Proceedings of the Standing Senate Committee on
National Finance
Issue No. 90 - Evidence - March 20, 2019
OTTAWA, Wednesday, March 20, 2019
The Standing Senate Committee on National Finance met this day at 6:45 p.m. to study the processes and financial aspects of the Government of Canada’s system of defence procurement.
Senator Percy Mockler (Chair) in the chair.
[English]
The Chair: My name is Percy Mockler, a senator from New Brunswick and chair of the committee. I wish to welcome all of those with us in the room and viewers across the country who may be watching on television or online.
[Translation]
I want to remind our audience that the committee meetings are public and can be watched online at www.sencanada.ca.
[English]
Now I would like to ask the senators to introduce themselves.
Senator Klyne: Marty Klyne, Saskatchewan.
[Translation]
Senator Forest: Good evening. Éric Forest from the Gulf region of Quebec.
Senator Pratte: Good evening. André Pratte from Quebec.
[English]
Senator M. Deacon: Good evening. Marty Deacon, Ontario.
Senator C. Deacon: Colin Deacon from Nova Scotia.
Senator Marshall: Elizabeth Marshall from Newfoundland and Labrador.
Senator Eaton: Nicole Eaton from Ontario.
[Translation]
The Chair: I want to recognize Gaëtane Lemay, the clerk of the committee, and Alex Smith and Shaowei Pu, our two analysts who also support the work of the Standing Senate Committee on National Finance.
[English]
Honourable senators and members of the viewing public, today our committee is continuing its special study on military procurement, which we started October 30, 2018.
For Canadians from coast to coast to coast, shipbuilding represents the largest component of military procurement in the coming years. The committee wanted to hear from the shipyard industries so we invited the three major ones to appear and give us their comments on the process and financial aspects of the government’s system of defence procurement.
Honourable senators, I will need your full cooperation and utmost support, as we only have a total of 40 minutes with each company and we have three. Therefore, colleagues, I would ask that questions and responses for the first round be kept concise — three minutes, question and response maximum — so all of us will have the opportunity to participate in the discussion and ask questions to our witnesses.
Therefore, for the first panel, our witnesses represent Davie Shipbuilding Inc., located in Lévis, Quebec. They are Mr. James Davies, President; and Mr. John Schmidt, Vice President, Commercial and Government Programs.
To Mr. Davies and Mr. Schmidt, thank you for accepting our invitation so we can have your comments on what impacts there are here in Canada from coast to coast to coast.
James Davies, President, Davie Shipbuilding Inc., (Davie): Thank you for that introduction. Allow me to express my sincere thanks to the Senate of Canada for conducting this study, and to honourable senators from Quebec, 21 of whom wrote to Prime Minister Trudeau to urge him to reform the National Shipbuilding Strategy in keeping with the unanimous motions adopted by the National Assembly of Quebec in 2017 and 2018.
Honourable senators, in 2012, my business partner Alex Vicefield and I purchased Davie, Canada’s largest and most experienced shipbuilder. Since restarting operations in 2013, Davie has delivered five new ships. It was recognized, ahead of General Dynamics NASSCO shipyard of San Diego, as North America’s Shipyard of the Year in 2015 by Lloyd’s List. Today, Davie remains Canada’s largest shipbuilder. Davie represents 50 per cent of Canada’s shipbuilding capacity. Yet despite our successes, capacities and the work provided by this government, we remain significantly underutilized.
Some background: The Asterix, Canada’s only supply ship, was delivered by Davie on time and to budget. It is a resounding success.
It is clear that we need a second Resolve-class replenishment ship to support the Atlantic and Pacific fleets. Canada has over 243,000 kilometres of coastline and, as the Senate said in 2017, we need four supply ships.
When the government launched the NSPS, officials pointed out that most navies have seen dramatic cost overruns in shipbuilding programs; efforts to implement projects have revealed cost escalations that far exceed the project budgets. Nearly 10 years later, no ships have been delivered and we are seeing dramatic increases to the original budget. The program cost has grown from a total of $30 billion to well over $80 billion.
Those officials who identified the challenges some 10 years ago — and made budgetary recommendations — have been unable to mitigate the very risks they warned about.
Today, the prevailing view is that Parliament and taxpayers should just accept price escalation and late delivery as normal for defence procurement and shipbuilding in Canada. We strongly disagree with this accepted wisdom. Allow me to explain why and share a few of our collective observations and recommendations.
It starts with the deal. In 2018, we delivered Asterix to a fixed price and to a set schedule. That was the deal. If we had gone over budget or materially beyond schedule, it would have been us who carried the penalty. By the way, penalties included contract cancellation. The risks were entirely our own to manage.
Future contracts should be based on fixed-price, fixed-delivery terms and not the cost-plus zero-risk model with circa 15 per cent profit margin that Canada currently suffers. In fact, the cost-plus-profit model in use today perversely incentivizes shipyards to spend more money.
The contract negotiation should balance risk, value for money and consequent reward. It should be about what the shipyard can deliver in terms of a fixed price and fixed delivery date. If the shipyard goes over either one, the yard needs to take a hit. Government, and implicitly, the taxpayer should not take all the risk yet pay the shipyard an excessive return. Of course, this does assume that the buyer, Canada, has performed its part: Neither delaying necessary decisions nor changing its mind on specification. Delay and change only come with cost.
My second point is about consequence. A deal with no consequence for failure is toothless. By failure, understand failure to deliver at budget, failure to deliver on schedule. Consequence means that, in the light of such failure, the government needs the ability to choose an alternative supplier for future contracts. I know some of the architects of the NSS and the recipients of those generous programs would like to perpetuate the myth that Canada has already removed the possibility for contractor substitution from the strategy. However, this is not the fact.
To quote the Auditor General, the umbrella agreements, or framework agreements, which form the basis of the National Shipbuilding Strategy, do not guarantee any future contracts to design or build ships will be awarded to the shipyards. There is no contractual obligation to allocate all of the NSPS’s large-ship construction program contracts to the selected shipyards under the umbrella agreements.
Recommendation 3 is about focus. To be successful, the federal shipbuilding file needs the buyer to focus on the primary mission to be achieved, on the assets required to achieve that objective, and not a myopic, slavish adherence to process perfection.
Today’s process fixation enables constant design evolution as ever-larger groups of influencers gradually make up their minds. Short story: Ship design by committee results in perpetual specification creep. Clearly no one set out to build ships at three to five times the normal cost, however, that is what has happened.
Canada needs smaller procurement teams empowered to deliver mission-specific, fit-for-purpose ships. Lock down the mission and specification early. Leave them locked down. Otherwise, 15 frigates for $61.8 billion or $77 billion or $100 billion — pick a point on the cost trajectory — will mean a lot less than 15 vessels and the single greatest boondoggle in Canadian procurement history.
Senators, the current plan is on trend to spend a minimum of $30 billion more than necessary. The opportunity cost is dangerously strategic in nature. It removes money that could be used to acquire or update capabilities, including a new fleet of submarines, minesweepers, urgently needed icebreakers or other capabilities to protect and defend our 243,000 kilometres of coastline. Unchecked spending, justified by the process, does not help the navy, Coast Guard or Canada.
Recommendation 4 is a by-product of getting the rest of this right. It is sustainability of the shipbuilding industry. When you build fit-for-purpose ships, it means you are building an exportable product that will attract global buyers. No country will pay four to five times the rest of world price for a ship. A shipbuilding strategy which doesn’t include an exportable product is reduced simply to a short-term economic stimulus program or, as some might say, “welfare for shipyards.”
My fifth and final recommendation is in relation to transparency. Canada needs to increase openness, transparency and accountability in defence procurement.
Today, under the national shipbuilding program, parliamentarians and Canadians are told they cannot know the real cost of ships, the real and accurate schedules for delivery of those ships, the profits negotiated and embedded in the contracts, or any meaningful detail so that we could have a fair evaluation of program success. This information is called “commercial” and labelled “confidential,” and it is used to deny information to parliamentarians who seek to oversee budgets and costs in an $80-billion program. Commercial to whom? It’s already contractual, so the only reason for it being labelled as such is that these details are unpalatable to the taxpayer.
In conclusion, today, the National Shipbuilding Strategy is poised to spend over $30 billion more than it should. You are not eliminating a boom/bust cycle. You are artificially sustaining a boom at excessive cost to the taxpayer — and it is not working. But what is worse is the sense of entitlement for this work, some sense that the program has been guaranteed to the two existing NSS shipyards, no matter the cost, schedule or quality of the delivered product. As the Auditor General explained, this was never the intent.
I’d be very pleased to take your questions.
The Chair: Thank you, Mr. Davies.
The chair will now recognize the deputy chair of the Finance Committee, Senator Pratte.
Senator Pratte: Gentlemen, welcome. Thank you for being here tonight. Mr. Davies, you did highlight your view of the umbrella agreements and what they imply. My understanding of your view is that, even though there are these umbrella agreements, you believe the government could change some aspects of its National Shipbuilding Strategy and give you more work than — well, you have no work from the strategy presently.
When we talk to government officials, they tell us that if they were to do that, the two other yards would simply sue and have a very good chance of winning because of the umbrella agreements and whatever is in these agreements. This is not your view?
Mr. Davies: It’s slightly more complex. If you were to cancel an existing contract that had already been awarded, there may be an issue. There would be a cost consequence. I’d ask you just to consider that for a moment: Is the cost consequence equivalent to the constant evolution of budget? At some point, you have to recognize it might be good money after bad.
But the question actually may be of greater consequence if you look at the detail of what I said. What I said was “additional contracts.” If you have had a problem with one, two or even a series of ships, don’t then reward by placing additional contracts onto that shipyard, which not only acts as a poor incentive but it will also tend to overburden that shipyard further. A shipyard recovering from a schedule that has gone off plan is a terrible place to be and the last thing they need at that point in time is more pressure.
Senator Pratte: If you were in government today and someone convinced you that Davie should get more work, how would you proceed, considering the work that has begun in the two other yards, which is quite advanced in some cases, and considering the umbrella agreements and the contracts already awarded?
