By David Pugliese
The Canadian Surface Combatant (CSC) program has emerged as this country’s largest single military procurement since the Second World War, now dwarfing the planned acquisition of new fighter jets.
It has been more than a decade since the Royal Canadian Navy identified the need to acquire what it hoped would be a common fleet to replace its Halifax-class frigates and Iroquois-class destroyers.
The CSC will consist of two variants. The first of these will be the Area Air Defence and Task Group Command and Control variant to replace the Iroquois-class. The second will be a General Purpose CSC variant designed to replace the Halifax-class frigates. Irving Shipbuilding Inc. of Halifax, Nova Scotia has already been designated by the Canadian government as the prime contractor.
The program has sailed, at times, into troubled waters, with delays and concerns raised by various companies.
So what are the latest developments?
First off, the Liberal government has actually made a commitment to a specific number of ships and has released what is seen to be a more accurate costing figure of the entire program.
The previous Conservative government had assigned a $26-billion budget that would build of up to 15 CSC vessels. By 2015, then Defence Minister Jason Kenney was backtracking from that promise.
“We’re not going to write a blank cheque on this program,” Kenney told reporters in October 2015. “Based on the expert advice that we received from the Royal Canadian Navy after exhaustive analysis by the Department of Public Works, following the most exhaustive and transparent major procurement process in Canadian government history, we believe it’s possible with a $26-billion budget to build between 11 and 15 surface combatants.”
Defence Policy: Strong, Secure, Engaged, the Liberal government’s defence strategy released on June 7, has solidified the commitment to 15 vessels. The budget has been increased to $60-billion to reflect actual costs, according to the Liberals. “This plan fully funds, for the first time, the Royal Canadian Navy’s full complement of 15 Canadian Surface Combatant ships necessary to replace the existing frigates and retired destroyers,” according to Defence Minister Harjit Sajjan. “Fifteen. Not ‘up to’ 15 and not 12. And definitely not six, which is the number the previous government’s plan would have paid for, as the Parliamentary Budget Officer reported.”
The next step is the submission of bids. The Liberal government announced October 27, 2016 that Irving Shipbuilding had issued a request for proposals to companies on the design of the new warships. Firms are required to provide those bids, which must not only include the design but details of teaming arrangements with Canadian firms.
Originally, the submission of bids had been set for April 27, 2017. That was pushed back to June 22. There are now further delays and the bids will be required to be submitted “no sooner than mid-August,” according to Public Services and Procurement Canada.
The department insists that the program is in order and all questions from companies about the bidding process have been answered. Those pre-qualified bidders are now working with an amended request for proposals.
Irving Shipbuilding president Kevin McCoy says the firm is ramping up to work on the CSC. He noted that Irving’s workforce is currently around 1,800, but by 2020 that is expected to grow to 2,400.
McCoy acknowledged the CSC program is the most complex procurement Canada has ever undertaken. But he is confident a contract announcement will be made in the spring of 2018.
Steel will be cut between mid-2021 and early 2022, he added.
Although some firms have raised concerns about the issue of intellectual property of the vessel design and systems, McCoy does not see that as an issue that can’t be dealt with. Companies who are bidding on the CSC program worry about turning over their sensitive intellectual property (IP) to a rival shipyard like Irving.
Intellectual property negotiations are a challenge, McCoy conceded, but Irving won’t be able to take proprietary intellectual data and then turn around, for instance, and sell such designs or systems to other nations. “I don’t view the IP as a stumbling block,” McCoy added.
Still, with up to $60-billion in contracts on the line it’s not unusual that there are other concerns associated with the Canadian Surface Combatant project. Prime contractor Irving, public service unions as well as defence firms have all raised issues.
Irving had identified several areas including the effect of inflation, the potential gap in work and the in-service support contract for CSC. “It is imperative that we work at a steady pace and minimize delays,” McCoy has warned. “Starting in fall 2019, production work on AOPS (Arctic Offshore Patrol Ships) starts to wind down. If we don’t put our skilled shipbuilders to work on CSC we face significant layoffs. If there is a production gap between the two shipbuilding programs, the cost to reconstitute this workforce and their experience will be borne by the CSC program.”
McCoy also warned that “the impact of inflation is very real on a shipbuilding program such as CSC. With shipbuilding inflation running 3-5 per cent annually, on a 15-ship program you lose the buying power equivalent of 45-75 per cent of one ship for every year of delay. Delays have a serious impact on a program such as CSC.”
