The National Shipbuilding Procurement Strategy: An Assessment

This article originally featured on the Conference for Defense Associations Institute. It may be read in its original form here

CDA Institute guest contributor Tom Ring, a Senior Fellow at uOttawa’s Graduate School of Public and International Affairs, comments on some of the challenges facing the National Shipbuilding Procurement Strategy.

With some observers and pundits clamouring for the National Shipbuilding Procurement Strategy to be completely scrapped, we should take the time to examine where we are and indeed whether the program is failing to meet its objectives. In a detailed analysis recently published by the Canadian Global Affairs Institute, the conclusion reached tells a very different story. This blog post provides a short summary of the issues that I explored more fully in the above paper, and concludes with identification of some of the very real challenges involved in implementing such a complex undertaking.

In 2006, the federal Government made a bold strategic decision – it would use the renewal of the Navy and Coast Guard fleets to rebuild Canada’s shipbuilding industry. The concept became the National Shipbuilding Procurement Strategy (NSPS). The economic benefits of this construction would accrue not only to the shipyards which eventually won the bidding process. Ancillary benefits would also be received by the hundreds and thousands of suppliers in this decades-long, multibillion dollar commitment.

Rather than the well-trodden practice of shipyards bidding on a project-by-project basis, they would bid on the entire package, one for the combat package, the other for the non-combat package. There would be two winners among Canada’s five shipyards capable of doing this work, meaning that there would be three losers. This was not how shipbuilding procurement had ever been done.

Much has been written recently about the NSPS, not all of which has been favourable. To be sure, any initiative that has the goals and ambitions of the NSPS will be (and ought to be) subject to considerable scrutiny. Healthy public debate on matters of important public policy is vital to democracy. Differing points of view and outright opposition should be a welcome part of a debate on an issue as important as the NSPS. Let me briefly outline the original goals of NSPS and assess where we are in achieving them.

Goal 1 – Rebuild the Federal Vessels in Canada: This is currently being accomplished. While it has been suggested that the ships can be built cheaper elsewhere, no evidence has ever been provided to substantiate this assertion.

Goal 2 – Revitalize the Shipbuilding Industry in Canada: This has been accomplished and the resulting job creation and associated economic benefits are being felt across Canada and will continue to be for some time to come.

Goal 3 – Build The Federal Vessels in a Manner that Maximizes Value for Taxpayers and Fosters Economies of Scale: This goal is perhaps one of the more contentious elements of NSPS, in so far as it implies acceptance by the Government of a “premium” for building vessels in Canada. There is likely no counter argument to the fact that shipyards in Canada cannot match the low labour rates charged by shipyards in Asia. However, for most Canadians, it is also likely a common sense proposition that if we need to invest $3050 billion to rebuild the Navy and the Coast Guard we should do so in Canada – as long as we do it in such a way as to maximize productivity and efficiency. This is why Canada engaged First Marine International (FMI), the recognized world leader in assessing shipbuilding processes. Measuring over 183 different processes, FMI established efficiency and productivity standards for the winning shipyards, based on leading practices world-wide. Any contract to be subsequently awarded is conditional on these standards being maintained. We are only able to assess achievement of this goal after the two shipyards achieve their “target state” as established by FMI, and subsequently verified by them as required by the Umbrella Agreement (UA). If one assumes that target state will be reached, then FMI has stated that the facilities will be a significant national strategic asset. The resulting economic impact for Canada in the long-term will not be only jobs created, but careers created that will last for decades.

Goal 4 – Establish a Long Term Strategic Relationship with Two Shipyards: The elements of this arrangement are set out in the two partnership agreements called Umbrella Agreements, and include all of the provisions needed to permit value for money assessments, open book accounting, risk sharing, cost/capability trade-offs, etc.

Goal 5 – Realization of the Shipyards Commitments on ITB’s and Value Proposition: The achievement of this goal will require continuous assessment but there is no evidence to date that this will not happen.

There are, nonetheless, some very real and problematic challenges to be addressed and, to date, real solutions have not yet been identified. The first of these is the acknowledged inadequacies of the project budgets. The second is the ongoing challenge of program management for a multi-billion dollar endeavour. Neither is new nor unexpected.

The risk that intended capabilities might not be achieved within the established project budgets was identified by officials involved in implementing NSPS even before the shipyard selection process began. Officials with the Department of National Defence (DND) and Department of Fisheries and Oceans (DFO) and well as at Public Works and Government Services Canada (now renamed Public Services and Procurement Canada) knew that most of the project budgets had been developed many years earlier and needed updating to reflect cost escalation, technology improvements, and new capability requirements. However, given the delays incurred due to the failed vessel procurement processes, and having nothing better to inform the new budget numbers before design work was well underway, it was decided to proceed with the overall program of work knowing that budgets would have to be re-visited at the design stage in any event.

In his 2013 assessment of the NSPS, the Auditor General noted that inadequate project budgets could constrain the achievement of required capabilities. No specific action was taken to address the observation. Cost estimation on projects that will be realized many years in the future is an imprecise undertaking, to say the least. Of course, every effort is made to account for inflation, currency fluctuations, and other known variables. Nevertheless, some factors cannot be fully accounted for. Innovation, advances in technology, and adjusted requirements due to new threats and changing circumstances will always have an unknown impact on a project that will only be realized in 10 years.

Still, the recent Australian Defence white paper estimated the cost of nine future frigates, to be built in the 2020 timeframe, at more than AUS$30 billion. And this number is for design and construction only, and does not include costs for weapon systems, or project management costs etc. Of course, there is no way of knowing whether Canada’s future naval vessels will be similar but the broad range of numbers provided by the Australian government should be instructive to those who are making similar estimations in Canada.

The second issue is the ongoing management of the program. This is also a critical shortcoming. If not addressed adequately, it will continue to hamper the achievement of the overarching goals and objectives of NSPS. Much like the issue of inadequate project budgets, the ongoing management of NSPS implementation was identified as a significant vulnerability in the fall of 2011, shortly after the selection process was completed. The challenge identified at the time was how to ensure that the entire implementation of NSPS was managed as one program and not a series of related projects. PricewaterhouseCoopers (PwC) was engaged in late 2011 to conduct a review and make recommendations on the “most appropriate governance and operating model to manage the Umbrella Agreements and long term sourcing relationships that have been created by the NSPS process.” PwC’s recommendations were never fully implemented.

The major criticisms of the NSPS are well known. The various vessel construction projects are over budget and have yet to be delivered. (It should be noted that construction is well underway on vessels in both packages, and construction on the second vessel in the non-combat package began on March 29th at Seaspan in Vancouver.) Has the Government maintained sufficient control/authority in the UA for its partnership arrangement with the shipyards? Does the UA sufficiently protect the Crown’s interests? Whether such concerns are real or could now be mitigated if they are real, is a question that deserves to be continually examined given the size, scope, and complexity of the program to re-build the federal fleets. In order to contribute to the public debate, I will more fully explore the nature of the challenges outlined above and discuss options for dealing with them in a policy brief in the coming weeks.

Tom Ring is a Senior Fellow at the Graduate School of Public and International Affairs at the University of Ottawa. He retired from the Public Service in January 2015 following a 39 year career, the last five of which were as the Assistant Deputy Minister of the Acquisitions Branch at Public Works and Government Services Canada. In that role he was responsible for the implementation of the selection process for the National Shipbuilding Procurement Strategy. (Image courtesy of The Canadian Press/Andrew Vaughan.)

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