Mr. Davies: Three shipyards qualified for the initial competition. Those were Seaspan Shipyards, Irving and Davie Shipbuilding Inc. To allow Davie in as an NSS shipyard would enable future contracts to be awarded to Davie. I wouldn’t take the contracts that are currently awarded to the shipyards that have them already. Of the contracts of the NSS objective, less than half of these ships are currently awarded.
Senator Pratte: Does that mean that, for instance, Davie could build some of the same ships that are presently being built in the two other yards, or are we talking of taking the Diefenbaker and deciding it would be built —
Mr. Davies: Currently, I believe the Diefenbaker has been awarded to Seaspan Shipyards. There are some multipurpose icebreakers and a number of similar class of vessel that are currently unawarded and that would be one way to relieve some of the pressure. There are a number of different ways of looking at it.
The alternative could be subcontracting by one of the existing contractholders, especially if they have a capability shortfall.
The Chair: I would like, for the record, to ask Senator Duncan and Senator Andreychuk to introduce themselves.
Senator Andreychuk: Raynell Andreychuk, Saskatchewan.
Senator Duncan: My apologies for being late. Patricia Duncan, Yukon.
Senator Eaton: As you know, what we’re trying to do with this study is to find better and less-expensive ways of military procurement. What interested me, Mr. Davies, is your remark about decision-making. I think there are five ministries and 33 decision gates. Have you seen a way to simplify that? Should we have a procurement committee with one minister answerable in Parliament? Should we have one or two ministries? How would you go about simplifying the process and speeding it up?
Mr. Davies: It’s when and how you introduce peoples’ ability to influence a specification. The way we worked successfully with Asterix was to initially pick a primary and even secondary supply ship — humanitarian and disaster relief are two basic specification requirements, objectives and missions — and stick to that. If you need other people to have some kind of influence, there has to be a very good question as to why the influencer is being asked —
Senator Eaton: I think before you got to that, there were 35 decision makers involved.
Mr. Davies: That needs to be simplified.
Senator Eaton: Do you have any suggestions as to how that could be simplified?
John Schmidt, Vice President, Commercial and Government Programs, Davie Shipbuilding Inc., (Davie): I might assist in that response, since I worked in Public Works for almost 25 years in the marine directorate buying ships in the old days, when we used to buy ships and turn around whole programs in four years at on-budget costs.
What has to happen is you have to empower the officers doing the work. Right now in the delegation, although it’s there from the ministerial level down, the senior bureaucrats are holding the decisions and the junior bureaucrats are deferring everything to the seniors for a decision on change orders, and scope creep, as Mr. Davies mentioned. Anything that would impact cost or schedule or be a major decision point is not delegated anymore. We need to empower the officers, who have ministerial authority to approve change orders up to $2 million or $3 million, to make those changes and move the programs.
As Mr. Davies pointed out, any time you delay a decision, it’s cost and escalation, and it changes schedules and drives the program to the right.
Senator Eaton: Would you have fewer ministries involved?
Mr. Schmidt: I don’t think it’s a matter of the ministries involved. I think you have to empower the project team. For example, in ship construction there is no empowerment for change, whereas in ship repair work, you have small teams working in the shipyard who can turn around change orders in 24 hours, because they recognize that time on the dock is valuable and they have to get their ships in and out. This is the issue.
Senator Eaton: Should there be one minister responsible to Parliament for military procurement?
Mr. Schmidt: At the DND level, it’s very clear that ADM (Materiel) is in charge of the programs. They have the money, they approve the programs and they run the submissions, so I think right now one ministry is in charge. PSPC does the procurement, but that is as a service to DND.
Senator Eaton: I think in some countries, such as in the U.K., though I might be wrong, there is a Minister for Defence Procurement, so if you, as an MP, want the answer to a question, you can address somebody who is responsible for what is going on.
Right now, there doesn’t seem to be, is there?
Mr. Schmidt: I think the authorities are split between the ministries. DND is responsible for the program and they define the requirement, while PSPC is responsible for the contract and negotiate terms, conditions and price. It’s very clear that —
Senator Eaton: Then you have Innovation, which is responsible for Canadian content.
Mr. Schmidt: Yes.
[Translation]
Senator Forest: Welcome. The budget tabled yesterday mentioned two ferries. Within the budget, do you see any possibility of contracts being awarded to the Davie shipyard?
[English]
Mr. Davies: I observed that budget item and I was very pleased to see it there. There are a number of ferries that are coming up for retirement throughout Canada, especially on the eastern seaboard. If we look in the near term, there are four or possibly five in total, and certainly eight over the next decade or so.
We feel that Canada’s build-in-Canada policy means this is effectively a requirement for them to be built at Davie. I’ve yet to see how this will permeate through PSPC.
[Translation]
Senator Forest: So these ferries aren’t part of the National Shipbuilding Strategy?
[English]
Mr. Schmidt: No, they’re not, senator. They’re outside the NSS right now.
[Translation]
Senator Forest: The National Shipbuilding Strategy provides for contracts worth approximately $100 billion. What percentage does Davie receive from this order book with the warships and support ships?
[English]
Mr. Schmidt: I would say, in reality, certainly less than is advertised on the government website, because all the repair work is now being counted as part of NSS. But our definition of NSS is the federal ship replacement program, which was brought forward by the government to replace and renew the federal fleet. We’ve had no new shipbuilding contracts at Davie, so I would say the answer to that question is zero.
[Translation]
Senator Forest: Apart from the Asterix.
[English]
Mr. Schmidt: Yes, it’s outside the NSS.
[Translation]
Senator Forest: So it’s outside the Asterix.
I’m surprised that the head of procurement isn’t here. I don’t see him in the room. I’ve tried a number of times to obtain the arguments that led to the conclusion that a second support ship won’t be necessary. Given the size of the north, east and west coasts, should the construction of the Obelix be launched?
[English]
Mr. Schmidt: I believe the Obelix is necessary. We have stated that many times. There is a gap in the naval program now. I think the reason that the advice received by the government not to proceed with Obelix is simply because they wanted to start the JSS too early, and they need a reason not to do the Obelix.
Senator Marshall: Thank you very much for being here this evening. Mr. Davies, I know that — these are my words, not yours — you’re not happy with the work that you have been awarded, but you know what has been awarded to other firms. What opportunities do you see out there for your shipyard?
Mr. Davies: Other than the NSS, the current national ship procurement strategy. Inside NSS?
Senator Marshall: No, right across the board.
Mr. Davies: We are looking at international tenders at the moment in excess of $1.5 billion; we’re looking at ferries, domestic, and as I mentioned, there are a number on the East Coast, and I also noticed there are a number on the West Coast.
Senator Marshall: But nothing from the federal government?
Mr. Davies: Other than the budget announcement yesterday.
Senator Marshall: In your opening remarks, you mentioned transparency. One of the issues I found in dealing with the government is that it’s very difficult to get information regarding what’s budgeted for different capital projects and what the actual costs are to date. You alluded to it in your opening remarks toward the end. Could you comment on that? I try to follow the numbers. Why is it so difficult to track numbers, to compare budgets and actual numbers within the government?
Mr. Davies: I’m an accountant.
Senator Marshall: And I am too.
Mr. Davies: What gets measured gets measured, gets analyzed, and we deal with it. If we can do it in a comparable fashion, that gives us the opportunity to compare and contrast. If you don’t have the base numbers, you can’t make the contrast. That’s my natural suspicious nature, but I wonder if that’s a motivation.
Sometimes these things are also difficult to track, but that isn’t something which isn’t surmountable.
Senator Marshall: What proposals have you made to the federal government?
Mr. Schmidt: Right now we’re working with the government. We were awarded an ACAN, Advance Contract Award Notice, which is a negotiation of repair periods for the Canadian frigates; so we’re currently preparing a proposal to the government.
National Defence has decided to add additional capacity to the ship repair of their naval frigates. Due to the overburdening of the other two shipyards, they’re opening up ship repair to Davie. We’re negotiating for the repair of three of the East Coast frigates. That would be the Ville de Québec, the Montreal and the Halifax.
Senator Marshall: That’s it?
Mr. Schmidt: We’re bidding on other federal ship small repair work. For example, in your riding, the Louis S. St-Laurent, we’re negotiating for a small repair.
Senator Marshall: Thank you.
Senator M. Deacon: Thank you for being here. It’s an important evening for this committee and the Senate. We appreciate your candidness in your presentation. I am trying to put these pieces together.
This document that has been shared is your document; correct?
Mr. Davies: Yes.
Senator M. Deacon: When we’re going through this, I want to come to two things — workplace then and now — a chart two thirds of the way through or near the end. You have given us some bar graphs on 2015 to 2019 regarding the workforce, direct and indirect.
You talked about 1,300 employees who are presently laid off. Could you expand on this, if it’s the direct result of straight domestic contract work? Is there an area that employees particularly are trending in one area over another, one skill set over another, that might be laid off? Are there more teeth you can give me on this bar chart?
Mr. Davies: It’s a little binary. We’re talking almost entirely about blue-collar trades. The workforce in Lévis is not particularly transient. Shipbuilding has lived there for more than 150 years, tending toward 200. These are folks who have built ships for much of their careers.
When you have a shipbuilding contract, it’s on. It’s like a light switch. Everyone is there.
At the moment, we have the MIB program — the three icebreakers we are converting to Canada’s requirement in the yard. That doesn’t sustain a shipyard with the capacities that we’re capable of working at now.
At the peak in 2017, we worked approximately 2 million man-hours, and that, happily, employs well over 1,300 direct employees and a host of subcontractors on-site and a supply chain off-site. The ripple effect from building ships is huge to the economy.
Senator M. Deacon: For those folks who are unemployed, and based on the nature of their skills and their historical commitment to shipbuilding, would they mostly be, if they’re not shipbuilding, not working?
Mr. Davies: No. They take short-term work, but in order to remain on the recall list, you have to be available. You can’t make the commitment to work in another province or take on a major contract because you are hopeful that your employer will come back with a new contract and bring you back to the job that you have trained for. That is the basic principle.
The Chair: Before I recognize Senator Andreychuk, I would ask Senator Jaffer and Senator Forest-Niesing to introduce themselves.
Senator Jaffer: Mobina Jaffer, British Columbia.
