Canada Needs Course Change to Build Overdue Ships

Federal government procurement rules for military and Coast Guard are creating a disaster at sea.

By Michael Byers 28 Dec 2017 | TheTyee.ca

Michael Byers holds the Canada Research Chair in Global Politics and International Law at the University of British Columbia. This piece was originally published in La Presse.

The National Shipbuilding Strategy is headed for disaster. It needs an urgent change of course, with new fixed-price competitions for support ships, icebreakers and warships.

In 2006, Ottawa announced that three naval support ships would be built for $2.1 billion, with the first being launched by 2012. Two years later, it announced that an icebreaker would be built for $720 million and launched in 2017.

Today, construction contracts for these vessels have still not been signed, while the projected costs have risen to $2.3 billion for just two support ships and $1.3 billion for the icebreaker.

All these ships are supposed to be built in Vancouver by Seaspan, which was selected in 2011 as one of two shipyards to build Canada’s navy and coast guard vessels. The other shipyard, chosen to build warships, is located in Halifax and owned by Irving.

Davie Shipyard in Levis, Que., has long played an important role in Canadian shipbuilding. But the company was passed over in 2011 because it was under creditor protection at that time.

In 2015, Davie took advantage of the delays in Vancouver to obtain a single procurement. The Navy had been without a support ship since 2014, and Davie proposed to convert a civilian container ship for this purpose. The contract was for $700 million, including $490 million for the ship and its services, with the remainder covering five years of operating costs. The converted ship has already been delivered, on time and on budget.

This success should have led to a contract for second converted vessel, which Davie proposed for $600 million. But Defence Minister Harjit Sajjan says no such contract will be awarded. 

As for the icebreaker, construction has been delayed until Seaspan finishes the two support ships, which are now projected to be as late as 2022. Meanwhile, the Coast Guard’s six icebreakers have an average age of more than 35 years. In November 2016, the Coast Guard said it might have to lease five extra icebreakers over the next two decades as its existing ships undergo repairs.

The plan for a single new icebreaker should be changed into a procurement of four to five icebreakers. This should take the form of a fixed-priced competition, which Davie would be well-positioned to win.

Canada’s new warships, due to be built in Halifax by Irving, are also headed for disaster. Ottawa has just rejected a French-Italian offer to build the 15 warships for a fixed price of $30 billion. This is exactly half the amount the federal government itself estimates it will pay Irving for 15 comparable vessels.

The French-Italian offer came from Naval Group and Fincantieri, which make the FREMM frigate that is already in service with the French and Italian navies. Backed by their national governments, the two companies propose to build the 15 ships at Irving’s shipyard using a completely off-the-shelf design. Irving’s workforce would operate under the supervision of Naval Group and Fincantieri employees experienced in the construction of 21st century warships.

Ottawa reacted with open hostility to the offer, stating, “The submission of an unsolicited proposal at the final hour undermines the fair and competitive nature of this procurement.”

Yet the French-Italian proposal confirms that the procurement has not, in fact, been “fair and competitive,” since the companies — which are not in the business of losing money — believe they can find $30 billion in savings and are prepared to commit to this.

Fortunately, no design or construction contracts have yet been signed for Canada’s new warships. Instead, the federal government has “umbrella agreements” with Irving and Seaspan. Under these agreements, the government retains the right to alter or cancel the procurements at any time and for any reason. As a result, the government could immediately open a fixed-price competition for the warships involving strictly “off the shelf designs.”

Following up on the French-Italian proposal would also help to repair two flaws in the National Shipbuilding Strategy, the first of which involves the use of “cost-plus” rather than “fixed-price” contracts. As PricewaterhouseCoopers found in a report delivered to the government in November 2015: “The regime provides perverse incentives for industry to increase costs … if the profit percentage is fixed, increased costs result in increased profits.”

Following up on the proposal would also take Irving out of its currently conflicted position, whereby it serves as both the shipyard and the prime contractor. As prime contractor, Irving is free to select the “system integrators” that coordinate various aspects of the procurements, including the selection and acquisition of propulsion, communication, sensor and weapon systems. It can do so while operating on that cost-plus basis, with no requirement to accept the most financially competitive bids.

The good news is there is still time to steer clear of disaster. The National Shipbuilding Strategy urgently needs to change course, with fixed-price competitions open to all Canadian shipyards — including in Quebec.

Dear readers and commenters: You may notice that comments are not enabled for this story. In what has become a Tyee tradition, we're closing the commenting system for the holidays. Thanks for all the insightful, informative comments in 2017. We look forward to more of the same in 2018.  [Tyee]

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