The most expensive shipbuilding program in Canadian history needs to do more to stay on course.
The National Shipbuilding Procurement Strategy (NSPS) was launched in 2010 to end Canada’s “boom and bust” approach to the building of government vessels. In the past, Canadian shipyards built capacity for the short duration of a project, and when it was completed, they mothballed their equipment and laid off their workers. Expertise was lost and retooling for the next job was slow and expensive. The NSPS aimed to solve that problem by sending a 30-year stream of work for over 38 large vessels to two, and only two, shipyards. Significantly, third-party experts, not the government, had assessed these two as being the most capable of doing the work. Thus, Irving shipyards in Halifax won the right to build the six Arctic Offshore Patrol Ships (AOPS) and 15 Canadian Surface Combatants (CSC). Seaspan shipyards in Vancouver would build the noncombatant ships for the Department of Fisheries and Oceans and two Joint Support Ships (JSS) for the Royal Canadian Navy.
For the first three years, the NSPS enjoyed wide support. The Office of the Auditor General concluded in 2013 that the government is “managing the acquisition of military ships in a timely and affordable manner.” The popular media was also broadly supportive; a 2012 Report on Business Magazine article declared that the NSPS had “been held up as a model of bureaucratic rectitude and political restraint.” By 2015, the tenor of the debate had changed. The project was starting to attract criticism, with the military historian Jack Granatstein, for example, calling for the government to “sort out the ship procurement mess.” Because this is the most expensive single defence procurement effort in Canada’s history, public perceptions matter, as they will ultimately guide public support.
The criticism falls into three categories. The first places the NSPS within a series of problematic procurement efforts like the F-35 airplane project and the Fixed Wing Search and Rescue Aircraft and declares each of them a “procurement fiasco.” The differences between the varied government processes supporting each project are often not probed within this type of umbrella critique.
The more detailed criticism aims directly at the National Shipbuilding Procurement Strategy. CTV, for example, has obtained government documents that acknowledge “a risk that appropriate facilities, expertise and [a] qualified labor force may not be available” at the Vancouver yard building the JSS. CTV also quoted data that showed a “very high risk” exists that the CSC will be over budget, late and short of warfare capabilities. A detailed analysis of the shipbuilding strategy by the Canadian Centre for Policy Alternatives also predicted higher costs. In its view, this increase stems from a lack of competition as too much power, it was felt, had been left in the hands of the prime contractors to select subcontractors. Other critics compared the costs of NSPS ships with the price tags of those built for other nations and concluded Canada was paying too much, claiming in one case that we were paying seven times the rate others were paying for similar ships.
The final category of criticism is indirect in that it attacks inadequate government funding for major defence projects. Detailed studies by the Office of the Auditor General, the Parliamentary Budget Officer and the defence analyst David Perry all argue, in one form or another, that the initial allocation of funds for the many ship projects of the NSPS was inadequate. Further, subsequent government funding clawbacks and delay-induced inflation have dramatically exacerbated the situation. In Perry’s view, “the naval recapitalization program, in particular, is believed to have a significant gap in funding relative to the desired capability.”
One could easily dismiss those criticisms that conveniently lump the NSPS with prior defence failures or argue that the strategy cannot be blamed if patently insufficient funds are assigned to it. This article will not, however, ignore them, as these perceptions are becoming rooted in the public’s mind and must, therefore, be addressed along with the more specific criticisms of the NSPS.
Our politicians have heard the criticisms, including the claim of inadequate funding, and the record suggests they have, in the main, responded positively. In fact, political support for the domestic building of government vessels is long-standing and remains solidly bipartisan. As the defence analyst Martin Shadwick and the Auditor General have pointed out, building government ships in Canada was a declared government policy dating back to at least 2001. Moreover, both Liberal and Conservative governments remain wedded to the “made in Canada” policy despite the embarrassing and very public failure of the original Joint Support Ship project in 2009 (before the NSPS began). In fact, Dan Ross, then assistant deputy minister, materiel, at the Department of National Defence (DND), has argued that the simultaneous failures of the first JSS project and the Coast Guard’s Mid-Shore Patrol Vessel — he termed the results “shipwrecks” — demonstrated to government the need for the NSPS.
Other political factors were also in play and these reinforced the “made in Canada” approach. In 2009, David Pugliese, writing for the Ottawa Citizen claimed both Canadian industry and at least one government department were in a “feud” with DND over the “offshore” C-17 and C-130J airlifter purchases. While delivered with commendable speed, these multi-billion-dollar purchases produced little to no long-term Canadian employment and nothing of substance for the country’s aviation industry sector, it was claimed. The government was then warned that if it wished to maintain high-technology defence and aviation industries in Canada, policy adjustments had to be made.