[Translation]
Senator Forest-Niesing: Josée Forest-Niesing from Ontario.
[English]
Senator Andreychuk: Thank you for coming and for your presentation. You dwelled on the fact of the escalating costs that are built in. Other than the figures — you talk in billions; I talk in thousands. I’m from Saskatchewan, and we are federal here; it’s millions. Other than the overwhelming costs that go into these cost overruns, both for you and the government, what’s different about your industry as opposed to others? Because we’re sitting in a building that has cost overruns.
It’s symptomatic of government having to be accountable, but everyone having their hand in it. I look at cost overruns virtually everywhere, and decisions that perhaps were not handled well or one department doesn’t talk to another department. That is pervasive when you talk about structures in government. What is it more so in yours that needs to be corrected? Is it just the overwhelming dollars, or is it something unique that I don’t understand because I come from Saskatchewan?
Mr. Davies: First of all, those aren’t our contracts running overbudget at the moment. I’d like to make that observation.
The problem is the principle. It starts with incentivization. If you have negotiated your cost-plus margin at the beginning of the contract, how will you increase the discrete number of dollars that you end up winning? You can’t do anything with the fraction, so you have to do something with the base cost. It’s not impossible to let a client take itself to a position where it incurs more cost and more change.
Also, there are elements in terms of what we’ve built here. We’ve taken the smallest shipyard and it is building the largest ships. It’s a very difficult thing to do, that makes the job very difficult to hit the assumptions that were made at the beginning. It’s a question of experience, capability and allocation of contracts to the right party, I would argue.
Senator Andreychuk: Is that unique to shipbuilding, as opposed to military equipment installations, et cetera?
Mr. Schmidt: It goes back to our presentation. It’s all about the deal. If you put in your contract firm delivery dates and schedules, and you have your requirement well defined at the beginning, you hold the contractors’ feet to the fire.
When I was on the other side of the fence in government procurement, it was important that you worked with the contractor to make sure that they had every opportunity to succeed and deliver on time. Now it may not be the same incentive.
Senator C. Deacon: Thanks to the witnesses. Mr. Davies, I’m really impressed by the numbers you’ve shown on your Resolve versus JSS comparison, but it causes me to think of different mistakes I’ve made in the past when I tried to get something for less and just believed in promises that something would be more expensive and better, and not necessarily on either end have I been happy.
I love the on-budget, on-spec, on-time promise. I also love the concept being that if we don’t have a competitive industry, then it won’t be an exportable and sustainable industry. Those are important points.
What confidence could you provide us in terms of your obligation around the Asterix on an ongoing basis to make sure you delivered what was —
Mr. Davies: The ship was delivered.
Senator C. Deacon: But in terms of the actual performance of it. Yes, it met the specs, but is it actually performing to the standards?
Mr. Davies: Yes.
Mr. Schmidt: I was the contracts manager before rejoining Davies on the project and we’re incentivized in that contract by the number of deployed days and availability. For example, we have a certain profit level built into the contract, and if we’re delivering and available to the navy 100 per cent of the time, we can double that number in the contract. We’re incentivized to make sure the ship is always available on a go forward basis. If we miss a day or the ship breaks down due to our negligence, we don’t get paid.
Mr. Davies: As specified, the requirement was 130 days a year of availability. Last year, or as we end the fiscal year, the availability will have been 350 days, so the ship has met and exceeded the requirements.
The navy is very happy with the vessel. They are keen to see her on both coasts to make sure that both groups of frigates get time practising replenishment operations.
Senator C. Deacon: My second question is, can you give the committee examples of projects from your experience that you ran in the past when you were on the other side of the fence that achieved these same ends?
Mr. Schmidt: Same objectives? On-time objectives?
Senator C. Deacon: In terms of on budget, on spec, on time and ongoing performance being delivered.
Mr. Schmidt: I think the entire Halifax-class modernization project, the FELEX project, which started when I was in government as a director of procurement, has been a resounding success. All the ships in that program were delivered on schedule and on time. I was responsible for the Hero-class program when I was with the Irving company as project manager. Then, when we delivered, I worked for the government of the Bahamas — working with the Canadian government — we delivered two patrol vessels on time and on budget.
Senator Klyne: Thank you for being here this evening. I want to get back to the National Shipbuilding Strategy, the NSS, and being excluded from that. Quite often in procurement you get the opportunity to go back and have a post-deliberation or conference consultation where they might have explained why you were excluded from the NSS. Was there a process like that?
I think there is a sentiment to reopen that and allow it to get opened up and rebid. What changes would you make if it did get opened? There are two questions there.
Mr. Schmidt: Having been involved in the early days of NSS, one of the biggest problems with NSS is that it was built on a false foundation. The analysis given at the time was that the need for the fleet renewal was for two shipyards, and that was based on roughly 2 to 3 million person-hours a year in production. That’s about the limit for two shipyards in new construction.
The reality is the fleet now has to replace about 55 vessels and you have had, seven years into the program, no ships. In reality, you need about 6 million person-hours a year to replace the federal fleet the way it exists today. Therefore, if you start on the wrong foundation that you only need 2 or 3 million and you really need 6 million, you will always be behind. That’s the reality.
What we’re saying is that you qualified three shipyards during the NSS competition and now it’s time to tap on the shoulder of the third shipyard.
Senator Klyne: That would reopen the national strategy?
Mr. Schmidt: No, sir, it wouldn’t reopen it, because three shipyards were qualified in the first place and you decided only award to two, based on the need for only 2 to 3 million person-hours per year.
We now have icebreakers to be built. We’ve shuffled the deck at Seaspan three times to get the schedule right and it’s still wrong. You need to add capacity.
Senator Klyne: So the scope of the need has changed?
Mr. Schmidt: The need, the demand. With the complexity of the ships, it’s taking longer to build, there are more person-hours involved and, as James said earlier, you’re trying to build large ships in small shipyards. That takes more man-hours.
Senator Klyne: Thank you.
The Chair: Looking at the clock, I could still recognize two senators with one question each. To the witnesses, in the event that I cut you off, you can easily write to the clerk in response to the question. Also for your information, you can — as I’ve heard that you’re following this study very carefully — bring additional information forward. You can do that through the clerk of the committee, Ms. Gaëtane Lemay.
Senator Pratte: Mr. Schmidt, about the Obelix, you said they wanted a reason not to do it. I’m wondering about that, because we asked this question of National Defence people many times and they assured us, giving different reasons, that they don’t need it.
I’m a legislator, I have no idea, but I’m thinking that if they tell us they don’t need it, what indications do you have that they need it, even though they don’t know it or they don’t want to admit it?
Mr. Schmidt: I think they don’t want to admit it because it would impinge on the program. I think the decisions at the bureaucratic level are to protect the program, not necessarily what’s best for shipbuilding.
As Mr. Davies pointed out, we were contracted to be deployed 135 days. Last year we were deployed 355 days on both coasts and we were never intended to go into the South China Sea and other areas like that. We’ve been all over. Halfway around the world twice. If that doesn’t indicate a need for a second ship — having a ship constantly deployed means that you need two ships. The old AORs, which we replaced, were deployed 150 days each, so we’re doing the work of two ships.
Mr. Davies: Germany has five AORs and it has a small coastline and a small navy compared to Canada. If you don’t have an AOR, you have a very expensive Coast Guard or you’re borrowing capacity from somebody else.
The Chair: To conclude with the first panel, we have Senator Eaton.
Senator Eaton: I think the navy told us in Vancouver at the Maritime Security Conference we needed four, two on each coast, because one is always in the maintenance dock.
Should we be looking at submarines?
Mr. Schmidt: I think there was a study recently where the navy did look at submarines and concluded that they felt they had sufficient capacity at this time.
Senator Eaton: We have two, do we not?
Mr. Schmidt: We have four. One is usually in maintenance. But you’re absolutely right, senator. I think the same philosophy applies with supply ships, whereas you have one usually in maintenance and the other three are in operations of some sort. I think if you can’t afford four, you certainly need three. We used to have three in Canada. That was the standard.
Senator Eaton: We used to have three?
Mr. Schmidt: We did, and Davie built the very first one. We cut back to two and I think the plan right now is to build two JSS vessels, delivery date unknown.
Senator Eaton: Thank you.
The Chair: To Mr. Davies, Davie Shipyards, thank you very much for accepting our invitation. Your comments and what you’ve shared with us have been very informative.
[Translation]
We’re now joined by the representatives of the Irving shipyard. This shipyard is located mainly in Halifax, but has satellite shipyards in other parts of Nova Scotia.
[English]
For the second panel, we have J.D. Irving, Limited, represented by Mr. James Irving, Co-Chief Executive Officer; Mr. Ross Langley, Executive Vice President; Mr. Kevin McCoy, President, Irving Shipbuilding Inc.; and Mr. Scott Jamieson, Vice President, Programs, Irving Shipbuilding Inc.
Senators, I have been informed that Mr. Irving has brief comments to make, followed by Mr. McCoy.
Mr. Irving, the floor is yours.
James Irving, Co-Chief Executive Officer, J.D. Irving, Limited (Irving): Good evening, Mr. Chair, members of the committee. Thank you for this opportunity to speak to you here today and provide an update on our work at the Halifax Shipyard.
With me today are members of the executive team at Irving Shipbuilding, Mr. Ross Langley, Mr. Kevin McCoy and Mr. Scott Jamieson, Vice President of Programs.
We have a proud history of building ships for Canada. We’ve built more than 80 per cent of Canada’s current fleet between our former shipyard in Saint John, New Brunswick, and the Halifax Shipyard. We were forced to close our shipyard in Saint John when Canada stopped building large ships for the Canadian Navy and Coast Guard. Today, that shipyard is a wallboard plant employing significantly fewer workers.
Twenty-five years ago this month we purchased the Halifax Shipyard. In the early years, we built the Maritime Coastal Defence Vessels. But starting in the late 1990s, things became difficult. We did not know from year to year whether there was going to be enough shipbuilding work in Canada to keep the Halifax yard open. We continued to believe in this industry, however, and in the abilities of our hard-working men and women that make their living in shipbuilding in Canada.
