By David Pugliese
The Canadian Surface Combatant (CSC) will be the backbone of the Royal Canadian Navy’s future fleet, yet the program — one of the largest defence procurements Canada has undertaken in modern times — is sailing into stormy waters.
The Liberal government announced October 27, 2016 that Irving Shipbuilding Inc. of Halifax 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.
But allowing only six months to compile bids for one of the largest procurements in Canadian history doesn’t make sense, say representatives of some of the companies. The extent of the technical data and other information the Canadian government requires is overwhelming, they add. Four companies requested that the bidding period be extended and on February 16 the Liberal government agreed. Instead of submitting bids on April 27, the proposals will now be due on June 22.
But there are other issues looming as well. Some firms are questioning whether it will be worthwhile to bid on the project, estimated to be valued at more than $26-billion.
On October 24, 2016 Italian shipbuilder Fincantieri sent Public Services and Procurement Minister Judy Foote a detailed outline of why the acquisition process was in trouble, warning that “Canada is exposed to unnecessary cost uncertainty.”
Preparing a bid for the Canadian Surface Combatant project will cost companies between $10-million and $20-million, industry representatives say. If they don’t see that there is a chance of winning the contract because of various issues, then firms might decide not to bid, further narrowing the choices for the Liberals on a new fleet for the Royal Canadian Navy.
In its letter to Foote, Fincantieri pointed out that the current structure of the procurement limits 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 are 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 have to provide a warranty on the integration of technology into their designs, even though they are 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, India, Iraq, Malaysia, Malta and the United Arab Emirates.
“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.
But that response further worried the Italian shipbuilder as they had believed the Canadian government and its ministers were ultimately responsible for the program and the spending of billions of tax dollars.
Foote’s comments to journalists on February 7 will also not likely go down well with the Italian firm. She said she wasn’t concerned about Fincantieri’s warning that the current process was putting Canada at risk of unnecessary costs.
“That certainly is not our opinion on this,” Foote explained. “We’ve worked with industry. We did extensive consultations with industry to get to where we are. We will always consult with industry, and that is why we were successful in terms of the CSC. The fact that some people are questioning it is something we’ll look at, but in reality, of the 12 primes, eight have not expressed any issue with respect to the deadline.”
Irving spokesman Sean Lewis said the contract for CSC design would be awarded to an existing warship design that best fits the requirements of the Royal Canadian Navy. “I can assure you that the procurement process is being conducted in a way that ensures that all bidders are treated equally, with no unfair advantage given to any individual bidder, and under observation of an independent fairness monitor,” he added.
The other issue that has emerged on CSC are questions about whether there is a bias on the part of Canada for a specific design.
There is a strong belief in some industry circles that the federal government is favouring the design from the British firm BAE, which is offering the RCN the Type 26 warship.
Much of that belief is fuelled by the unusual change in the CSC procurement process in mid-2016.
In the summer of 2016 Foote said only proven warship designs would be considered, a strategy that she insisted would cut down on risk and speed up construction.
But just months later the Liberal government retreated on that and instead indicated it would accept a Type 26 bid, even though that type of vessel has not been built yet. Construction of the first Type 26 ship for Britain will start sometime this year.
“You want to make sure that what you get on offer reflects not only what’s tried and tested in the market but also what’s coming on the market,” Lisa Campbell, assistant deputy minister of acquisitions at Public Services and Procurement Canada, explained to journalists.
In an earlier statement, BAE official Anne Healey said the company looks forward to bidding in an open and fair competition.
Other industry representatives point to the close ties between Irving and BAE as a reason for concern on the CSC. The two firms had joined forces to bid on the long-term maintenance contract for the Royal Canadian Navy’s Arctic patrol ships and the Joint Support Ships. They lost that contract to Thales.
But rival companies are still worried about whether BAE has an inside track on CSC.
Irving’s spokesman Sean Lewis said there is no need for concern. “The CSC procurement is being conducted in a way that ensures that all bidders are treated equally, with no unfair advantage given to any individual bidder,” he noted in an email. “We will continue to actively monitor the effectiveness of measures taken to avoid any conflict of interest.”
Meanwhile, Irving has raised its own issues about CSC. Irving president Kevin McCoy said the firm is concerned about the gap between when it finishes work on the new Arctic Offshore Patrol Vessels (AOPS) and the start of the CSC building.
The work Irving is doing on AOPS will provide its employees with the experience and expertise required to construct the surface combatants starting in the early 2020s.
But McCoy told Esprit de Corps that he is worried that if there is a gap where there is a slowdown or lack of work then those skilled employees will leave for other jobs. That, in turn, could impact the CSC program.
McCoy had an even blunter warning in early February when he told the House of Commons defence committee that the gap or any delays on the surface combatant program could mean “significant layoffs” for employees.
“It is imperative that we work at a steady pace and minimize delays,” he warned. “Starting in fall 2019, production work on AOPS 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 three to five per cent annually, on a 15-ship program you lose the buying power equivalent of 45 to 75 per cent of one ship for every year of delay. Delays have a serious impact on a program such as CSC.”