Renegotiate Spanish ship deal: Xenophon

Independent senator Nick Xenophon is demanding the federal government renegotiate a deal to build two new navy supply ships in Spain.

He also warns the deal will turn into a major election issue in his home state.

"The federal government has to stop treating the people of South Australia, the taxpayers of Australia and the national interest with contempt," he told reporters in Adelaide on Friday.

Defence Minister Marise Payne announced on Thursday Spanish shipbuilder Navantia would construct urgently needed replacements for supply ship HMAS Success and tanker HMAS Sirius.

Labor accused the government of sending work offshore while Australian shipyards were on life support.

Senator Xenophon said five per cent Australian content in a $2 billion deal was an insult.

The government should exercise a clause in the procurement contract to freeze the deal until there was more for Australian workers.

"We can do this now. We can build the superstructure here. We can do the fitout. We can do hundreds of millions worth of work," he said.

Senator Payne said there would be Australian work worth more than $100 million.

The new defence Integrated Investment Plan costs the entire replacement supply ship program at $1-2 billion, including long-term operations and sustainment.

The actual ships, Navantia's 19,500-tonne Cantabria-class oiler replenishment vessel, each cost around $350 million.

South Australian Labor frontbencher Penny Wong said this would result in 36 jobs for Australia and 3000 for spain.

"On the supply ships, we made clear before the election that we would bring them forward and we would ensure Australia would be part of that build," she told reporters outside the ASC shipyard in Adelaide.

The government accused Labor of rewriting history. Labor's 2009 and 2013 Defence White Papers both called for urgent replacement of Success and Sirius, yet Prime Minister Kevin Rudd only announced Labor's plan just over a week before the 2013 election.

"The reality is that Labor sat on their hands and did not commission a single naval vessel from an Australian shipyard during its six years in office," Senator Payne said in a statement.

Defence materiel minister Dan Tehan said he understood this deal would involve 400 jobs in Spain.

To build the ships in Australia would have involved a major upgrade to an Australian shipyard and that would have taken too long, he said.

"We had no alternative but to make this decision because of the mess left to us by the Labor Party," he told Sky News.