When the government did not have enough shipbuilding work, we kept the Halifax yard open by building smaller ships for our own company to keep the business going. We considered closing the yard and redeveloping the real estate when Canada finally launched the National Shipbuilding Strategy competition. We are very proud to have won the large combat ships competition.
Canada can be proud of the National Shipbuilding Strategy. After a long period without building large ships in Canada, we now have a strategy that makes sense for Canada and Canadians, and it will make sure that the Canadian Navy and the Coast Guard get the ships they need at a fair price.
We have gone around the world to bring the best management team with the right experience to lead our Canadian workforce. To create a cost-efficient business, we invested over $450 million to construct state-of-the-art facilities with the best and most modern equipment.
I would like to personally invite each of you on this committee to visit the Halifax Shipyard to see firsthand the scale and complexity of the work and meet our shipbuilders. This is a large, world-class operation that all of Canada can be proud of. We are committed not only to doing a great job building ships for Canada, but also to making sure that the industry remains sustainable for the long term.
Finally, we put a lot of effort into telling the story of our progress and success to Canadians through our website and other communication means. You may have seen our positive ads on the billboards at the Ottawa Airport or in newspapers aimed at letting Canadians know that the National Shipbuilding Strategy is delivering results. Every time we place a contract or a value proposition commitment is honoured, we get the word out. We want Canadians and government leaders to hear about the good things that are happening as a result of the National Shipbuilding Strategy.
We are proud to continue our long history as a trusted partner in Canadian shipbuilding. We need a shared vision among all the political parties and our government officials to sustain and build the shipbuilding industry in Canada, and to retain the shipbuilding skills that we are now rebuilding.
Kevin McCoy, President of Irving Shipbuilding, will speak to the work under way at our Halifax Shipyard and the benefits across Canada.
Kevin McCoy, President, Irving Shipbuilding Inc., (Irving): I want to thank the chair and committee members for having us here today.
I joined Irving Shipbuilding in 2013 after a 36-year-long career in shipbuilding and ship maintenance. In my previous position, I was responsible for ship design, shipbuilding, maintenance and modernization for the U.S. Navy’s fleet of surface ships, submarines and aircraft carriers as a vice-admiral. I held that position for five years.
To focus my remarks, I will briefly address four main areas: first, progress at the Halifax Shipyard since being selected as Canada’s combatant shipbuilder in 2011; second, the significant economic impact the National Shipbuilding Strategy has already had across Canada; third, the impact the strategy has already had in stabilizing and growing employment in the shipbuilding industry; and, last, we have recommendations on how to improve and ensure the long-term success of the shipbuilding strategy and drive shipbuilding and sustainment costs down.
Let me start with progress to date. The National Shipbuilding Strategy was conceived to revitalize Canada’s shipbuilding industry and reverse the lack of sustainability in shipbuilding nationwide. Boom-and-bust cycles were experienced at all major shipyards and in the communities in which they reside. In developing the framework for the strategy, Canada acknowledged that there was not enough large ship construction required for the navy and Coast Guard to sustain more than two shipyards and their skilled workforce for the future.
Since being selected as Canada’s combatant shipbuilder in 2011, we’ve been very busy. Specifically, we’ve built nine mid-shore patrol vessels for the Canadian Coast Guard, on schedule and on budget. We completed the highly complex midlife overhauls and combat system modernization of all seven of the Royal Canadian Navy’s East Coast Halifax-class frigates, again, on schedule and on budget.
Following their modernization, we also completed two docking work periods on Halifax-class frigates. We are currently working on a third in our dry dock. We also completed maintenance periods on 25 of the public- and private-sector ships at our Halifax Shipyard since October 2011. Additionally, in Shelburne, we refitted and maintained 97 ships, supporting good jobs in rural Nova Scotia.
I will add that, during this period, we also submitted a highly competitive bid for the navy’s interim refueller, which started out as an open, transparent and fair process. We bid $220 million for the lease and conversion of that ship, which was ultimately placed somewhere in the $660-million to $700-million range. We bid 100 per cent IRBs, all work done in Canada and the value proposition consistent with what we bid for the National Shipbuilding Strategy.
We bid much more capability, roll on/roll off capability, twin-shaft ship instead of a single-shaft ship, and, to this day, we are still waiting to find out why our $220-million bid, to be delivered in one year, was bested by a $660-million to $700-million bid to be delivered in two years. We were going to use our ultra-modern Halifax Shipyard, in which we have invested $450 million, to do module construction of the modifications to an existing roll on/roll off ship. I’ll be happy to take follow-up during the question period today.
Today, we’ve re-established the capability to build large ships in Canada and are stabilizing the shipbuilding industry. Our $450-million facility enables us to build ships efficiently, and it would not have been possible without the certainty of the National Shipbuilding Strategy.
I have personally been in every major shipyard in North America, and I can tell you that the Halifax Shipyard is the most modern. It’s also the largest single building for shipbuilding in all of North America. Just having a large acreage, which is not modernized, does not make you Canada’s largest shipbuilder. Having the facilities to build a ship from raw steel to a combat ship out the back end, as well as the trained workforce, makes you Canada’s largest shipbuilder.
That’s why we, in our bid to build the interim refueller, were able to commit to doing 100 per cent of that work in Canada and not have to offshore that work to Finland or other places.
We currently have Canada’s first three Arctic and Offshore Patrol Ships, AOPS, under construction. The lead AOPS, the future HMCS Harry DeWolf, will be delivered to the Royal Canadian Navy this summer, providing a tremendous new capability to the navy. The second AOPS is already over 75 per cent complete, and will be launched later this year and delivered in summer 2020. Construction of the third AOPS is well under way. We will cut steel on the fourth AOPS later this spring.
There is a lot of false and misleading rhetoric from folks outside the National Shipbuilding Strategy that not much has happened since October 2011. The facts clearly show otherwise.
Our contracts with the Government of Canada are fair, they require significant investment on our part, they are subject to regular audits, and they are fully transparent. We are contractually committed to building the Arctic and Offshore Patrol Ships within a ceiling price. It’s a performance-based contract and incentivizes us to maximize efficiencies, increase productivity and achieve cost savings.
We are already realizing significant production efficiencies from ship to ship. At 75 per cent complete, our shipbuilders are 34 per cent more efficient with the construction of the second AOPS compared to the first, and we’re seeing even more efficiencies on the third.
Together with the Government of Canada, last month, we selected Lockheed Martin-Canada, BAE and their Type 26 Team as the winning design for the 15 Canadian surface combatants that we will build at the Halifax Shipyard. We are focused on starting CSC construction by mid-2023. Production work on AOPS starts to wind down in 2022, and there is a gap in our workload which, if left unmitigated, would result in 650 shipbuilders being laid off for up to 18 months.
Canada hired the RAND Corporation to analyze our gap and make recommendations for mitigating it. RAND has international expertise in evaluating and mitigating production gaps between shipbuilding programs. Following RAND’s recommendations, the government awarded us a sixth AOPS and made a commitment for continuous Halifax-class maintenance at our shipyard. This helped reduce the gap from what would have been 36 months to the current 18 months.
We’re continuing to work with the Government of Canada to eliminate the gap. RAND documented that a labour disruption would result in significant cost increases and delays to the CSC program as a result of reconstituting and training the workforce following layoffs.
Before I leave the topic of the Canadian surface combatants, I want to acknowledge that a shipyard in Canada that did not win the national shipbuilding competition is now falsely touting the benefits of distributed block construction to garner support for building parts of CSC. Distributed construction has been used in other countries, where no one shipyard has the capability or capacity to efficiently build an entire ship in one location, such as was employed when the United Kingdom built its massive aircraft carriers recently. Distributed construction is much more costly than single-site construction, and it makes absolutely no sense for CSC. Our Halifax Shipyard was specifically sized for efficient production of CSC, and we have the skilled and trained workforce.
Let me now shift to the economic benefits and the impact the strategy is having across Canada already.
The Chair: On that, Mr. McCoy, I’ll have to cut you off in exactly one minute. The document you’ve shared and brought to the attention of the committee is on record. Then we will proceed to questions and answers, please.
Mr. McCoy: Let me shift to recommendations.
The Chair: Absolutely, sir.
Mr. McCoy: We strongly recommend that Canada take a more holistic approach to lower costs and fully leverage the investment in people, training, facilities and processes the strategy has already developed. Let me explain using a real example.
In 2016, Irving Shipbuilding bid against a non-Canadian company to manage the in-service maintenance, engineering and logistics efforts for AOPS. The government’s solicitation contained four main sections for evaluation and scoring. Cost was the only objectively scored section; the other three sections were based on subjective scoring. Although we were evaluated as the low-cost bidder, we did not win.
We are the only company with design, construction, testing and operational experience relative to AOPS. We are developing the AOPS maintenance and training plans, spare parts provisioning and warehousing plan. Moreover, we will have AOPS under warrantee with a trained, experienced and already fully funded workforce until mid-2025. However, Canada is now standing up a new, higher-cost team for AOPS support, instead of leveraging the significant investments we have already put in place.
New construction shipyards are strengthened by having a broad business base to move people to and from during workload peaks and valleys, and a broader base to spread fixed overhead costs across so the cost of building ships is reduced.
In closing, we’re proud to be Canada’s national shipbuilder, and we take that responsibility seriously. We look forward to a bright and productive future that will benefit not only the men and women in uniform,but all Canadians. We appreciate that our statement has been read into the record.
The Chair: This is in the record verbatim and also as presented.
Mr. McCoy: I’ll just say the National Shipbuilding Strategy is working; we must stay the course.
The Chair: Thank you, sir.
Senator Pratte: Thank you, gentlemen, for being here tonight.
I sense a degree of frustration in some of the things you said tonight. I’m wondering why there is frustration, because my understanding is that most of the contracts have now been given and, frankly, Davie Shipbuilding doesn’t appear to be winning a lot of their arguments.
Is there something in the umbrella agreements that gives the government the flexibility, if they wanted it, to award contracts out of the National Shipbuilding Strategy to Davie rather than what you presently have?
Mr. McCoy: I would say maybe “frustration” is not the right word. There’s a lot of false rhetoric, and we’d like to make sure that particularly the Senate and this committee, as they’re deliberating, understand that not everything that is put out is actually true. I’ll leave it there.
