National Shipbuilding Procurement Strategy
RICHARD BRAY and PETER CAIRNS
© 2011 FrontLine Defence (Vol 8, No 6)

The parties in Halifax and Vancouver that celebrated the selection of Irving Shipyards in the east and Seaspan Marine Corporation in British Columbia to build Canada’s new generation of Navy and Coast Guard ships marked one step in a process that will last for decades and cost tens of billions of dollars. As one shipbuilding insider remarked, NSPS now means “Nights, Saturdays, probably Sundays.”

The signing of Umbrella Agreements will set the terms and conditions under which contracts for individual ships and ship classes will be negotiated. Speaking in his Halifax office in early November, Irving Shipyards CEO Steve Durrell said he did not have a timetable for reaching an agreement. “We hope to have the negotiations completed by the end of the year. We have our first session with government [November] 10th, so that is our first sit-down with them since the announcement and we’ll start going through the Umbrella Agreement.”

ADM(Mat) Dan Ross confirmed that the Arctic Offshore Patrol Ships (AOPS) will be the first ships built by Irving Shipyards under the NSPS. After the UA will come contract negotiation with Irving, ­followed by contract award. Irving does not expect to start actual construction work on AOPS until sometime in 2013, because a great deal of technical and engineering work remains to be completed.

At Seaspan, winner of the non-combat ships package, vice president John Shaw said the company expects the Coast Guard’s three Offshore Fisheries Science Vessels to be the first construction, followed by the Offshore Oceanographic Science Vessel. “Once the Umbrella Agreement is signed,” he said, “it will then be passed on to the project where we will commence discussions with Fisheries and Oceans on the Offshore Science Vessel and work with the government to finalize the design, complete the production design and then prepare an estimate.”

As of late October, neither Irving nor Seaspan knew what the exact requirements for their ships would be. However, according to Peter Cairns, President of the Canadian Shipbuilding Association, “The science vessels are way into the design process. The designs were separately tendered and that was won by a joint venture of Robert Allen of Vancouver and Alion. By the time the individual ship contracts are negotiated, the designs should be pretty well ready.”

Seaspan will be building the Royal Canadian Navy’s Joint Support Ships (JSS). Dan Ross has indicated that the JSS has about 24 months of definition work remaining, followed by contract negotiations with Seaspan and contract award. Three companies had been vying for the design contract, but the Spanish team recently pulled out.

After the first JSS competition failed, the government in effect fired a spread of torpedoes at the elusive design target. “BMT Fleet Technologies is working with the navy on one and they put out two ACANs (Advance Contract Award Notice, in effect, sole source contracting) to Thyssen Krupp Marine Systems and Navantia in Spain, to look at the German Berlin class and the Cantabria design,” Cairns said. The companies may not have signed the ACANs because Canadian government conditions are simply too onerous. “The long and the short of it is, that one has come up against the stops a little bit and whether that will turn out to be three designs to choose from remains to be seen, but certainly that is setting the Joint Support Ship perhaps a little behind the power curve,” Cairns told FrontLine not long before Navantia pulled out.

The most important ships in the NSPS, by price, power and prestige, are the 15 Canadian Surface Combatants (CSC). These frigate-class ships will replace the three DDH-280 Tribal class destroyers and 12 Halifax Class frigates that have served Canada well for many years.

At least three of the new frigates will be equipped for Anti-aircraft Warfare and task group command and control. “Those are key vessels, the task group commanders and the protection providers for with long-range surface to air missiles,” Cairns says. “If Canada is going to be in command of a NATO squadron or some other group, you are going to need a vessel with that capability.”

The government made it clear some time ago it would ‘warm up’ the combat shipyard with the AOPS before building the CSC, but Cairns argues the Irving Shipyard is already in good shape, having built the Mid-shore Patrol Vessels for the Coast Guard and a highly complex commercial offshore supply vessel, and carrying out the $3.1 billion Halifax Class Modernization and Frigate Life Extension program.

MONEY FOR VALUE
The National Shipbuilding Procurement Strategy features a ‘value proposition’, which is something new to Canadian defence procurement. “It is something we haven’t seen in any procurement before and I don’t believe that it has ever been put into a major crown project,” agrees Steve Durrell. Irving Shipyards included what he calls a very detailed plan to give the most value back to Canada through the NSPS program. “There are values in it. There is a timetable laid out that is triggered by the contract starting and there are partners that we dealt with to help put that together.”

As Seaspan’s John Shaw explains, the bidding companies were required to make a commitment to spend 0.5% of the contract value to the betterment of the greater marine industry. There are three pillars within the value proposition. “The first was Human Resource Development, the second was Industrial Development and the third was Technology Development,” Shaw noted. “The commitments that we have made within our bid are part of the umbrella agreement, and our commitment to support the greater marine industry is very much part of our bid.”

Vice-admiral (retired) Ron Buck, former Chief of Maritime Staff and program ­manager for the Maritime Coastal Defence Vessels points out that satisfying value proposition requirements could range from apprenticeship programs to emerging design technologies and modern shipbuilding processes. “It’s quite broad. This is quite separate from the standard IRB [Industrial and Regional Benefits] requirements – they will still apply – and whatever commitments made under the terms of the value proposition cannot be claimed as an IRB,” he notes.

