NSPS: A Question of Strategic Choices

15 September 2011

The National Shipbuilding Procurement Strategy (NSPS) sets lofty goals that have never been achieved before in Canada. Based on the political principal that funds for federal ships must be spent domestically to promote employment and other economic ­benefits, over $30 billion is earmarked for a 30-year ‘made-in-Canada’ program that sets out to establish a “strategic relationship with two Canadian shipyards” for large ship construction. The first contracts are divided into two types of large ships – combatants and non-combatants. A decision is expected before the end of October.
The pent-up demand for ships requires swift action to prevent the wholesale loss of capabilities in a number of department fleets. Already, the navy and coast guard are expending large sums to extend the lives of vessels that should have been replaced years ago. When the decisions on the Strategy are announced in mid-October, a rationalized shipbuilding industry along functional lines will result. The government will establish a strategic relationship with two Canadian shipyards to deliver the two major components of the strategy; one for combat ships of over 1,000 tonnes displacement and another for non-combat ships of the same or greater size. A third functional component will be construction of ships under the 1,000-tonne limit, which will be held for yards not affiliated with the winners of the first two components. A fourth component will include ship repair, refit, and maintenance, which will be competed on a case-by-case basis.

How these major shipbuilding components will fit together to contribute to the larger issue of providing maritime security for Canada has not been analyzed in any detail. Instead, the concentration has been mainly speculation about who the ‘winners and losers’ of the selection process will be, and whether or not politics and lobbying will affect the final outcome.

This article will look at the larger issue of how the contending shipyards currently contribute to the functioning of the federal fleets and what strategic factors might affect how the relationship between them and the government may develop in future.

This long-term commitment of major funds has raised the hopes of a chronically under-utilized sector of Canadian industry. Three competing bids have been tendered for the two major components of the NSPS. Irving Shipbuilding on the east coast, and Seaspan on the west coast are each bidding for the combatant and non-combatant components (the combatant ships are where the big money is).

A potential partnership between Davie Yards Inc. and the Italian shipbuilding firm, Fincantieri, couldn’t be finalized in time for the NSPS bid deadline, thus opening an opportunity for the Upper Lakes Group.

ULG purchased the assets and shipyard of Davie Yards Inc. in Quebec, and established a new company, Chantier Davie Canada Inc., to operate the shipyard. Davie, supported by a joint venture with SNC-Lavalin Defence Contractors, then submitted a bid for the NSPS non-combat package.

The three shipyard organizations are significantly different in corporate structure and make diverse contributions to the national capacity to generate maritime security capabilities.

Shipbuilding in Canada
Irving Shipbuilding and Seaspan (Vancouver Shipyards and Vancouver Drydock plus Victoria Shipyards) have benefited greatly by a relationship with the federal government and other shipbuilding-related companies through the refit, repair, and maintenance contracts let previously for navy and coast guard vessels.

Halifax Shipyards and Victoria Shipyards are both engaged in the Halifax Class Modernization (HCM) and Frigate Life Extension (FELEX) project, and the Victoria yard is providing the In Service Support Contract for Canada’s naval submarines.

The Royal Canadian Navy is not the only federal fleet that has required maintenance and refit over the years. ULG, which now includes both the Seaway Marine & Industrial shipyard in St. Catharines and Davie Yards Inc. at Levis, benefits from the Seaway Marine experience of handling several contracts for refit, repair and maintenance of Canadian Coast Guard vessels from three of their five regions.

Irving’s Halifax Shipyard is part of a stand-alone corporate structure that they feel contains resources and capabilities sufficient to undertake either of the major NSPS components. New construction work has been focused on vessels that include state of the art offshore supply ships, a small cruise ship, and tugs. They are also currently engaged to provide the Canadian Coast Guard with nine ‘mid-shore patrol vessels’ based on the widely used Dutch Damen Stan 4207-class, which is 42 metres long and displaces approximately 238 tonnes. Irving’s ship design and project management capabilities are contained within their Fleetway Engineering Inc. facility. The Irving facilities are geographically focused in Halifax between the main yard just north of the naval dockyard and their Woodside Industries site on the Dartmouth shore. No expansions are necessary to build the Arctic Offshore Patrol Ships (AOPS) or the Canadian Surface Combatants (CSC), however, some modifications will be required to accommodate a modular build style and for a new side launch method to be installed.