Thus, it was no surprise when Defence Minister Peter MacKay signalled he was ready to pay a “premium” for warships to be built in Canada. Arguments for paying the premium included a claimed potential $1 billion a year in NSPS-related Canadian business and some 10,000 jobs (both direct and indirect) for 20 years. In addition, supporters could point to an earlier venture, the Canadian Patrol Frigate Project, which produced benefits for industry: at least 12 Canadian firms making everything from integrated machinery control systems to automated ship bridges and helicopter recovery systems were able to export hundreds of these complex systems internationally as a result of their being first fitted and showcased in the Canadian ships. Only one detailed study, done by DND’s chief of review services in 1999, has addressed the cost of this Canadian-made “premium” in any detail, and it concluded that Canada spent no more than 7 percent over what other Western navies were paying for like warships.
This process of progressive cost refinement is ill understood, and any upward movement of project cost is reported instead as an indicator of government mismanagement or corporate “gouging.”
Those contesting these data have had a difficult time, as warship costing is not for the faint of heart: such studies take expertise, time and money. Recent brief accounts suggesting Canada is paying seven times or even eight times what others are paying for warships follow no identifiable costing approach and appear to rely on their favoured vessels arriving via a miraculous process where none of the normal Canadian purchasing rules are applied. If you choose to not apply them — and the rules are cumbersome — you also overlook the need to account for the cost of training, spare parts, ammunition, inflation, project oversight and the necessary infrastructure upgrades (such as longer jetties or runways). The requirement for even modest “Canadianization” is also overlooked, and this amounted to 50 percent of our purchase price for our British-built submarines. The original F-35 project was alleged to have downplayed some of these attending costs and did not recover.
This is not to suggest that Canada should stick blindly to domestic warship construction. Indeed, Britain, Norway and the Netherlands have gone to foreign construction of their supply ships for a variety of reasons. In addition, Australia has also suffered high warship costs, reportedly paying as much as a 40 percent home-built premium for destroyers under its own “boom and bust” shipbuilding approach. Given these claims, it would seem prudent for government or industry to devote the resources to collecting hard-to-get national and international shipbuilding cost data and applying internationally accepted ship-costing criteria — like NATO’s — to accurately establish the new premium Canada is paying under the NSPS. The economic benefits that accrue to Canada, or not, should be included in that study. Until this is done, it is not surprising that the Canadian government and its navy, the customer that is actually paying the premium at the end of the day in less capability or fewer ships, continue to support the NSPS.
In addition to accepting the need to pay a “made in Canada” premium, both the Liberals and the Conservatives have been ready, or have declared they are ready, to add additional monies to underfunded NSPS projects. Thus, in 2015 the Conservative government increased the $3.1 billion allocated to the AOPS project to $3.5 billion, as it also boosted funding for the Offshore Fisheries Science Vessel from $244 million to $687 million. During this fall’s federal election, however, the outgoing Conservatives seemed to suggest the CSC’s budget would remain fixed and that as few as 11 of the planned 15 combatant ships might be delivered. The Liberal Party also recognized the NSPS budget shortfalls in its September platform but declared, “Unlike Stephen Harper, we will have the funds that we need to build promised icebreakers, supply ships, arctic and offshore patrol ships, surface combatants, and other resources required by the Navy.” The Liberal platform also said part of the expanded funding for the NSPS would come from the savings produced by not purchasing the F-35.
The money required may be significant. David Perry recently argued that the $31.6 billion allocated to naval capitalization has the potential to rise to as much as $50 billion if the program is to deliver the number of ships promised. This disconnect between initial price and, it seems, the inevitably higher mid-contract price stems from the fact that the Conservatives’ Canada First defence strategy was underfunded, combined with Treasury Board policies. These policies require only rough, plus-or-minus-40-percent costing estimates for projects in the early “definition” phase, with much more precise costing becoming available as the project goes into “implementation.” As a result, the probability that project costs will change is high. The Auditor General supported this process of progressive cost refinement and concluded:
The initial budget for each class of military ship was set years before construction will begin…Their design will be defined more precisely over time, which will result in greater certainty on the cost of the vessels. It is not realistic to expect that the original budget cap will remain the same from a project’s conception to completion…While budgets are a useful control, Canada may not get the military ships it needs if budgets are not subject to change.