Senator Pratte: About the umbrella agreements, we’ve been told, depending on whom we talk to, that this gives or does not give the Government of Canada flexibility to award contracts to another shipyard besides the two shipyards that were first selected.
Mr. Irving: We spent $450 million with no contract. We had no contracts to build ships. We went out in good faith, put the money in place, and we did it on the basis that we were going to be Canada’s shipbuilder. We went through a competitive basis, including Davie, ourselves and the folks on the West Coast. It was thoroughly analyzed, and we were successful. The whole basis on which we made the capital investment, hired all these people, and did all this work is that in good faith we will have the work, provided we perform properly.
To say there’s the perception that there might be flexibility in terms of moving the contract around, in my world, that’s false, because we spent the money in good faith and we expect Canada to perform in good faith. We expect we will have to perform properly to be a good supplier to Canada. Thank you.
Senator Pratte: Thank you.
Senator Eaton: Thank you, gentlemen. We are trying to do this study to improve, as I said to the Davie gentlemen, Canada’s procurement process, which seems to be bogged down, very expensive and slow.
Are there too many decision makers in the whole process of awarding contracts, of deciding what should be built, and who should build it? There are five ministries involved and 35 decision gates. Do you know of other countries where they have a simpler, more efficient process?
Mr. McCoy: In my previous job, I had shipbuilding. A shipbuilder came in, sat across the table, and sat across from my organization. I had the legal side; I had the lawyers on the staff. I had the war-fighting requirements from the head of the navy. I had all the contractual and technical authorities. The shipbuilding negotiated with one entity — the Naval Sea Systems Command, if you will, in the United States — for shipbuilding and if there was an issue, there was a decision by a single person in charge.
We’re on record as having recommended to the government that there be a single decision maker for a program as big as the Canadian surface combatant. Other countries do have single entities to manage it, because it’s speed of decision-making, and consensus tends to build in mediocrity at times because everybody gets a say.
Senator Eaton: And no one is accountable in Parliament.
Mr. McCoy: That’s right. Somebody has to have the chequebook and somebody has to have the schedule.
Senator Eaton: The other thing I’d like to ask you — because you’re building the six Arctic Offshore Patrol Ships and I think the initial cost was $400 million, and then it went to $800 million for the sixth — or perhaps that’s wrong, but that’s what my research tells me.
Then several people have told us that procurement shouldn’t be on a cost-plus contract basis. It should be a fixed contract. Is that possible? Is that workable?
Mr. McCoy: Depending on the first ship’s start-up cost, and the last ship, which is the way overhead is distributed, the ships in the middle of the run are about $400 million apiece.
Senator Eaton: The first ship is the most expensive because you are setting it up.
Mr. McCoy: Because you have start-up costs. Even though you get more efficient over time, inflation tends to take off.
I’d also say the original contract approach that we went into with Canada was that we didn’t want to tie up a bunch of contingency money. We were starting up a brand new industry in Canada — an all-new supply chain, new shipyard, new processes, new software and training.
Senator Eaton: If you had to do it over again — I’m looking at the future — this is all past — but in the future, should it be a fixed cost or cost-plus?
Mr. McCoy: I will tell you this is unprecedented on a lead ship of a new class. We agreed to an initial ceiling price for the ships. We are not on cost-plus on AOPS; we’re on a ceiling price. If we spend more than the amount of money that the government has, it’s on us.
Senator Eaton: And the surface combatants?
Mr. McCoy: The surface combatants are yet to be negotiated.
I don’t think there’s any country in the world that could get a shipyard on a ship as complex as the Canadian surface combatant and as high-end a war-fighting ship as that is, that you would get any shipyard in the world to do a fixed price unless there was so much contingency built into it, it would be a bad deal probably for the government. It’s all a question, when you’re building a new class, with that much risk, of who holds the risk and when, and what is the best way to apportion that risk.
Senator Jaffer: Thank you for being here. I found your presentations very interesting.
Mr. Irving, I heard you clearly. You said you invested the money, if I got you correctly, and you were ready to do the job. From what you’ve heard, were the contracts fair and competitive? Were the communications from the government transparent? Did you know what they needed?
Mr. Irving: Look, you have to understand a couple of things. The shipbuilding industry, the machinery for building ships, was rusty because we hadn’t built any warships anywhere in Canada on any scale. The federal government’s shipbuilding machinery, if you will, the management, was rusty as well. This was a big job, not just for us, but for the federal government.
We were selected or awarded the contract in October of 2011. We started spending money almost immediately. But it was July of the next year before we were able to receive a dollar from the federal government. Because while the federal government had done a good job preparing for the bid and selection, and so on and so forth, what happened on day two after the selection, there was a void. We started off on that basis.
We’ve worked closely with the bureaucrats, and they’ve done a good job, because all the silos you’re talking about, it is correct, there are a number of silos and a number of masters who have to be answered to, but they’ve worked well with us. We’ve had our difficulties, but we’ve worked our way through them.
I wouldn’t complain about saying the contracts weren’t clear or what was expected, because we were both building this. The intent was ships would cost so much up front and they will come down over time. That’s what happened to the frigates when we built them in the 1980s and 1990s. The first ship was more expensive; the last ship was much cheaper. I hope that answers your question, senator.
Senator Jaffer: Mr. McCoy, I have not had a chance to go through all your stuff — I appreciate it, and we will read it of course — on the jobs. I was interested in your talking about jobs for people — marginalized people, people who would not normally be — and women who are not marginalized, but women. Are these long-term jobs, or do you just give them the opportunity and they then look elsewhere? Do they become part of your workforce?
Mr. McCoy: These are absolutely career jobs. They become full union members.
If you look at traditional shipbuilding across North America, there is a single demographic, which is White males. That excludes 50 per cent at least of the talent in a nation. We have three programs right now: one for Indigenous peoples, one for women and one for African Nova Scotians. They are doing very well. These are long-term careers that you can raise a family on.
Senator Jaffer: At your shipyard?
Mr. McCoy: At our shipyard.
Senator Marshall: Thank you very much. Mr. McCoy, in your opening remarks, you spoke about the gap. When you look at the Arctic and Offshore Patrol Ships, I know that program is well under way and you will pick up the Canadian surface combatants. You’re talking about the gap. You are saying we are focused on starting the Canadian surface combatants by mid-2023.
Is that agreeable to the government, or is that something you’re aiming for?
Mr. McCoy: Both of us together are aiming for that. We’re in the early phase. We were just selected as the winning bid. We’re now in what’s called requirements reconciliation, making sure we have the requirements right and we’re pointing the design in the right direction.
Then we have three phases of design: a preliminary design, where you make sure everything fits; a functional design, where you start sizing pumps, piping systems and those kinds of things; and then a detailed design, which gives us the plans to give the shipbuilders on the floor to build the ship.
We think that whole process would take about four years, so that takes it to 2023. If there are any hiccups in there, we would be off that schedule.
Senator Marshall: The government has a 20-year investment plan. We’ve been trying to follow through. For example, they were supposed to spend $6 billion last year; they only spent $4 billion. The same has happened this year, so it seems like there is some slippage there.
Where exactly are the Canadian surface combatants in their investment strategy? I don’t know, because they won’t give us the numbers.
How do you close that gap, and what do you do if the gap widens? My first question would be: What would you do if the gap widens? It seems like the government is not investing according to their plan, so there is slippage. Could you just answer that question?
Mr. McCoy: We’re looking at a few things. First, we’ve got folks on retainer around the world trying to sell the Arctic and Offshore Patrol Ships to other nations. We have had strong interest from at least one nation. I don’t want to publicly talk about it, because they’d like to keep it quiet. It is a very capable ship. We have had a couple of navies and Coast Guard look at it and show some interest.
We’re looking at possibly selling offshore. Having been in this business for a long time, I would say that is a low probability, but we’re pursuing it.
We’re also talking to the government about other options for work. Maintenance is certainly one.
Also, regarding the CSC design, the combat systems piece would be the most complex, but the platform should be almost identical to what the United Kingdom and Australia are using, so maybe there are elements of the platform we can start building if there is a threat to the design being finished by 2023.
Senator Marshall: That was my next question. Would you be ready? Could you narrow the gap by starting work on the Canadian surface combatants earlier than, say, mid-2023?
Mr. McCoy: Yes, we’re looking at that, senator. However, one thing we have to be careful of is that if the design isn’t finished on such a complex and dense ship and then it changes, the rework gets very expensive. So there’s a sweet spot.
Senator Marshall: That’s why I’m asking if you would be ready.
Mr. McCoy: We would be ready with the workforce. It’s a question of how close the design is to being finalized.
Senator Marshall: But you feel confident with that 2023 number?
Mr. McCoy: I don’t right now. We’re all working to that. I would probably be overcommitting to say that. We’re all working in that direction, and we will do everything we can to make it happen, but this is a very complex ship.
Senator Marshall: We’re going to do everything we can to see what numbers are in that 20-year span.
[Translation]
Senator Forest: Thank you for accepting our invitation. How many slipways does the largest shipyard have?
[English]
Mr. McCoy: Modern shipbuilding is not done in a dry dock; modern shipbuilding is done on the land. Steel comes in one end of our factory, which is essentially a quarter-of-a-mile long, and a third of the warship goes out onto a land-level facility where the three thirds are joined. Then the ship is launched onto a launch barge.
Modern shipyards do not build in a dry dock; they build on a land-level facility. It’s more flexible, capable and amenable to workforce, facilities, et cetera. We have a graving dock that we use for maintenance; we have a launch barge that can also be used for maintenance; and we have the land-level facility on which we do our building.
And that’s part of that $450-million investment that Mr. Irving talked about.
[Translation]
Senator Forest: As part of the strategy, you confirmed that you have a monopoly on the construction of Canadian warships. It’s a form of “cost-plus” contract. Is that correct?
[English]
Mr. McCoy: No. I would say I don’t agree with the word “monopoly.” The competition was won in fair, open and transparent —
[Translation]
Senator Forest: You’re the only shipyard with a mandate to build the 15 warships.
