National shipbuilding procurement strategy

There is a somewhat biased but still very useful look at the successes of the National Shipbuilding Procurement Strategy (NSPS) in the Ottawa Citizen by Howie Smith who is the Past President of the Naval Association of Canada. Mr Smith is a retired Canadian naval officer who has provided consultancy services to several firms pursuing opportunities within the projects of the National Shipbuilding Strategy, which is why his article is somewhat biased. Mr Smith is responding to a recent report by Professor Michael Byers of the University of British Columbia, who is also a biased commentator on defence issues, which said that the NSPS “was flawed from the outset” and “According to Byers, the Liberal government should open-up the non-contractually-binding umbrella agreements with Irving and Seaspan, then cancel and restart the Canadian Surface Combatant and the Joint Support Ship procurement programs with fixed-price competitions involving completely ‘off the shelf’ designs.”

It is important, I believe, to understand why Canada needed something like the NSPS in the first place. The notion came in about the middle of the Harper government’s term in office – in around 2010. I think that two problems confronted the government:

  • The Canadian shipbuilding industry was, once again, “on the ropes;” Davie, Canada’s largest shipyard was in bankruptcy and the other yards were too reliant on government contracts; and
  • Both of the major federal fleets (the Royal Canadian Navy and the Canadian Coast Guard) were approaching “rust out,” again.

The solution to the first problem was to modernize the yards and make them internationally competitive … but that would cost money and private investment money is scarce ~ especially for shipbuilding, plus under the international trade rules to which Canada has agreed direct government subsidies to commercial shipyards are prohibited. The solution to shipyards that are too reliant on government contracts was ~ wait for it ~ another big government contract that would allow them to modernize themselves.

That indirect government subsidy is perfectly legal if the contracts are for navy and coast guard ships because “national security” is a big loophole in international trade law.

Both Professor Byers and Mr Smith have some good points … but neither is 100% correct. The NSPS was and remains a sound idea … the costs, which is the real crux of Professor Byers’ complaint, are not relevant because the defence and coast guard budgets are being (mis)used for industrial development ~ those are not the real costs of warships: they are the real costs of warships PLUS the cost of yard modernization.

The new surface combatant project is, as Mr Smith says, the biggest and costliest peacetime military procurement ever … and the NSPS is working just about a well as any “system” would at bringing it to fruition. At some point in the future a government will have to decide if Canada gets fewer ships than it needs or spends more more money than it wants … or, most likely, both.

The real problem with the NSPS is that it, as an industrial strategy, is too cute by half. The bureaucrats who designed it tried to take too much risk away from the government and, at the same time, gave the industry too much contracting control. That was what bothered the Franco-Italian consortium ~ it looked a lot like Irving, acting as the Government of Canada’s agent, was trying to “mine” too much proprietary information in the bidding process … and there is, quite possibly, some truth in that.

Then, just after the NSPS was announced, Davie was rescued from bankruptcy and a new, foreign ownership team took aggressive action to demonstrate that it could produce on time and within budget and it is hungry for more work and it is not above playing the Quebec as victim card, either.

The process is flawed, but it is not a disaster than needs a “do over” as Professor Byers suggests. What it does need is some retuning to:

  • Develop a Phase II which will include another of the Asterix type conversions ~ Davie has already named it the Obelix and, down the road, some (say eight to 15) corvettes, because even with 15 full sized, sophisticated “major combatants” the RCN’s fleet will still be too small, and, perhaps even some amphibious ships, and more icebreakers for the Coast Guard and/or the Royal Canadian Mounted Police;
  • Return more contracting control to the government, proper, rather than allowing or forcing a prime contractor to do what ought to be the eventual end user’s jobs.

We must accept that it may not be possible to develop an export oriented ship building industry analogous to those in America, Europe and Asia, all of which receive a lot of indirect government subsidies and, currently, dominate the market; but it should be possible to have an industry that can meet the needs of our federal fleets and of our coastal and Great Lakes shipping industries at competitive prices … the cost of getting there will be high, much higher I suspect than the few tens of billions forecast in the NSPS.

 

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