KWHIY Kawasaki Heavy Industries Ltd (PK)

CANBERRA, Australia—Australia may privatize state-owned shipbuilder ASC Pty Ltd., people familiar with the matter said, as decisions near on a lucrative submarine deal spearheading a 90 billion Australian dollar (US$68 billion) naval buildup.

One proposal would break ASC into submarine and warship divisions, people familiar with the government's thinking said, with the winner of the A$50 billion submarine contract expected to buy the former. The warships unit would be likely to attract interest from companies vying for separate contracts to build nine naval frigates and 12 large patrol vessels.

The warships-division deal could net the cash-strapped government at least A$1 billion as it seeks savings under a pre-election budget to be unveiled on May 3. The government is also considering a multibillion-dollar privatization of public health and welfare payments, as conservatives look for ways to fill coffers emptied by an economic slowdown.

"There's expectation it will be looked at in the context of the budget," said a government lawmaker with knowledge of defense considerations. Finance Department officials had been working on a strategic review of ASC for two years, another person said.

The conservative government has said it isn't looking to sell the former Australian Submarine Corp.—"no plans to privatize ASC," a spokesman for Finance Minister Mathias Cormann said in a statement—but many remain persuaded otherwise.

"I think the fix is in," independent lawmaker Nick Xenophon told Australian media. An influential voice in the upper-house Senate, he has closely followed the fortunes of ASC, which is based in his home state of South Australia.

"It's going to be split for a bargain-basement (price) and in the process potentially thousands of jobs will be lost," he said.

Elections are coming as soon as July, and ASC's future has become a pivotal issue in South Australia, where voters have reacted bitterly to car-plant closures. With Australia's steel industry also suffering, shipbuilding is seen as something of a manufacturing-jobs savior.

David Johnston lost his job as defense minister after saying he wouldn't trust ASC "to build a canoe" after a A$3 billion cost overrun in a missile-destroyer job. To avoid hemorrhaging vital seats, the federal government has promised A$90 billion in naval shipbuilding as a centerpiece of a defense policy unveiled in February. The three companies pursuing the submarine deal have all pledged to build in Australia.

Also playing into considerations around the company's future are regional China-U.S. strategic rivalries and the militarization of artificial islands being built by Beijing in the South China Sea. With U.S. encouragement, Australia is doubling its submarine fleet and boosting military cooperation with Japan, part of a 10-year, $140 billion military expansion.

The submarine deal is one of the world's most lucrative current weapons contracts. Japan's Kawasaki Heavy Industries and Mitsubishi Heavy Industries, Germany's ThyssenKrupp Marine Systems and France's state-controlled DCNS are competing to equip Australia with the largest conventionally powered submarine ever built.

The separate warship contracts are expected to attract interest from ThyssenKrupp and DCNS as, well as Australia's Austal, which is building new-generation littoral combat ships for the U.S. Navy. Britain's BAE Systems is likely to offer its Type 26 Frigate, company executives have said.

ThyssenKrupp Marine Systems' Australian Chairman John White told the WSJ on Thursday that his company is open to taking a stake in ASC as part of an offer to build the submarine fleet entirely in Australia. "We must be able to manage the work processes," he said.

DCNS, which has offered Australia a diesel-electric powered version of its Barracuda nuclear submarine, said it would "consider the business case for purchasing ASC if the government decides to proceed with privatization."

At a defense conference on Thursday, Australia's new Defense Minister Marise Payne declined to say whether the coming elections could delay a decision on the submarine contract to later this year.

Write to Rob Taylor at rob.taylor@wsj.com

(END) Dow Jones Newswires

April 07, 2016 04:35 ET (08:35 GMT)

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