Although the current footprint of the main Halifax yard seems cramped for conventional construction of 20,000-ton major vessels, representatives of the yard are confident that their modular plan can be adjusted to accommodate the largest vessels currently projected under the NSPS.

Modernization monies have resulted in a number of improvements to the yard and the reinvigorating of the workforce. A new apprenticeship program that engages some 250 young candidates is viewed as the leading edge of the employment potential that awarding of the contracts will bring.

Seaspan’s assets include both the Victoria shipyard and the major shipyard and drydock facilities in Vancouver. Seaspan’s yards have been busy, mostly with military and commercial repair and refit work, but they also conduct cruise ship conversions, work on deep sea vessels and containerships, and provide both new construction and repair work on fishing vessels, ferries, barges, tugs, and yachts, plus ‘Arctic Class’ and research vessels of all types and sizes. The company’s origins in the towing and barging business are very evident in their current operations. However, Seaspan has assembled a corporate partnership to bolster the military design and systems integration aspects of their business. These include American, Canadian, French, Dutch and South Korean companies with a wealth of design, construction and program management experience.

The Victoria yard provided the navy with eight Orca-class training patrol vessels between 2006 and 2008. They are based on the Australian Pacific Forum ASI 315-class patrol boat design, which is 33 metres long and displaces approximately 162 tonnes.

Although the shipyards of the east and west coasts did manage to make it through the lean years, the Davie organization in Quebec took a harder hit.

The well-known financial difficulties of Davie Yards Inc. have been the subject of extensive coverage in the media, but the future has finally improved. The purchase of the shipyard and assets by the Upper Lakes Group, combines significant material assets with those of Seaway Marine & Industrial. Additionally, their joint venture with SNC-Lavalin brings a world-class level of experience in construction, ownership, operation and management of industrial activities in a wide variety of fields. These include agrifood, pharmaceuticals and biotechnology, chemicals and petroleum, environment, heavy construction, mass transit, mining and metallurgy, power and water management.

If some see a deficiency in marine construction, that is clearly being compensated for by an affiliation with Daewoo Shipbuilding and Marine Engineering of South Korea. DSME is the second-largest shipbuilder in that country, ranking only behind Hundai Heavy Shipbuilding (the largest shipbuilder in the world), their expertise includes naval vessels, the world’s largest containerships, all manner of offshore exploration, drilling and production ships, as well as a wide variety of other ships.

From a strategic perspective, a number of potential outcomes from the NSPS decision process are possible. All of them will have different impacts on how maritime security is achieved.

Repair vs New Builds
The current functional arrangement, which has grown out of necessity, generally has the yards in closest proximity to the naval and coast guard fleet bases focusing on repair, refit and modernization work for the two government sea services. The exception, as noted earlier, is Seaway Marine & Industrial’s work for some of the coast guard regions. In the case of repair, proximity is of great value – saving time and expense through shorter distances to obtain support and return the ship to service. The same is generally true in the case of refit and modernization, except that these planned periods of inactivity far exceed the time taken to transit to and from a service provider’s yard. Both the east and west coast navy and coast guard fleets have grown comfortable with the close and convenient location of a repair yard that has a practically guaranteed capacity to handle short-notice ‘running repairs.’ However, there is a reasonable probability that this relationship will change if either the Halifax or Victoria shipyards, or both, become involved primarily in new construction work. It is also true that the type of small vessel construction conducted by the Halifax and Victoria yards would be lost.

New construction of large vessels is the first preference of shipyards for workload. One assumes that profit margins are higher and the potential for making a reputation as a builder of excellent vessels is vastly more appealing than repair, refit or maintenance work. Moreover, the NSPS is designed to create long-term relationships that will deliver a steady stream of new contracts for the selected yards. This is vastly more secure work and should be more predictable than having to compete on a case-by-case basis as the need arises for repair or maintenance work.

This new orientation represents a ­cultural challenge for both the Halifax and Victoria yards, whose continued existence has been sustained, in large part, by an inconsistent diet of work that comes from what will be the third and fourth functional components of the strategy. Making the organizational shift from one line of operation to a radically different one will be a fundamental adjustment for both the ­corporation executives and the workforce.

