By R. Bruce Striegler

In the 2013 Fall Report of the Auditor General of Canada, made public November 26, an entire chapter examines the federal government’s National Shipbuilding Procurement Strategy. Objectives of the audit were to review whether the key government departments and agencies have designed and are managing the National Shipbuilding Procurement Strategy (NSPS) in a way to sustain Canadian shipbuilding capacity and capability to procure federal ships in a timely, affordable manner. Some of Canada’s naval vessels have been in service for more than forty years, making them older than most of the sailors aboard them, and in 2008 the government announced the National Shipbuilding Procurement Strategy with the objective of replacing about 50 large ships and 115 smaller vessels for the Royal Canadian Navy and the Canadian Coast Guard.

Canada’s Auditor General Michael Ferguson concludes that the competitive process for selecting the two principal shipyards did result in a successful and efficient process and the resulting arrangements should help sustain Canada’s shipbuilding capacity. But the auditor warned that the Canadian Navy may get neither the type nor the number of warships it needs because of government budget inflexibility and failure to do its defence-policy homework.

In response to the Auditor General’s report, both Seaspan and Irving Shipbuilding’s CEO’s said via news releases they were pleased to receive and supported the Auditor General’s findings. “The selection process included an unprecedented level of industry involvement and we’ve established a strong working relationship with the federal Government that we are confident will be maintained throughout the program,” said Kevin McCoy, President, Irving Shipbuilding.  “We will continue to work closely with Canada to design and build the most cost-effective, capable ships for the Royal Canadian Navy.”

At the outset, both winning shipyards indicated they would upgrade their facilities at “$0 net cost to Canada” and they would “assume all the risks associated with the financing of shipyard upgrades.” However, shortly after the deal was signed, both shipyards raised concerns they would be shouldering this burden without a guarantee that the federal government would build as many ships as promised. So the government agreed to guarantee $300 to Irving Shipbuilding and $200 million to Vancouver Shipyards to help defray their infrastructure upgrades.

The budgets for the planned replacements of the country’s frigates and the signature Arctic patrol ship program have not been revised or increased in more than half a decade, despite rising labour and material costs. As a result, the Auditor General’s report says, it’s unclear how many ships the strategy will produce, particularly with such cost restrictions in place, meaning the Navy could be forced to reduce the fleet size below its needs. The audit points out that in order to stay within budget, the Navy has made capability trade-offs on both the Arctic patrol ships and planned replacements for military supply ships. Auditor General Ferguson says the thirty-year, $34-billion strategy requires close monitoring but also budget flexibility.

Early budget numbers seen as compromising final design and build objectives

National Defence established indicative budgets for all three ship projects early in the options analysis phase based on rough estimates and parametric modelling, but these rough estimates have been treated as budget caps. Budgets for the Arctic off-shore patrol vessels, now in the project definition design phase at Irving Shipbuilding in Nova Scotia, and the surface combatant vessels have not been revised since approvals in 2007 and 2008 respectively.

The Joint Supply Ship Project was allocated an additional $340 million when the government re-launched the project in 2010, but those sums were acknowledged as covering the expenses of the project office and inflation. However, according to National Defence, there have been significant increases in cost elements, which are impairing the affordability of the military ships. These include costs of raw materials, labour, and military components for the ships. Additional costs related to implementing the NSPS, such as third-party and NSPS Secretariat oversight will also be charged to the projects.

In 2009, the requirements for the Arctic off-shore patrol ships (AOPS) were reduced in order to stay within the allocated budget. National Defence reduced the top speed in order to lower the cost associated with the propulsion system and overall size of the vessel, and to help keep the proposed ship project achievable and affordable. Officials have said that this would not compromise the ability of the AOPS to meet the mission objectives set by the government.

One of the reasons that the original Joint Supply Ships (JSS) procurement did not succeed was the inadequate budget for the requirements included in the Request for Proposal. When the project was re-launched, National Defence reduced its requirements to two ships, with the option for a third. The decision was made to replace the existing two ships and their capabilities rather than significantly improve them, as had been previously planned. There are no indications that funding will be available for a third ship. The statement of requirements for the new JSS has been downgraded to call for less than half of the fuel cargo of the replenishment ships it will replace. Also, the JSS will no longer have dedicated space for Army vehicles, nor will it be able to carry landing craft to get them ashore quickly. These requirements were removed not because the Navy no longer needed them, but because the government’s budgeting errors made them unaffordable.

Departmental documents indicate that by acquiring fewer than three ships, Canada’s ability to respond autonomously to crises and contingency operations will be significantly diminished when one ship is in maintenance. “Canada may not get the military ships it needs.” The government’s budgeting problems will force the Navy to choose between acquiring either fewer ships, or ships that are significantly less capable than they need. Despite what the Navy asked for, Canada is likely to see two, not three, Joint Support Ships; one, not two, Polar Icebreakers; and six, not eight, Arctic Patrol Ships.

According to the Auditor General, “National Defence has already made cost/capability trade-offs on the AOPS and the Joint Support Ships projects.” But critics, both political and former naval personnel respond that these trade-offs will limit the type of missions the Canadian Navy can undertake, reduce the amount of time ships can be deployed at sea, and could ultimately put lives at risk.

A statement from Diane Finley, Minister of Public Works and Government Services in response to the Auditor General’s Report, said, “The Auditor General’s three recommendations have been accepted. The NSPS Secretariat will continue to closely monitor developments of each project to ensure appropriate adjustments are made. They will keep Ministers informed. And they will ensure that the productivity and cost-effectiveness of the shipyards are measured.” The Minister’s statement also added, “NSPS has been the most open and transparent military procurement in Canada’s history. Our officials will have held six technical briefings on NSPS after today. This is in addition to the regularly updated information that is easily and publicly available online. As the process continues, we are committed to continuing this transparency for Canadian taxpayers.”

What the Minister’s statement did not address was the report’s comment dealing with discussions around cost/capability trade-offs and might seem an odd oversight, was the revelation which states, “As designs for all three ship projects progress, departments will need to ensure that they continue to involve Treasury Board Ministers in the cost/capability trade-off discussions and request budget increases if required. We were told that information is presented verbally to Treasury Board Ministers annually for major capital projects; however, we were not provided with any documentary evidence to support this statement.” The largest procurement project in Canadian history costing at least $50 billion over thirty years with no written documentation of costs or budget increases?