[English]
Mr. McCoy: Yes. We were selected in the competition. We were also audited by Canada’s agent, First Marine International, to make sure we are following all the modern shipbuilding practices. We had to agree to change almost 700 of our processes and practices to meet what’s called “target state”; it’s essentially for the best of the best shipyards in the world. They come in on a regular basis to ensure the ships we’re building are at a fair price, based on our processes.
Everything is transparent, and we’re fully audited by Canada.
[Translation]
Senator Forest: I have an ethical question. I read that a journalist made an access to information request. Within two or three hours, you called the journalist to ask him about this confidential access to information request. You must have very close ties to the public service to obtain this privileged information.
[English]
Mr. McCoy: I would characterize it differently, senator. We got a call from the federal government saying that a reporter was making very wild accusations about the workmanship, that the ship would have reduced ice-class capability and that the ship would have to go in dry dock. We said, “Nothing true. Let us talk to the reporter, see what his issue is and we’ll tell him what’s going on.”
I got to phone with him, and he immediately hung up on me, saying that we had no right to know that he had asked that question. Okay, but we were concerned about our reputation and the shipbuilding strategy’s reputation. They were very wild accusations being made to several government people, so they reached out to us and asked, “Is this true?” and we said, “We’ll talk to him and find out.”
The Chair: Thank you for the clarity, Mr. McCoy.
Senator C. Deacon: Thank you for the presentation. I’ve met a number of the workers at your yard. They are proud of the work they do.
Help me in terms of the National Shipbuilding Strategy, the proposal that won in 2011 and the plan that was put in place. I’ve not seen it, but how close are you in your experience and expectations? Are you following what you expected? Is the process with the federal government and what is happening following what was expected in terms of the specs and what you’re delivering, the costs being incurred, the timelines that you are seeing? How well has that met with what you expected back in 2011?
This has been a remarkably large project. I have a sense of the amount of money invested in the facilities, but how closely is it aligning to what you expected?
Mr. McCoy: I will let Mr. Jamieson answer because he was here in 2011.
Scott Jamieson, Vice President, Programs, Irving Shipbuilding Inc. (Irving): Looking back at the original aim, it was to have a long-term shipbuilding strategy, with ships being built, with jobs being created and with a vibrant industry being sustained. Now we can see all those things coming true.
You only have to drive along Barrington Street in Halifax to see the facilities and the $450-million investment; or talk to the 485 people we hired last year alone; or talk to the 1,400 people we hired over the last three years; or talk to the people in training courses as a result of this contract; or talk to the suppliers benefiting from the contracts; or talk to the taxpayers in Ontario, who are the second-biggest beneficiary of the National Shipbuilding Strategy in terms of spend or in Quebec, the third-biggest beneficiary of the work we received.
If you look at the original aims and where we wanted to be, we’re very satisfied that it is indeed working.
Mr. McCoy: Let me add, as the naval architect here, that these are fantastic ships. They will be incredibly capable for Canada. That’s one of the reasons why we have international interest in them.
I could not have bought these ships in the U.S. for the amount of money Canada is paying. We have had several senior folks from the U.S. Navy come up here. When we talked about what we are delivering for a 6,600-tonne ship, their eyes opened up. This is a ship that, from capability and cost, Canada can be proud of.
The Chair: Senator Klyne, one question. We only have three minutes.
Senator Klyne: Would you say that the government has been clear, consistent and transparent in its communications with you?
Mr. McCoy: Yes.
Senator Klyne: I want to go back to a comment you made earlier. I couldn’t find it in your notes so I can’t remember the exact numbers, but you had bid to spec on a ship and were beat out by a number about three times higher than what you bid. What was the upshot of that? Did you get any post-consultation on that?
Mr. McCoy: No. It started out as a fair, open competition with several bidders. We worked closely with the navy, PSPC, and others, to shape our bid. We had an industry day where we presented our bid. We heard nothing.
Then, essentially, we were told that another company was getting the bid. We were not told whether they had more capability or a better price.
We were told by the navy that they had to have the ship in one year. That’s why we assembled some of the most capable architects available — Maersk, a very capable teammate — to come up with an innovate ship that needed few modifications and that we could deliver in a year. That was why it had the $220-million price tag. We have never been told why we were beat out on that.
Mr. Irving: The point about this famous or infamous ship that keeps going around here, which always puzzles me, is that a good part of that ship was built in Finland. Everyone wants jobs and I understand that, but no one says why was the major part of the ship was built in Finland. We were going to build it all in Halifax, at a much lower price and with a quicker schedule.
I get a bit annoyed when I keep getting poked at about that, because, as far as I’m concerned, it’s not right. Ask that question. I wish you would. It would be a good question to ask.
The Chair: With that, senators, we have to bring it to an end.
To the second set of witnesses on this panel, if you feel that you want to add anything — I’m sure you’re all following the mandate of our committee, from the Senate of Canada — you can do so in writing to the clerk and it will be included in the fact sheets of the committee.
To the witnesses of J.D. Irving, Limited, we say thank you very much. Thank you for your clarity and thank you for being informative.
Honourable senators, we will resume with our third panel of witnesses, Seaspan Shipyards from North Vancouver, British Columbia.
[Translation]
We’re joined by two representatives. They are Mark Lamarre, Chief Executive Officer, and Tim Page, Vice President, Government Relations.
[English]
Thank you for accepting our invitation and taking the opportunity to share clarity and information on the order of reference that we have received from the Senate of Canada regarding military procurement of shipbuilding.
I have been informed that Mark Lamarre, Chief Executive Officer, has a statement. Following his comments, we will have senators asking questions. Mr. Lamarre, the floor is yours.
Mark Lamarre, Chief Executive Officer, Seaspan Shipyards: Seaspan Shipyards appreciates your invitation to be here to address the Standing Senate Committee on National Finance as you study the question of how to improve Canada’s defence procurement system. I’m a third-generation shipbuilder, with 35 years’ experience in the U.S. and Australia, with many of those years at General Dynamics Bath Iron Works.
I started as Seaspan Shipyards’ CEO in July 2018, after serving as a CEO of ASC Shipbuilding in Adelaide, Australia, for a number of years. Since that time in July and starting at Seaspan Shipyards, I brought in a team with over 450 years of shipbuilding experience, folks who are leading different value streams for our business and helping to coach our young team and help us move faster. Each of those folks has better than 40 ships behind them in experience.
Seaspan Shipyards is proud to be the Government of Canada’s long-term partner in the National Shipbuilding Strategy, a strategy designed to avoid the procurement challenges historically faced in Canadian shipbuilding: boom and bust cycles occasioned by short-term programs with limited design and production continuity, and the allocation of work approach to satisfy regional appetites.
In contrast, the NSS has set an ambitious and achievable objective of recapitalizing the Royal Canadian Navy and Canadian Coast Guard and, at the same time, rebuilding and sustaining a lagging domestic shipbuilding industry and generating economic activity and jobs for Canadians across the country.
Before the NSS, shipbuilding in Canada was struggling. Because of the historic boom and bust cycles, the shipbuilding industry was starved of predictable work and not in a position to invest for the future. Skilled and experienced shipbuilders were leaving an industry that left them unable to support their families. Canada, as a result, was left with a withered domestic shipbuilding capacity.
Before the NSS, the Canadian Coast Guard and Royal Canadian Navy didn’t have a strategic platform to garner sufficient attention or resources to recapitalize their fleets and, as a consequence, many of their vessels were at or already beyond a normal life expectancy and had their operational needs compromised.
And before the NSS, Canada had lost its own capacity to manage complex naval and Coast Guard procurement programs.
In each respect, the National Shipbuilding Strategy has been a game changer. The NSS is a recognition by the Government of Canada of the strategic importance to a maritime nation of a sustainable domestic shipbuilding industry and the requirement for a stable, predictable and long-term volume of an appropriately resourced program of work.
Based on extensive consultations, the government understood that Canada would best achieve these goals by establishing strategic relationships with two shipyards to build all large vessels as there was insufficient long-term work to sustain employment, a key priority of the NSS, at more than two locations over the long term.
Through the NSS, the Government of Canada competitively chose Irving Shipyards to build its fleet of large combat vessels and Seaspan Shipyards to be its non-combat shipbuilder for all vessels to be built over 1,000 gross tonnes.
Because of the Government of Canada’s long-term commitment, Seaspan Shipyards has invested over $200 million of its own money to upgrade its facilities, equipment and processes and transform Vancouver Shipyards into the most modern shipyard of its kind on the West Coast of Canada.
Because of the NSS, the industrial marine sector in B.C., which now includes more than 900 companies, employs over 20,000 workers and contributes over $880 million to provincial GDP, has been revitalized.
Because of the NSS, Seaspan is leading the way on the reinvigoration of the shipbuilding trades. Seaspan has invested over $6 million with several B.C. post-secondary educational institutions and trades training schools to attract the next generation of shipbuilders.
Because of the NSS, last year alone Seaspan employed over 200 apprentices and 75 interns in its shipbuilding and ship repair facilities in Vancouver and Victoria. Furthermore, Seaspan is working with organizations specifically focused on attracting women and Indigenous workers to pursue a career in the marine industry.
Today, because of the Government of Canada’s long-term commitment provided by the NSS, Seaspan employs more than 2,300 people, including welders, pipefitters, electricians and other tradespeople, engineers, naval architects, procurement specialists, estimators and program managers. Some of these people have been in shipbuilding for decades, yet they experienced firsthand the boom and bust cycles that led so many of their colleagues to leave the industry.
But many more of them are up-and-comers, new to the industry, new to the trades, part of the aforementioned reinvigoration of the workforce and evidence of Seaspan’s commitment to investing in training and education.
It’s because of the NSS and its long-term predictability that Seaspan is able to create and sustain these good-quality, middle-class jobs and help create stability and security for British Columbia families.
And the game-changing impact of the NSS isn’t just being felt at Seaspan and in the British Columbia industrial marine sector. We are creating a very long Canadian supply chain to join us on this journey.
After six years in the program, we have already awarded $850 million in contracts to 540 companies in Atlantic Canada, Quebec, Ontario and Western Canada, and this puts us ahead of the economic projections established at the beginning of the NSS.