Regrettably, this process of progressive cost refinement is ill understood, and any upward movement of project cost is reported instead as an indicator of government mismanagement or corporate “gouging.”
To date, our politicians have understood this cost refinement process and generally reacted in a practical way. They also deserve credit for their attention to a heightened public concern over inadequate competition within defence procurement projects. The uproar over the original sole-sourcing of the F-35 as Canada’s next fighter certainly provided a loud wake-up call. Parallel concerns arose over the fact that the CSC project might adopt a “most qualified team” approach that could hand the combat systems integration portion to a single dominant firm. As a result, the Conservative government mandated the opening of both the warship design and the combat systems integrator tasks to competition, with the government casting the deciding vote. This seems to have worked: the largest shipbuilding firms in Britain, France, Italy, Germany, the Netherlands, Denmark, Spain and the United States offered their latest destroyers in the warship design competition. Meanwhile, Lockheed Martin Canada, Saab, Thales, ThyssenKrupp, DCNS, Atlas and SELEX are competing for the combat systems integrator role. Overlooked, perhaps, is the fact that this increased competition also brings with it the risk of delay. Negotiations could drag on, and there could be holdups in then integrating the winning warship design with the winning combat system integrator’s intentions and the shipyard’s building plan.
The evidence is equally strong that the defence procurement bureaucracy, be it within the navy, DND or Public Services and Procurement Canada (formerly Public Works and Government Services Canada), has also learned from past failures and adapted to recent public criticism. Certainly the pre-NSPS Joint Support Ship project saw the two competing firms submit unaffordable bids, as they felt the government’s extensive specifications were not matched by what it was willing to pay. There was also broad agreement that both sides had lost much of the expertise needed to accurately cost ship design options. Additionally, there were claims of too little dialogue between the two sides to overcome differing estimates, in part because of an extremely rigid government negotiating process.
Certainly considerable progress was made to overcome many of these problems during the $3.5-billion Halifax-Class Modernization project that will replace the 12 existing frigates’ command and control system and all of the ships’ radars and will include dozens of other upgrades. The actual work began in 2010 and will conclude in 2018, with Lockheed Martin Canada as the combat systems integrator working with Irving’s yard in Halifax and Seaspan’s facilities in Victoria. The project is on time and on budget, and the modernized ships are now deploying to operational theatres overseas. Significantly, the Telfer School of Management at the University of Ottawa intends to include the Halifax-Class Modernization project within its curriculum as a “successful project.” The school’s director highlighted the role played by both government and contractors working within a “collaborative mind-set” and selecting “excellent” people who were left in the job long enough to succeed. This contrasts sharply with the problems reported in the failed 2009 JSS project.
The National Shipbuilding Procurement Strategy is showing every sign of continuing that collaborative path, with its combining of staff from DND, the Department of Fisheries and Oceans, Public Services and Procurement Canada, and Innovation, Science and Economic Development Canada (formerly Industry Canada) within a single NSPS Secretariat under one leader. Industry can now go to a single government point of contact. Favourable assessments, like the 2013 Auditor General’s report, then resulted in it becoming the model, and as a result a Fixed Wing Search and Rescue Aircraft Secretariat and a National Fighter Procurement Secretariat were created.
The bureaucracy has also moved well beyond the rigid specifications and inflexible processes that hamstrung the original pre-NSPS Joint Support Ship. Rather, the navy’s quite detailed but “draft” statement of requirements (SOR) for the CSC was introduced as part of 13 “engagement with industry” sessions that ran from 2012 to 2015. At these sessions the government made clear that it sought industry suggestions on the requirements, especially those that might lower costs and reduce surprises. The stated object was pleasantly simple: “Optimize communications between the PMO [Project Management Office] and industry. We want to reduce the chance of surprises downstream.”
Tim Mahon, writing in Canadian Defence Review in 2014 reported high levels of satisfaction with this industry engagement effort from every one of the eight major firms he interviewed that were competing in the CSC project. On the surface, this series of technical engagements with all of the competing industry players and the iterative process of operational requirement development contrast rather sharply with the original F-35 project, where, some continue to argue, an aircraft was picked without a statement of requirements or with one drafted after the fact. Certainly Mahon specifically contrasted the NSPS process against the F-35 project in his article.