(Jean-Denis Fréchette, the Parliamentary Budget Officer (PBO), has also raised such concerns. In late May, the PBO also estimated the cost due to inflation for delaying the awarding of the contract after 2018. “We estimate that for each year of delay, the program would cost about $3-billion more,” Fréchette noted in the study.)
In addition, Irving Shipbuilding has emphasized its belief that the long-term in-service support (ISS) contract for the CSC fleet should be in the hands of the shipyard that constructed the vessels. It only makes sense since Irving would have intricate knowledge of the warships, the firm argues.
But various unions representing federal employees involved in ship maintenance are starting to warn about the increasing role private firms are playing in what used to be largely a federal government responsibility. They have already complained to the Liberal government about the ISS package for AOPS/Joint Support Ships that will be awarded to industry. It is expected they will ramp up for a campaign to prevent a similar deal with industry for CSC.
Then there are the concerns from industry itself on how the CSC acquisition is structured.
First there were complaints that the 12 pre-approved companies were not being given enough time to prepare their bids. There were warnings from firms that the limited six-month window to prepare bids didn’t allow time to adequately team up with Canadian suppliers.
At first, Procurement Minister Judy Foote dismissed such concerns. But when a third of pre-approved bidders requested a delay in the bidding process, the federal government and Irving eventually acted. The bid period has been extended a number of times. In addition, some companies have also warned the Canadian government about the alleged flaws in the CSC procurement process.
Fincantieri, the Italian shipbuilder, had told Foote in October 2016 that the project was so poorly structured it had doubts whether it could bid unless significant changes were made.
Fincantieri sent Foote a detailed outline of why the acquisition process was in trouble, warning that “Canada is exposed to unnecessary cost uncertainty.”
In its letter to Foote, Fincantieri pointed out that the current structure of the procurement limited the role of the warship designers to simply providing engineering and design services to Irving, which will then build the vessels.
In return for that small role, the companies were being asked to provide valuable intellectual property to their designs, access to their established supply chains, and transfer technology to Irving and Canada.
In addition, the warship designers had to provide a warranty on the integration of technology into their designs, even though they were not responsible for buying that equipment.
The project as it is structured now leaves little incentive for warship designers and builders such as Fincantieri, which has designed and constructed ships for the navies of Italy, the United Arab Emirates, India, Iraq, Malta and Malaysia.
“If the current proposed procurement approach is retained, then it will be very difficult for Fincantieri to obtain approval to bid from its board,” the company warned Foote.
The company instead proposed to Foote that a fixed-price competition be held, with the wining shipyard building the first three warships, complete with Canadian systems, and deliver those to Irving. The ships would then be run through evaluations and, after any technical issues were worked out, Irving would begin to build the remaining 12 vessels.
That way work on the new ships could get underway faster, the vessels will be fully tested, and the risk to the Canadian taxpayer significantly reduced. The “winning team can be held accountable for the overall performance of the finished ship,” Fincantieri added.
“Companies are also given incentive to make long-term investment in Canada because they can expect to get a fair return from the greater value of their work responsibility,” Foote was told.
The minister responded by suggesting Fincantieri approach Irving with their concerns.
However, the Italian firm’s proposals were not adopted.
Lucas Maglieri, a consultant for Fincantieri, has pointed that the company “remains interested in doing business in Canada and in the CSC project — we continue to assess our options for the Canadian marketplace.”
Fincantieri, however, is not alone in its concerns.
In June the CBC, citing industry responses to Irving about the CSC program, noted one of the bidders told the shipbuilder that the project faces a “very high risk of failure” unless the requirements were rewritten. The unidentified firm warned the plan was more complex than initially advertised by the federal government and that no pre-qualified bidder had an off-the-shelf design which could be modified to meet all of the Canadian requirements, the CBC reported.
“Not only will we not be in a position to make a proposal, which we believe will best meet Canada’s objectives, but we have reason to believe that most, if not all, other pre-qualified bidders with an existing ship design will be in a similar situation,” the firm noted in its comments to Irving. “In such an event, a failure to respond positively to our enquiries might put the (request for proposal) process at a very high risk of failure, either because an insufficient number of bids are received or because the bids which are received do not meet Canada’s value for money objectives.”
Irving responded that it would look into the issues that were raised but no changes to the request for proposals would be made.
Whether that is the right call will be seen in the coming years as the CSC moves forward.