degrees in engineering and management would also be expected to graduate in the lead up to the construction phase of the defence ships. In 2005, approximately 50,000 Australian students graduated from South Australian universities. Applying the national average percentage of engineering graduates to this total (approximately 6 per cent) would result in 3,000 engineering graduates in South Australia. If only 20 per cent of these graduates had skills relevant to the shipbuilding industry (as was calculated examining ASCO data for 2005-06), this would imply that 600 engineering graduates would enter the South Australian market with relevant skills each year.

Similarly, applying the national average percentage of management graduates to this total (approximately 27 per cent) would result in 13,500 management graduates in South Australia. If only 33 per cent of these graduates had skills relevant to the shipbuilding industry (as was calculated examining ASCO data for 2005-06), this would imply that 4,400 management graduates with potentially relevant skills would enter the South Australian labour market each year.



Net labour potential in South Australia

Adding together the change in industry demand for relevant tradespersons and labourers (-350 persons), the estimated exit of existing skilled tradespersons and labourers from the market (3,100 persons) and the growth in new trades and labourers (7,200 persons), there would appear to be an ample number of persons available with either sufficient skills or the ability to be trained to work on the AWD and LHD projects. A pool of roughly 4,500 workers would be available to meet the labour demands of both the LHD and AWD projects. However, there is likely to be a large labour demand created by the Olympic Dam expansion, if that project is committed, that would represent a very large demand on State resources, which is not captured in this analysis, but the conclusions of this analysis are likely very sensitive to.

There should be growth in the number of engineers, with approximately 1,800 persons expected to enter the South Australian labour market over the next three years. In addition the number of new managers and associate professionals (17,000 persons) from the vocational and university sectors should be sufficient to supply labour to meet the needs of the LHD and AWD projects (approximately 450 persons).

Existing naval shipbuilding capability in South Australia

Like New South Wales and Victoria, South Australia is home to one of the large naval shipbuilding contractors, ASC. The company has accumulated considerable experience in managing a large naval shipbuilding workforce in its association with the Collins Class submarine project.

ASC has also been selected to be the constructor of the AWD ships, although it is expected that a number of important modules for the AWDs will be built elsewhere and consolidated at ASC’s facility in South Australia.

In spite of this, there are indications that ASC has found it necessary to access labour markets elsewhere in Australia to find the people it needs with specialist skills for key occupations to build up its workforce for the AWD project. In that sense, despite the findings of our broader labour market analysis, it could be something of a stretch to both find the workforce needed for the AWD project and the LHD project without risking bidding up wage costs for the specialist employees it would need to deliver the two projects in additional to its existing submarine related work. Moreover, unlike other States the upside potential for new labour entrants from university and vocational training is not large, particularly given the level of net labour migration out of the State over the past 10 years. Given this finely balanced supply of labour and demand any increase in the number of committed projects, including the very large Olympic Dam project, would likely push this market into labour shortages for a number of occupations.

As far as the LHDs are concerned, the risk to the Department of Defence of wage cost increases or delays is much higher in South Australia than in Victoria, NSW or Queensland.

A.2.6 Conclusions of skills capacity by market The needs by broad labour category for each State labour market are summarised in Table A.6. This shows that most States would have a net pool of potentially trainable labour, which is equal to the sum of:

• new labour entering the market in the lead up to the ships’ construction (2007-2009), minus

• demand from other industries (change in average demand from lead up to construction phase), minus


• the number of existing workers expected to retire in the lead up to the ships’ construction (2007-2009).

This shows there is a large labour potential, even after applying some very strict assumptions about the supply of new entrants (no growth in the number of completions) and the level of work to be undertaken in any one state (i.e., all of the LHD and AWD work to be undertaken in that State) in most States where the LHD work may be done. Clearly only a proportion of the LHD work would be undertaken in any one State. Nevertheless this analysis indicates that the additional imposition of the LHD work stream is very small and not likely to impact on the AWD project’s ability to source skilled labour.


TABLE A.6 – LABOUR FORCE POTENTIAL SUMMARY EXPECTED TO BECOME AVAILABLE BY 2009

NSW VIC QLD WA SA

Supply of new labour

New entrants, tradespersons

15,300 14,400 11,000 5,100 4,500

New entrants, labourers

5,700 5,800 10,800 2,700 2,700


11,600 8,700 9,100 5,400 3,100

Demand from other industries

1,900 1,400 7,000 4,600 (350)

Trad

espe

rson

s an

d La

bour

ers

Pool/(shortage)

7,500 10,100 5,700 (2,200) 4,500

Supply of new labour New entrants, (university) 8,100 6,500 5,000 1,800 2,600


(130) (150) 460 120 (100)


1,200 900 700 300 230

Engi

neer

s

Pool/(shortage)