Our program of announced work to date is not easy, even for a mature shipyard; four classes of vessels in the first seven will be designed and built in Vancouver. It is even more challenging for a new shipyard with a new workforce, a new customer and high political expectations. We are building a national capability. That takes a lot of time, lots of lessons learned and a long-term commitment to the strategy.
Notwithstanding, we will deliver two Offshore Fisheries Science Vessels this year to the Canadian Coast Guard and have started construction on the Joint Support Ship program for the Royal Canadian Navy. Next up after the JSS will be the Coast Guard’s Offshore Oceanographic Science Vessel and we will also be delivering Canada’s new Polar Icebreaker.
While we have been making exciting progress and there are major milestones ahead of us in 2019, it has not been all clear sailing in the program. Shipbuilding is a complex business and Canada is relearning it after 30 years of undernourishment.
Canada, with Seaspan on the West Coast, is essentially developing a new sector and resource base in parallel to building ships. This is a complicated undertaking, to say the least, and it’s fair to say that all members of this strategic partnership have been investing, growing and learning — and by that, I mean Seaspan and Canada.
Speaking for Seaspan, the early learning curve was steep. The non-combat program is highly developmental in nature. Of the first seven vessels to be built, four are prototypes.
We have learned from our early challenges and absorbed the accompanying financial losses. We are working with the NSS office to ensure that, going forward, there is a greater project certainty for everyone.
You asked us for advice on how to improve the world of defence procurement. First, NSS is the right strategy for Canada but it cannot be held accountable for the absence of decades of decision-making and funding for the Royal Canadian Navy and the Canadian Coast Guard.
Second, the Coast Guard is hamstrung in its fleet management by the absence of a long-term capital plan and associated budget. That should be addressed to avoid production gaps and cost and schedule uncertainty.
Third, pent-up demand should not divert the government’s attention to short-term fixes that will disrupt market predictability and, therefore, bring more risk into the NSS program.
Fourth, earlier engagement with the shipyards and potential ship designers is needed to influence design and take advantage of the economies of scale of increased commonality of equipment across multiple platforms to reduce lifecycle costs and increase schedule certainty.
Finally, the key message I want to leave with you today is that the NSS is working and delivering on the priorities it was designed to address. The government, having set a wise course for the NSS, should continue to steer it.
Based on its strategic partnership with the Government of Canada, Seaspan has heavily invested in the program. We are all in and working hard to keep up our end. We appreciate the support of our partners in the Government of Canada who have been with us on this journey.
As a team, we are excited about what has been achieved by working together to develop a strong and viable Canadian marine industry, provide economic benefits for Canadians, and deliver Canada’s next generation of non-combat vessels.
Senators, once again, thank you for inviting me today to share Seaspan’s NSS story with you. I would also like to extend an invitation for you to visit our shipyards for a firsthand view of the national capability the we are building.
The Chair: Thank you.
Senator Jaffer: Welcome and thank you for being here. I live in North Vancouver, so I have seen your business many times.
You talked about your experience. Can you share your experience that you had in Australia that’s relevant to the work you are doing here with Seaspan Shipyards?
Mr. Lamarre: There are a lot of parallels between the continuous shipbuilding program that was put in place in Australia and the National Shipbuilding Strategy here. In Australia, there was a $90-billion program for submarines, surface combatants and minor war vessels. Very similar to here, we had rapid growth of facilities, processes and hiring of people, and there were some initial bumps in the road on that program as well.
Also, importantly, the first program under the continuous shipbuilding program was a three-ship program for a complex surface combatant that was originally awarded around Australia. It was in multiple shipyards for a three-ship program, and that ultimately had the effect of fragmenting the industry and making things a lot more difficult with respect to sharing design, managing contracts and managing accuracy control, for instance.
What ultimately happened in Australia is that we turned that program around eventually. Our work, along with the work that was done in the submarine business at ASC, as well as by Austal on the West Coast, ultimately took what was $90 billion of work that was headed offshore and won the confidence of government to bring that onshore.
The other important change is that the government shifted to exactly what Canada is doing now, which is setting up two centres of excellence for shipbuilding, one for complex surface combatants and one for minor warships, to avoid further over-capitalization and fragmentation of the business and to create those centres of excellence that you’re looking for.
It takes a long time and hundreds of millions of dollars, quite frankly, to build a large organization that has learned to operate at the right cost and schedule, at the right quality level, the right safety priorities and to have a culture of continuous improvement. That’s really what sticking with your strategy allows you to do, to make those things happen.
Senator Jaffer: There are only 20 minutes and many of my colleagues have questions, so I want a quick answer on this, if I may ask. There are suggestions that there are many departments in the procurement process. Can you explain how this has worked for you and how have you dealt with this bureaucratic process?
Mr. Lamarre: Our experience has been that we have a very effective governance process with government. We have, as you know, multiple stakeholders that are in government. We have a framework and a drumbeat of governance meetings that has been very manageable. We have a program management committee and then we have an executive governance committee that I’m a member of, along with the ADMs, if you will. That has been effective.
Going back to something I said in my early comments, we’re all learning in this program. The government is learning how to define what they want to buy and how to buy what they want to buy, and we’re learning how to build what they want to buy. We are together working on lessons learned to keep streamlining that process.
Senator Eaton: Thank you for admitting that we’re all learning, because it’s costing the Canadian taxpayer a lot of money. If we had to go to war tomorrow, I think we would be in tough shape.
That said, I will ask you gentlemen what I asked the other two shipyards. There are a number of departments involved in specific ship projects allocated to Seaspan: DFO, DND, Public Services, Treasury Board and Innovation Canada. Can you explain who is in charge? Where do you go when you have a problem in Ottawa? Which minister do you consider your minister?
Mr. Lamarre: We have multiple ministers in the program. There are a number of stakeholders in the program.
Senator Eaton: You have a Rolodex?
Mr. Lamarre: No. It’s actually pretty straightforward. There is the governance that I mentioned before. I attend, for instance, the executive governance committee, which has the associate DMs on that, and we are responsible for governing this program. From there, if there are any issues, they’re escalated to the deputy ministers. We also meet with the deputy ministers periodically. I just met with them last month, when we met with central agencies and we met with the deputy ministers across all of those agencies and were able to —
Senator Eaton: I’m being silly here, but it’s a very important point. What if the five deputy ministers don’t agree? Do they take it to the ministers? I guess what I’m trying to get at is this: Should the decision be simpler? Should we have one person in Parliament, a minister of procurement? Should we have fewer than 35 decision gates?
Mr. Lamarre: My experience has been that we haven’t run into those roadblocks. We have ADMs representing different deputies and different ministers in that room, and we have had effective decision making and course adjustments when needed on the program.
Senator Eaton: Thank you.
The other question I asked Irving is about cost-plus contracts. There are many critics looking at this that say that we should have fixed-cost contracts, which would be an incentive for shipyards to control costs. Right now with cost-plus there’s no incentive to control costs.
Mr. Lamarre: I would say there is no one-size-fits-all for these kinds of programs. There are varying levels of complexity, varying levels of risk, varying levels of completion of some of the fundamentals in advance of key decisions that are made. For instance, there is the amount of design completion that there might be.
You’ll find it is customary around the world that programs will start off as perhaps a cost-plus and then change the balance of risk over time. On this first program for the OFSV, we have a contract with a firm price and, if we break that ceiling, that is on us.
Senator Eaton: Thank you.
Senator Pratte: Thank you, gentlemen, for being here tonight. One of the frustrations in Canada and in other countries with military procurement is at least two issues: delays, delivery dates that are much more long-term than they were supposed to be; and cost overruns. From what the media have reported, certainly, Seaspan has had these types of problems. The ships will be delivered later than first announced, and the costs will be significantly higher than, again, was announced originally.
What are the causes of these problems in your case? Is it the procurement process, or is it what is happening in your shipyard?
Mr. Lamarre: I would say, first of all, what is very common on starting up an industry is that we run into these kinds of problems. It happens around the world. It’s also very common to run into these kinds of problems when the design and specification of the design of the ships is not clear at the beginning, as was the case on our first two programs. That means you’re setting a budget and you’re setting a schedule to an unknown. That is one place where the process can improve. I can talk about that in a moment, if you’d like, and some ideas on that end.
With that being said, Seaspan has had some of our own issues, of course, with growth. We have had some quality issues, particularly in the welding area, on one type of process of welding that we’ve had. We’ve overcome those issues. There are other times when we could have or should have gotten on top of things earlier than we did but, by virtue of the fact that we’re a brand new shipyard and we’re learning, we didn’t get on top of it as quickly as we’d like.
What I think is important in what distinguishes a shipyard is its ability to focus on what they control and demonstrate improvement on their follow ships when we do run into problems. Again, it is not to worry about what everybody else is saying but to focus on what we control.
We have arrived here together, as I said before, and we’re all learning in this process. It often happens that — and this is not to deflect responsibility, just a fact — with shipbuilding programs, the shipbuilder wears the perception that all the problems are theirs. I will tell you we have learned together on this program.
The biggest areas we could focus on together to ensure better outcomes, first of all, would be to start much earlier than we’re starting today with our customer. What normally happens, and has happened here in Canada, is that you have an overlap between technology development, between detailed planning, and between production. The schedule doesn’t change and, if the dates are not realistic in the first instance or they’re being done simultaneously, you absolutely get guaranteed problems.
The biggest recommendation we have for the next program that will be coming for NSS is to get the right people to the table early enough with our customer and take advantage of the time that we have to do things sequentially.
You will always get better outcomes in shipbuilding if you complete your detailed design in advance of production, for instance, just as one example. There are those opportunities for the future programs coming and we need to, in my view, drive around some of the potholes that we know are in front of us.
Senator Pratte: Thank you very much. Time is running out.
Senator Marshall: Thank you very much. Thank you for being here this evening. Could you run down some of the vessels that you’re constructing? Of the three Offshore Fishery Science Vessels, I think you said two will be delivered this year. What about the third?
Mr. Lamarre: The third will be delivered next year. It will be launched by the end of 2019, early 2020. I did bring some show-and-tell today. I want to show you that we have our ship at sea. Our first NSS ship is at sea. This week it went to trials. There’s the living proof that the program is working.