Steve Durrell suggests the value proposition appeared to be like an IRB program aimed at people rather than businesses. “Yes, it’s about what we are doing to add value. What legacy is going to be left to the marine industry from this procurement process – and that is what we focused on in our proposal.”

But the line between IRB and value proposition could be hard to draw. The government insists the shipyards make “commitments that contribute to the health of the marine sector over the long term” that will “sustain a knowledge-based economy”, “invest in skills and human resources”, support “long-term supply chain development” and increase “commercial work (job creation)”.

For instance, Lockheed Martin satisfied IRB requirements on the CP 140 Aurora Structural Life Extension program with $1,000,000 to the British Columbia Institute of Technology to “help design and support the creation of the BCIT 3D simulation technology”, technology that can also “enable individuals to become adept problem solvers, to learn new skills, and to prepare for hands-on activities in real work environments.”

The Boeing Company uses its IRBs in the creation of the Canadian Composites Manufacturing Research and Development consortium, “a virtual centre of excellence” as an offset for the Medium-to-Heavy Lift Helicopter program.

There could be some intense discussion as to whether a proposed initiative satisfies IRB or value proposition requirements.

PICTURE PERFECT PROCESS
The NSPS procurement process received almost universal praise for its transparency and even-handedness. However, the government probably had no alternative to its regime of fairness monitors and absence of political interference. Dan Ross candidly points to the collapse of the Mid-shore Patrol Vessel and Joint Support Ship procurements. “Why has the process been so detailed, and scrupulously fair? Because it followed some shipwrecks. The JSS and the MSPV.”

Ron Buck adds another dimension, “I would say that what primarily drove this process was the growing understanding that you could no longer go along with boom and bust. That was the genesis of this, but the actual process, how they did it, I would suggest to you, was probably driven more by a number of procurements that were either seen to be potentially sole source and not in the best interests of the country. I am really talking about a number of the air programs.”

So, can defence procurement in Canada “weather this storm of approval and come out as hated as ever”? This ­procurement is managed by the NSPS Secretariat, led by Public Works and Government Services Canada. The big decisions have of course been made by Cabinet, but recommendations arrived by way of a Deputy Ministers’ committee, representing PWGSC.

John Shaw acknowledges “there are various benefits to having a secretariat. There is benefit to maintaining the continuity with the people involved, in the relationships that have been developed and the processes that have been developed. And it’s a new type of working relationship with the government which we heartily endorse and support.” The NSPS process, with interdepartmental committees and a secretariat, operated like a virtual defence procurement agency when there was no time or impetus to reorganize and create a real one. Its success to date might provide lessons for future major projects.

VALUE FOR MONEY
Now that the yards have been selected, will each ship program now be just another procurement? “Maybe not,” according to Dan Ross. “The process has raised expectations. Election cycles are coming and the money crunch could be severe.” The new government ships will be purchased on the basis of best overall value to Canada, which is a lot more work than simply checking the boxes on a list of mandatory requirements and selecting the lowest bid.

“Value for money is even more important now,” says Ron Buck, “because government has granted this long-term opportunity and does not want to see inflated prices.” They will need to build in a mechanism wherein, while it is no longer an open competition, the pricing for subsequent contracts is actually seen to be good value for the Canadian taxpayer in the sense that the price is reasonable.”

Paying too much for ships is one risk, but not paying enough is another. Underfunding is acknowledged to be one of the greatest risks to defence procurement. The first JSS bids were rejected because builders could not provide the required ships within the government’s budget. “The challenge that the government will still have, even once it has Umbrella Agreements, it is going to have to ensure that when it comes forward with its various ship projects within each of the work streams, that the dollars that are being offered in fact are realistic in terms of delivering the capability,” Ron Buck points out. There has always been the potential for underfunding but Buck believes there is enough political will to be realistic about what is needed and what is approved.

The Umbrella Agreement calls for contract negotiations to be conducted “on an open-book basis, with Canada having full and free access to the shipyard’s books and records of account.” It also establishes that shipyards must cooperate with third-party periodic benchmarking to assess capability and productivity improvements and whether the shipyard has met its commitments. The shipyards have already been benchmarked by a private company, so the government can compare productivity improvements over time and “ensure value for money over the duration of the long-term strategic sourcing relationship.”

Durrell doesn’t consider the measures intrusive. “The crown is deep into our operations right now. We have a very open, transparent process with the FELEX program. Part of what we always put forward as a requirement, as a trade-off for the long-term procurement commitment, is to have open transparency on our end as well. We welcome it. It’s not a problem.”

So, is NSPS a piece of the Defence Industrial Strategy? “It is certainly a piece of a government industrial strategy,” replies Ron Buck, “because remember, it is not just Navy, it is also Coast Guard. You could argue some of this has been done in the aerospace sector, but not quite in the same way. But, can you point to this as a step in the direction of a defence or government industrial policy? The answer is clearly yes, and frankly I would argue that is good news, and I think most in the industry would argue that is good news, because it is recognition that if you just carried on with open competition, you would probably lose any ability over a relatively short period of time to have the capability to be able to build ships in Canada, because no one would be left standing.”
 
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Richard Bray is FrontLine Defence’s Senior Writer.
© FrontLine Defence 2011

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