7,000 5,800 3,800 2,200 1,700

Supply of new labour

New entrants, managers (vocational) 480 340 1,000 135 240

New entrants, assc. profess. (vocational) 9,600 6,600 3,100 3,600 900

New entrants, managers (university) 59,500 48,600 37,300 13,330 19,500


6,500 4,900 3,700 2,100 440


7,500 5,000 5,300 3,400 (350)

Man

ager

s an

d A

ssoc

iate

Pro

fess

iona

ls

Pool/(shortage)

55,600 45,600 32,400 15,100 17,000


Although the aggregate number of workers implies there will be sufficient skills to meet the needs of the LHD and AWD projects, some occupations are in demand in all States, including in particular;

• General Managers;

• Engineering Managers;

• Production Managers;

• General Fabrication Engineering Trades;

• Structural Steel & Welding Trades;

• Structural Steel Construction Workers; and

• Insulation & Ancillary Trades.

Some industry stakeholders have reported wage increases of 40 per cent on pre-AWD rates to attract labour into South Australia to undertake the AWD project. This may in part reflect the high level of labour immobility, or it may also reflect the fact that while there may be many persons with core skills available to be trained, some occupations including managers with specific industry experience and process knowledge, will be difficult to recruit. To the extent that highly skilled individuals or structural steel welders and construction workers are required for both the AWD and LHD projects, it is likely that the project will face rising wage costs for these employees. Nevertheless for many of these occupations that will all be increasingly in demand in all States it should be possible for businesses to train new entrants to fit their organisational needs, including the AWD and LHD projects.

The ability to undertake the LHD and AWD projects in Australia is more than the simple sum of the potential number of skilled metal workers, electricians, plumbers and managers that could work for the project. As drawn out in the analysis, the influence of existing capacity in naval shipbuilding is pivotal to effective recruitment and workforce assembly.

While some risk is inherent to all major projects, overall it would appear that the risk of project cost increases is low if all or the majority of the LHD work were to be undertaken in New South Wales, Victoria and Queensland. The analysis in this section has shown high labour potential in these States, even with the application of a number of conservative assumptions, including that all of the work for both the AWD and LHD projects would be undertaken in the same location, which is highly unlikely to happen, and that there would be no growth in the number of university or vocational completions.

Both South Australia and Western Australia have riskier labour market profiles, with comparatively fewer new entrants compared to the Eastern States and a higher threat of labour competition from future major projects.

A.3 Relaxing growth and migration assumptions A.3.1 Relaxing the ‘no migration’ assumption (Scenario 2) The Western Australian market was shown to be the only market with a skills shortage (if the no growth on 2006 completions assumption held), and this was limited to its tradespersons and labourers sector. If the LHD and AWD projects were not undertaken in Western Australia and the no growth assumption still held, a skills shortage of 2,200 persons would remain in this sector. In this section we relax the ‘no labour mobility’ assumption used in Section A.2.


If the ‘no labour mobility’ assumption were removed, and there was a migration of workers to Western Australia to fill this ‘skills gap’ (noting that this was the result of stringent labour market assumptions), then on a State-by-State, this would result in:

• The projected labour pool in tradespersons and labourers in NSW to fall from approximately 7,500 persons to 5,300 persons, implying that the NSW market has a very reasonable buffer in its labour market to absorb the potential migration of some young workers to other States. Note that this figure assumes there is no growth in the number of new entrants from university and vocational courses on 2006 levels and that all of the AWDs and LHDs work is undertaken in NSW, but does not include the impact of any potential new projects that may be committed after March 2007.

• The projected labour pool in tradespersons and labourers in Victoria to fall from approximately 10,100 persons to 7,900 persons, implying that the Victorian market would be the least impacted by the potential migration of some young workers to Western Australia. Note that this figure assumes there is no growth in the number of new entrants from university and vocational courses on 2006 levels and that all of the AWDs and LHDs work is undertaken in Victoria, but does not include the impact of any potential new major projects in Victoria that may be committed after March 2007.

• The projected labour pool in tradespersons and labourers in Queensland to fall from approximately 5,700 persons to 3,500 persons, implying that the Queensland market is similar to NSW in terms of its sensitivity to potential migration of some young workers to Western Australia. Again this figure assumes there is no growth in the number of new entrants from university and vocational courses on 2006 levels and that all of the AWDs and LHDs work is undertaken in Queensland, but does not include the impact of any potential new major projects in Queensland that may be committed after March 2007.

• The projected labour pool in tradespersons and labourers in South Australia to fall from approximately 4,500 persons to 2,300 persons, implying that the South Australian labour market is likely to be slightly more sensitive to labour migration to other States (though again this assumes no growth in the number of completions). This is particularly so given that it has not seen only three per cent growth in vocational education completions over the past five years and that the number of graduates from university and vocational institutions is far smaller in South Australia than the other Eastern States of NSW, Victoria and Queensland. This would suggest this labour market projections for this State are perhaps not as conservative a projection as in other states (including Western Australia). Furthermore, some major projects that are currently uncommitted in South Australia have a high probability of going ahead (such as the proposed Olympic Dam expansion) and will place a significant demand on labour for that State. The risk for increasing wage costs and project delays in South Australia is therefore material.