Senator Marshall: When you responded to Senator Pratte, you were talking about the contract cost. What kind of contract? Would that have been a fixed-cost contract for the three Offshore Fisheries Science Vessels?
Mr. Lamarre: I don’t know the exact construct. It’s a contract that has a firm price in it and if we breach that ceiling it is —
Senator Marshall: What would the estimated cost be of those three vessels? What would I expect to see going through the government accounts?
Mr. Lamarre: I’m not sure I’m in a position to share that information if government hasn’t done that.
Senator Marshall: You’re not able to provide that? Can you move on and talk about the Joint Support Ships? Just go through the order you are constructing —
Mr. Lamarre: We have three Offshore Shore Patrol Vessels. We’re building a JSS. We’ll be building an Offshore Oceanographic Science Vessel. We’re building another JSS, and the next ship under our umbrella agreement is the large icebreaker.
Senator Marshall: So the Offshore Oceanographic Science Vessel, is that going to be built before the Joint Support Ship?
Mr. Lamarre: We’re building the first Joint Support Ship and then we’ll be building our Offshore Oceanographic Science Vessel and then we’ll be building the JSS. They will be delivered in that order, but they’re built largely simultaneously.
Senator Marshall: So the first Joint Support Ship will be built before the Offshore Oceanographic Science Vessel?
Mr. Lamarre: It will be delivered before the Offshore Oceanographic Science Vessel. There will likely be work going on on both of those ships with the early start of the OO program while finishing the first JSS.
Senator Marshall: If I’m looking through the government records, I should see the three Offshore Fisheries Science Vessels first, then a Joint Support Ship, then an Offshore Oceanographic Science Vessel, and then I’ll see the second Joint Support Ship.
Mr. Lamarre: Correct.
Senator Marshall: Why would you not do the Joint Support Ships consecutively?
Mr. Lamarre: It gives us an opportunity to crank in all of the lessons learned that come off the first ship. What is routine, especially in new shipyards, is that it’s hard to keep up with incorporating the lessons learned in the design to keep up with the start of the construction of the second ship. While we’re growing, this gives us the opportunity to get all of those lessons learned in the right stage of construction.
In the interests of time, I would just say that’s vitally important. We want to catch the work in the correct stage of construction, because there is a cost multiplier in this industry. If it takes me an hour to install this foundation in the buildings, it will take me at least four to five hours to do it on the hard stand and then seven to nine hours to do it out on the water. It’s vital that we are doing what I would call pulling work to the left. That’s what will give us that opportunity.
Senator Marshall: When do you think that the first Joint Support Ship will be delivered?
Mr. Lamarre: July 2023.
[Translation]
Senator Forest: Thank you for being here and for your honest comments. How many ships are currently under construction at your shipyard?
[English]
Mr. Lamarre: We currently have — I didn’t hear it. We currently have four ships under construction for NSS.
[Translation]
Senator Forest: Under construction?
[English]
Mr. Lamarre: Correct.
[Translation]
Senator Forest: You’re confirming that, at this point, you’re working according to a cost-plus concept as part of the strategy.
Tim Page, Vice President, Government Relations, Seaspan Shipyards: Can we wait until the microphone works?
Senator Forest: We can check the microphone.
[English]
The Chair: We will verify, Mr. Lamarre.
Mr. Lamarre: I can hear it very lightly in the background, but it may be that I spend too much time on ships and I’m deaf. That’s very possible.
[Translation]
Senator Forest: It’s to remind you that today is the International Day of La Francophonie. It’s to celebrate this day.
When we look at the concerns regarding the management of public funds, we end up in a situation where, as a result of the National Shipbuilding Strategy, you have an order book for seven or eight ships as part of cost-plus contracts. This puts you in a monopoly situation. Is this the optimal environment for obtaining the best product at a competitive price? When I look at the figures for the construction of the Diefenbaker icebreaker, which is five years behind schedule, which should have been delivered in 2017, and whose costs have almost doubled, how can this be explained? Who is responsible for this? Did the public service make the wrong estimate? Is the issue the efficiency of the shipyard? Why are we five years behind schedule, and how did the cost rise from the original $720 million to the $1.4 billion we’re talking about today? As Canadian citizens, who can we ask about this outcome? We were talking about centres of excellence, and I think that we need to improve in terms of excellence.
[English]
Mr. Lamarre: Thank you for your question, senator. I would acknowledge there is still improvement to be made. We’re working together as a team to accomplish that.
Seaspan does not have any cost-plus construction contracts for the NSS program.
With respect to the monopoly, there was a competition. It was an open competition. All shipyards across Canada had the opportunity to compete for this work that was done. It was ultimately won by Irving and Seaspan. We see ourselves — and so does the government — as a strategic partner for all non-combat ships over 1000 gross tonnes. It’s on that basis we invested over $200 million of private equity in developing the most modern shipyard on the West Coast and it is on that basis that we continue to invest in new technology in support of these programs.
I make reference to my comment earlier about starting shipbuilding projects early enough, getting the right people to the table early enough to understand clearly what the specifications for these vessels need to be, and taking advantage of getting some of the major equipment suppliers to that table early and running competition for those large pieces of gear, propulsion gear, switchboards, generators and so on. In doing so, we have an understanding that the preliminary design that comes out the other end of this evaluation actually has some legs to it and has some viability. Those are steps that need to be taken, again, avoiding that overlap. You will find that in these programs we’ve had a significant overlap between design maturity and construction.
[Translation]
Senator Forest: You must agree that, although you were accredited in an open competition, you didn’t give a price for the delivery of the seven ships. It was a competition to receive accreditation and authorization to build the ships. The price is given afterwards, as we can see. That’s just a comment.
[English]
Senator C. Deacon: I’ll defer to the permanent members of this committee.
Senator Klyne: I apologize that I was late for your presentation, but I did catch some comments around working on a diversity program. How are you making out with that? In particular, I’m thinking about the Indigenous workforce you’re trying to build there. Second, do they put any weighting criteria on something like that in terms of criteria for diversity?
Mr. Lamarre: I can’t be specific about the numbers, but we have a requirement with our programs through the government to have programs of that kind. We are running several programs now.
One of the largest ones is called Access, which is for the Aboriginal community, where we’re doing trades training; and there are either two or three apprentices out of our four new welding programs, for instance, are Aboriginal females.
We’ve spent several million dollars on these programs and they continue to bring us great shipbuilders that will be able to join us on this journey of growing with these middle-class jobs.
Senator Klyne: Congratulations. Thank you.
Senator Jaffer: When Irving came, they spoke about three groups, including African Nova Scotians. B.C. is highly ethnic. Does the government require you to have ethnic hiring or just Indigenous and women? I’m curious.
Mr. Lamarre: We’re not required to have a range of ethnicities, if you will. Our shipyard, particularly in the front end of the business, in our procurement, engineering and design, has folks from all over the world. We have a hugely diverse workforce, more than I’ve seen in this industry anywhere.
Senator Jaffer: I’m talking about the training.
Mr. Lamarre: We have three specific training programs. I don’t have the details with me, but I could absolutely provide that to the committee.
Senator Marshall: When is the Offshore Oceanographic Science Vessel expected to be delivered?
Mr. Lamarre: That will be delivered in April of 2024.
Senator Marshall: And has construction started on that one?
Mr. Lamarre: No, construction hasn’t started. We’re still in design for that vessel.
Senator Marshall: You said the first Joint Support Ship is going to be delivered in July of 2023; is that correct?
Mr. Lamarre: Correct.
Senator Marshall: And has that one started construction?
Mr. Lamarre: Yes, it has.
Senator Marshall: When do you expect the second Joint Support Ship to be delivered?
Mr. Lamarre: October of 2025.
Senator Marshall: So that one hasn’t started either. Okay. Thank you very much.
The Chair: Senators, I have four minutes left.
Senator C. Deacon: Do you use the same method of building as Irving was describing in terms of how you assemble your ships?
Mr. Lamarre: That’s correct. We’ve just built our shipyard, so it has been designed consistent with the same attributes you will see at Irving and what we saw at the new facility in Adelaide. Our job is to maximize the pre-outfitting of large units of ships inside the building, where you have the best opportunity to service them and get the lowest cost. What sizes a shipyard and its ability to deliver multiple vessels for their customers is our ability to assemble ships on the hard stand and get them in the water for completion.
The best shipyards around the world try to leave no more than 15 per cent of work to be completed in the water. In fact, those at international benchmarks do it at 90 per cent on the hard stand before launch. That’s where we will be with the ship we launch in May. We will be better than 90 per cent on ship two.
[Translation]
Senator Forest: I have one last quick question. As part of the strategy, what’s your authorized profit margin?
[English]
Mr. Lamarre: Again, every program is different. Every ship program is different.
[Translation]
Senator Forest: But what’s the margin?
[English]
Between 10 and 20? Between 5 and 50?
Mr. Lamarre: The SAC rules and the umbrella agreement rules that accompany them have a maximum gross profit of 20 per cent. By the time the bites are taken out along the way, you have a single-digit margin normally in this business. We call that the margin walk, if you will. Those are areas that we should be talking about.
Regarding the gross profits, again, the SAC rules have a maximum of 20 per cent. However, by the time you’re done with what isn’t allowed along the way, with the specifics related to the SAC rules and the umbrella agreement, you end up in a single-digit margin.
My experience, especially with a book of business like what we have at Seaspan, where we have a lot of prototype vessels, you would be shooting for a double-digit net margin. That is where we should be at some point. That will come with efficiencies over time.
Senator Forest: That’s a nice goal.
The Chair: Honourable senators, I wish to thank the representatives from Seaspan Shipyards very much for sharing their information.
I want to tell Davie Shipbuilding, Irving Shipbuilding and Seaspan Shipyards that you’ve been informative and have brought clarity to the order of reference we received from the Senate of Canada on military procurement.
If you feel that you want to add any information, please do not hesitate to do so, Mr. Lamarre, through the clerk. If you have any questions, again, do not hesitate to do so, through the clerk. We’ve said that to Canada’s three shipbuilders.
With that, honourable senators, I now declare the meeting adjourned.
(The committee adjourned.)