He also reported that the operational requirements themselves have been termed “tough” by BAE, and he noted that only the unclassified but still very detailed draft SOR has been made available. My own review of the requirements confirms that assessment; the more advanced warfare capabilities such as maritime theatre ballistic missile defence may fall under the documents’ initial warning that “some requirements highlight desirable or future capabilities for CSC.” The documents also made clear that the 30-year span of the project and the changing warfare environment mean that the requirements will change and bidders should be prepared for this possibility. This is a prudent approach that recognizes that the CSC will be delivered between 2025 and 2042. This long production schedule allows the insertion of new technology such as high-power lasers after they have been proven elsewhere. It also introduces the potential for trading off capabilities between batches, or “flights,” of the CSC. This provides needed flexibility by also allowing the navy to tailor ship capability to the dollars available in the future.
There are, however, several lessons from the F-35 that do not yet appear to have been fully captured. Up to now government-industry consultations have necessarily been conducted behind closed doors, even though most of the material was unclassified. While this practice was justifiable in the initial negotiations, it is probably time to expand the audience. Further, the navy has not been able to publicly release a “vision” document to the public that explains in layman’s terms how the Arctic Offshore Patrol Ship, the Joint Support Ship and the Canadian Surface Combatant fit with its existing fleet or the other elements of the Canadian Armed Forces. Equally, a description of the expected warfare environment for the period 2025-42 is urgently needed. Here, the CSC project’s reliance on mostly unclassified requirements, which very capably describe the ship, is a huge advantage that could be exploited.
Industry, particularly the shipyards, is responding well to recent criticisms with a bullish outlook. Seaspan’s CEO recently suggested it would be wise to “not bet against Seaspan on the National Shipbuilding Procurement Strategy.” In a competitive business, an outward show of confidence is important, but on both coasts the shipbuilding strategy is being backed up by very large investments, significantly improved shipbuilding practices and, increasingly, evidence that steel is being cut and ships are now being built. This is not surprising. All the firms involved or preparing to compete have long and successful track records, and this includes the Canadian-based ones. Lockheed Martin Canada claims to have been Canada’s lead combat systems integrator for the past 30 years. Seaspan’s Vancouver and Victoria yards won the contract to modernize the New Zealand navy’s frigates, a $180-million project. Irving Shipbuilding points out that it has built over 80 percent of the Canadian navy’s current fleet. Moreover, what Irving has built is internationally regarded as successful. Forecast International, a US publication that conducts an annual assessment of warship capability, concluded:
After a very shaky start, mainly due to the long gap in Canadian warship construction, the Halifax class frigates have matured into fine warships. The lead ship of the class has been the subject of unstinting praise from the US Navy, following visits to American naval bases. HMCS Halifax is also regarded as being a very satisfactory and a well-conceived design by the British Royal Navy Directorate of Navy Construction.
The long gap in ship construction after the Canadian Patrol Frigate Project has undoubtedly caused problems, and many, especially those related to personnel expertise, still exist, as seen from government documents released by CTV. Yet industry briefings and my interviews suggest that problems at the tradesperson level — welders and electricians — are being overcome, even in high-cost Vancouver, as a result of the large investment by Irving and Seaspan in community colleges and training of indigenous workers. As in the civil service, however, there remain significant gaps in senior and middle management staffs; one expert notes that the Canadian cupboard of those with the needed skills in military procurement is now bare. As a result, Canadian firms have gone offshore, and at the very top those who have been recruited are impressive. For example, Irving Shipbuilding’s president, Kevin McCoy, was responsible for the 60,000 personnel and US$30-billion annual budget of the US navy’s ship design, maintenance and procurement effort.
There is also evidence of progress at the shipyards themselves. Both the Halifax and Vancouver yards show the obvious outward results of $300-million and $175-million investments in new buildings, cranes and yards. In partial response to the claims of shipbuilding delay, Seaspan pointed out during my interviews that this massive rebuilding could not have commenced before the 2012 signing of the umbrella agreement that established the contract ground rules between shipyards and the government.
The building processes inside those yards have also been redone, and quite dramatically. Both yards now claim they have the most modern shipbuilding facilities in North America and use the latest shipbuilding techniques, involving several interlinked components. First, both shipyards are working toward a point where large-scale production is not begun until the final detailed plans for the entire ship are loaded into a master computer program that will ultimately guide assembly and feed its computer-controlled welding and plate bending machines. While this “design then build” approach takes time to prepare, it is claimed that it leads to a far more precise and less wasteful process. Second, under the NSPS, each shipyard will build a smaller, often less complex ship before it moves to the next vessel type. Thus Irving’s shipyards commenced with the Arctic Offshore Patrol Ship before beginning the Canadian Surface Combatant, and Seaspan is producing the Department of Fisheries and Oceans’ Offshore Fisheries Science Vessel before moving to the Joint Support Ship.
