Canadian Shipbuilders welcome review and reform of the National Shipbuilding Procurement Strategy

OTTAWA, Feb. 17, 2016 /CNW Telbec/ -

• A shortage of shipbuilding capacity within the existing framework has resulted in an unaffordable and untenable fleet renewal program
• Shipbuilders must be evaluated based on credible, realistic criteria such as experience, cost, schedule and labour and not primarily on promises of future capabilities, as has been the case
• Delays and budget increases can be overcome with sourcing decisions that take advantage of Canada's entire shipbuilding capacity and do not require extra spending
• Only competition will drive value-for-money for Canadian taxpayers
• The current cost-plus contracting model is incentivizing over-spending and creating an unnecessary burden on the Canadian taxpayer
• The Federal fleet renewal program must create a useful, sustainable shipbuilding industry
• It is not too late to correct the flaws of the previous strategy. The remaining umbrella agreements are non-binding and Canada has a free hand in shaping the future of domestic shipbuilding

The Shipbuilding Association of Canada welcomes reports that the new government has retained experts to review the National Shipbuilding Procurement Strategy. The Shipbuilding Association of Canada encourages and urges the need for reform to Canada's fleet renewal program.

Capacity shortages within the fledgling NSPS framework have led to an unaffordable and untenable fleet renewal program
Shipbuilding capacity shortages within the current framework have resulted in ever-increasing levels of delay within the Federal fleet renewal program. In the shipbuilding industry – as in most industries – delays drive up costs. With delays associated with the NSPS framework now expected to stretch into decades, it is of little surprise that ship-costing estimates have increased exponentially. Canada must act to ensure that capacity constraints do not hinder the fleet renewal programs. Canada's significant shipbuilding capacity must be leveraged to ensure a timely and affordable delivery of our much-needed fleet renewal.

Shipbuilders must be evaluated based on credible, realistic criteria. Shipbuilding contracts must match the capabilities, experience and cost-efficiency of the shipyards
In 2009, just prior to the launch of the NSPS, the SAC together with all of Canada's major shipyards, submitted a policy recommendation to Prime Minister Stephen Harper that – if accepted – would have avoided all of the current problems plaguing the fleet renewal program. It provided a logical and common-sense approach as to how Canada could obtain the ships it needs at a competitive cost, within the timeframes required by the Royal Canadian Navy and Canadian Coast Guard.

The recommendation was to match each class of ship to the corresponding shipyards that had the experience and capacity to build them. This approach gave priority to criteria such as experience in building a particular type of ship, the ability to build ships in parallel to avoid delays, and the availability and cost of labour. Most importantly, the proposal gave greatest weight to the cost of building the different classes of ships at the different facilities. The proposal mirrored best commercial practices without abandoning the goal of a "made in Canada" solution. 

Despite this, the previous government seemingly ignored industry's advice and instead gave priority to 'promises of future capability' – what the shipyards would promise to deliver. This meant that any shipbuilder or non-shipbuilder for that matter, regardless of capacity, experience or cost considerations, could be selected to build Canada's future fleet - provided the bidder promised to create such a capability in the future. To ensure that the government of Canada had an 'out' should the shipyards not meet their promises or the requirements of Canada within the set budgets and schedules, the framework agreements (or Umbrella Agreements) were non-binding.

Delays and budget increases can be overcome with sourcing decisions that take advantage of Canada's entire shipbuilding capacity and do not require extra spending
With the former government tied to their fledgling policy, capacity constraints created by the policy meant it faced a self-imposed dilemma. With only two shipbuilders with limited facilities, they had to choose between the urgent operational requirements of either the Canadian Coast Guard or the Royal Canadian Navy – rather than look to other shipbuilders to meet the lack of capacity. Because of the delays emanating from a lack of capacity, the anticipated costs of the future programs have ballooned.

There is a simple solution. The NSPS must be amended to include any Canadian shipyard capable of delivering ships to the program. Given the age profile of our fleet and corresponding potential safety issues for our brave men and women, there is no time for delay.

With Canada's relatively low labour rates and significant shipbuilding capacity throughout Canada, there is no reason for ships in the fleet renewal program to cost more than what other countries pay. It is a matter of building the right class of ship at the right shipyard with the right build strategy.

Only competition will drive value-for-money for Canadian taxpayers
The two single-source framework agreements, or 'umbrella agreements', prohibit competition on cost, quality, and schedule. They put Canadians and their tax dollars at risk.  For the former government to have suggested creating a monopoly in a market in which it was to acquire products (ships) over several decades demonstrated a severe lack of understanding in the most basic of economic theory.

Further, both the world around us and the Canadian shipbuilding industry have changed significantly over the past five years. We have thriving shipyards, both large and small. There is not one class of ship within the fleet renewal program that must be limited to a single source of supply due to capacity constraints. We must create competition.

The current cost-plus contracting model is incentivizing over-spending
Without competition within the National Shipbuilding Procurement Strategy, Canada is unable to negotiate fixed-price contracts. Under the current structure, all shipbuilding contracts would be awarded on a 'cost-plus' basis: the government will pay for any costs incurred by the shipyards, and add a fixed profit margin. This approach incentivizes shipyards to spend as much as possible and discourages them from reducing costs - even where possible. Only with competition as an integral part of the fleet renewal program will Canada be able to apply standard worldwide practices and seek bids for individual shipbuilding programs based on cost, quality, and time of delivery.

An additional disadvantage of cost-plus contracting is that the only way for the government to manage costs is to put into place a complex bureaucracy that reviews all costs incurred by the shipyards. This creates a significant administrative burden for the government and causes additional unnecessary delays, resulting in even greater overall costs. Already, Canada's expenditure on oversight costs is escalating and eating into the funds that should be used to build ships.

The Federal fleet renewal program must be reformed to create a useful, sustainable shipbuilding industry
By overburdening two shipyards with more work than they can manage, the government is doing a great injustice for the entire domestic shipbuilding industry. The National Shipbuilding Procurement Strategy, in its current form, only serves to provide a short-term artificial economic stimulus by perpetuating the two shipyards' dependence on government contracts. Instead, shipyards would be better off in the long-term if government work provided a stable base upon which to develop a sustainable, innovative industry. This would make it possible for Canada's shipbuilding industry to become internationally competitive in specialty markets.

Fortunately, today we have a chance to make the changes needed. The non-binding nature of the National Shipbuilding Procurement Strategy's Umbrella Agreements means that capacity can be added to Canada's fleet renewal before the program becomes an embarrassment to Canada and its shipbuilding industry.

Any review of the NSPS should therefore include a review of Canada's fleet requirements, program schedules, and budgeting approaches intertwined with an assessment of Canada's current shipbuilding capacity, and how existing capabilities can contribute to the success of the fleet renewal program. There is no reason for the current government to be bound by the mistakes of the previous.

The Shipbuilding Association of Canada and its members stand ready to work with the new Federal Government to ensure that Canada's fleet renewal investments are optimized, building the maximum number of ships, while utilizing the entire Canadian supply chain and thereby becoming a true economic engine for the entire marine industrial sector.

The Shipbuilding Association of Canada calls on the Canadian government to seize the opportunity offered by the review of the NSPS to put federal fleet renewal on a fast track to success and Canada's shipbuilding and maritime industries on a path towards economic sustainability.

SOURCE Shipbuilding Association of Canada

Peter Cairns, President, Shipbuilding Association of Canada, 222 Queen Street, Ottawa, Ontario, K1P 5V9, Tel: [phone], Fax: [phone]