A.3.2 Relaxing the ‘no growth’ assumption (Scenario 3) Although the first two scenarios assumed no growth in the number of new entrants from vocational or university courses, this would have a potentially significant impact on the balance of supply and demand in State markets. In this section, we relax the ‘no growth’ assumption used in Section A.2.

Over the past five years the number of vocational completions in Australia has increased on average by 13 per cent in NSW, 15 per cent in Victoria, 7 per cent in Queensland, 9 per cent in Western Australia and 3 per cent in South Australia. Very little growth was seen in the number of university graduates.


TABLE A.7 – ALLOWING FOR GROWTH IN THE NUMBER OF VOCATIONAL COMPLETIONS FOR TRADESPERSONS AND LABOURERS (LABOUR POTENTIAL TO BECOME AVAILABLE BY 2009)

NSW VIC QLD WA SA

Supply of new labour (no growth, from Ch 3)

New entrants, tradespersons

15,300 14,400 11,000 5,100 4,500

New entrants, workers

5,700 5,800 10,800 2,700 2,700

Additional supply allowing for growth

6,000 6,200 5,000 1,800 1,200


11,600 8,700 9,100 5,400 3,100


1,900 1,400 7,000 4,600 (350)

Trad

espe

rson

s an

d la

bour

ers

Pool/(shortage)

13,500 16,300 10,700 (400) 5,650

Applying historic average annual growth rates to the number of trades and labourers would increase the supply of labour by:

• 6,000 skilled persons in NSW (between now and the LHD project commencement) above Section A.2 projections;

• 6,200 skilled persons in Victoria (between now and the LHD project commencement) above Section A.2 projections;

• 5,000 skilled persons in Queensland (between now and the LHD project commencement) above Section A.2 projections;

• 1,200 skilled persons in South Australia (between now and the LHD project commencement) above Section A.2 projections; and

• 1,800 skilled persons in Western Australia (between now and the LHD project commencement) above Section A.2 projections.

This would further reduce the risk to Australia of cost increases arising due to the LHD project’s construction, particularly in Victoria, NSW and Queensland and, to a lesser extent, in Western Australia.

Similarly, applying historic average annual growth rates to the number of trades and labourers would increase the supply of labour by:

• 8,600 skilled persons in NSW (between now and the LHD project commencement) above Section A.2 projections;

• 6,900 skilled persons in Victoria (between now and the LHD project commencement) above Section A.2projections;

• 1,800 skilled persons in Queensland (between now and the LHD project commencement) above Section A.2 projections;


• 700 skilled persons in South Australia (between now and the LHD project commencement) above Section A.2 projections; and

• 700 skilled persons in Western Australia (between now and the LHD project commencement) above Section A.2 projections.

This would further reduce the risk to Australia of cost increases arising due to the LHD project’s construction, particularly in Victoria, NSW and Queensland and, to a lesser extent, in Western Australia.

TABLE A.8 – ALLOWING FOR GROWTH IN THE NUMBER OF VOCATIONAL COMPLETIONS FOR MANAGERS AND ASSOCIATE PROFESSIONALS (LABOUR POTENTIAL TO BECOME AVAILABLE BY 2009)

NSW VIC QLD WA SA

Supply of new labour (no growth, from Ch 3)

New entrants, managers (vocational) 480 340 1,000 135 240

New entrants, assc. profess. (vocational) 9,600 6,600 3,100 3,600 900

New entrants, managers (university) 59,500 48,600 37,300 13,330 19,500

Additional supply allowing for growth

2,900 2,300 600 200 200


6,500 4,900 3,700 2,100 440


7,500 5,000 5,300 4,600 (350)

Man

ager

s an

d as

soci

ate

prof

essi

onal

s

Pool/(shortage)

58,500 47,900 33,000 14,100 17,200

Adding this growth to the very conservative ‘no growth’ analysis conducted in Section A.2 shows there is ample labour available in Australia for each labour category.


TABLE A.9: AVAILABLE SKILLED LABOUR FOR THE LHDS BY 2009 (ALLOWING FOR GROWTH IN THE NUMBER OF NEW ENTRANTS, SCENARIO 3)

NSW Vic Qld WA SA Australia Peak AWD and LHD labour

requirements


13,500 persons

16,300 persons

10,700 persons

(400) persons

5,650 persons

45,750 persons

1,600 skilled tradespersons

and labouerers


7,000 persons

5,800 persons

3,800 persons

2,200 persons

1,700 persons

20,500 persons


58,500 persons

47,900 persons

33,000 persons

14,100 persons

17,200 persons

170,700 persons

450 management,


skilled persons


Australia's capacity to build the LHD ships

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