Third, these advanced processes would not appear to be optional or something that can be later cast aside, given that both shipyards owe their NSPS work to their ability to continuously meet the shipbuilding standards of First Marine International (FMI). This firm is the government’s declared third party assessor and is conducting regular reviews of the shipyards as the contracts progress. FMI has done this work in over 50 countries. In spite of this level of intrusion, both shipyards have acknowledged the value of it, and one of the potential combat system integrators has briefed that “FMI was very effective in base lining teams and establishing metrics to assess plans. Credibility unquestioned.”
Fourth, contracts under the NSPS provide for financial incentives to the builder to be as efficient as possible. Irving’s Kevin McCoy has argued this keeps him “highly incentivized to reduce spending,” and that will allow him to deliver six Arctic Offshore Patrol Ships, not the five-ship contract minimum. David Perry has also argued these front-end efforts “will likely lead to lower costs and more secure delivery later on.” The University of Calgary’s Tim Choi takes this one step further, arguing that, “shockingly, the costs of carrying out the NSPS program may actually be less than predicted,” given that the initial NSPS cost estimates may have been based on older, less efficient shipbuilding techniques. One person interviewed cautioned that one should not expect dramatic results in cost reduction in the first years of production, however.
There remain significant challenges, and these have the potential to lead to delays. The “design then build” philosophy would appear to require even more detailed negotiation before construction begins. While most agree the process will cut down costs later, the initial negotiations have been arduous with, unsurprisingly, much of the focus being on project risk and the sharing of that risk. Addressing these complex issues is reportedly a major challenge across the NSPS for the small number of experts available in Canada, though their numbers are expanding. It is also a challenge for government and the taxpayer. When warship cost inflation can reach as high as 11 percent per year, one expert has estimated the CSC program is losing $1 million a day from project slippage. At the end of the day, however, industry’s score sheet suggests it is mastering the challenge. The yards are now building ships, and it is very likely the public will see very large ship structures emerge from both assembly halls next year.
To date the political class, the procurement bureaucrats and the shipbuilding industry are all working effectively together, and indications are strong that they will continue their considerable history of delivering on-time, on-budget and capable ships. One cannot, however, ignore the dangers. The first two are project delays and inadequate budgets, and these, of course, are directly linked to the third one: public perceptions and public support.
Recent reports suggest that workforce experience is growing, assisted by increased shipyard training and overseas hires. That and a better understanding of both costs and risks as production capacity increases should assist both contract negotiations and building schedules. However, one cannot significantly increase competition, as was done with the CSC, without increasing the risk of project delay. Yet today the public is attuned to the fact the Canadian navy will be relying on a stopgap series of leased and loaned support ships for the next five years, given that the first NSPS-produced JSS will not be delivered before 2019. More serious is the delay-induced erosion of available program funds as a result of inflation eating away an already inadequate shipbuilding funding base.
That necessarily returns us to the question of public perceptions and public support. Two years ago I wrote that the media environment for the NSPS was largely positive. Today that environment is at best neutral, with equal numbers of newspaper articles and online posts opposed and in support. Ship delivery delays and rising costs are part of the problem, yet reporting rarely mentions the fact that competition must be balanced against attending delay or that Crown projects will rarely begin with an accurate cost forecast. The outside defence experts seem to have accepted this, but there should be no doubt that the public discourse has not.
The reaction to the public perception problem by the stakeholders has been mixed. The shipbuilders are now reacting with detailed, often joint rebuttals of what they consider unfounded criticism. The NSPS Secretariat feeds the media and the Web a steady stream of announcements and shipbuilding documentation. More needs to be done, and some priority should be given to a researched examination of the “made in Canada” premium for ships. The navy must also do more. I acknowledge it is in some ways hamstrung by the fact that it is not in charge of the ship acquisition process; the secretariat is.
Moreover, the previous government did not encourage any department, including DND, to actively engage with the media. Yet the Royal Canadian Navy is the final customer, and only it can explain what the ships are for and how they will meet Canada’s maritime security challenges over the next three decades. The Department of Fisheries and Oceans has a similar role, although its apparent budget shortfalls are not yet as large as the navy’s. Nevertheless, both must become far more engaged, and a good start would be vision documents that make clear what their future fleets will provide for Canadians.