Should the awards for major combat or non-combat construction come the way of either the Halifax or Victoria yards, the move away from repair, refit and maintenance work and into major work will limit the availability and flexibility of maintenance that the government’s sea services have come to rely upon.

What will happen when they realize that either a long transit to a third-party, potentially unfamiliar service provider, or a long wait for admission into the local shipyard, will be a consequence of the NSPS? Some naval officers are already privately expressing concerns over the potential impacts of this.

Strategic Factors
The interdepartmental team that comprises the NSPS Secretariat is led by Executive Director Terry Williston from PWGSC. Other key members include Edward Lam of PWGSC; Navy Captain Joel Parent from DND; Jean-Marc Corriveau from Fisheries and Oceans/Canadian Coast Guard; and Gary McGee from Industry Canada. Through an extensive consultation process with stakeholders, the NSPS Secretariat has very clearly defined the objective evaluation criteria to determine the outcome of the RFP process Officially, the team is charged with implementing the shipbuilding strategy in a fair and transparent manner, however, the Secretariat is amassing information for the three higher committees which are headed by the Deputy Ministers of the respective departments.  Let us not forget, however, that the DMs take their strategic direction from the PM and PMO, not their respective ­ministers. The governance structure for the NSPS is: Secretariat > Interdepartmental Working Group (DG-level) > Interdepartmental Steering Committee (ADM-level) > Governance Committee (DM-level).

So, the basic information amassed by this group will be ‘reinterpreted’ at least twice before it gets to the decision makers.

Apart from existing arrangements for fleet support and modernization or minor new construction, the Governance Committee’s decision could turn on their perception of the national industrial character. I believe there are at least three strategic plans that the awards could follow (based on the existing process): a centralized plan that builds on existing industrial capacity; a distributed plan that set goals for continued development of centres of excellence; and a hybrid plan for developing more capacity as a contingency response to a strategic threat.

A Conference Board of Canada report on the economic consequences of the NSPS’s outcome (May 2011) shows that whatever the decision, a large portion of the resources committed to the strategy will benefit industries in Ontario and Quebec. This is a natural consequence of resident capacity to build technologically advanced products.

If the major combat component of the strategy goes to only one of the two coastal yards and the non-combat component goes to ULG, very little benefit will flow to the second coastal yard, leaving it to either settle for a lesser future in new construction, or to specialize in a supporting role.

A decision to award the non-combat component where the majority of the advanced industrial capability already exists could be portrayed as a logical reinforcement and in the strategic interests of the country. This is a ‘fly in the ointment’ argument that has not been seen to date. However, based on current political realities, it is far more likely that charges of parochialism and regional interests will be advanced rather than acknowledging a strategic vision based on practicalities.

Another strategic factor that could come into play is the current government’s policy of building centres of excellence across the country.

Based on the principle that even distribution of available resources between all of the groups competing for funding results in mediocrity everywhere, an approach of making hard choices about where to make major investments has led to a “Network of Centres of Excellence” across Canada over the past decade. The aim of these centres is to bring together expertise to serve as a bridge between the international research community, the private sector and policy-makers – and to provide the best possible tools and scientific information to assist those making informed decisions.

The creation in June 2011of the Halifax Marine Research Institute (HMRI), under the directorship of Dr. Doug Wallace, Canada Excellence Research Chair in Ocean Science and Technology, provides Halifax with a definite competitive advantage. HMRI professes to “contributing to world-class science and helping build a stronger, more robust commercial sector in ocean products as well as in marine governance, science and technology.”

Likewise, the 2009 establishment of the Ocean Networks Canada Centre for Enterprise and Engagement (ONCEE) in Victoria, with a roughly equivalent grant of approximately $7 million, indicates that the ­government may be leaning more toward a distributed plan of strategic development based on their perception of regional competencies.

An Alternate Option
Back in February 2011, when the RFP was released, five shipyards were shortlisted. Now, with only three bids, a compelling argument has been advanced that the combat component of the NSPS is large enough that it could be divided and given to two of the contenders, leaving the third to take on the non-combat component. The advantages of Irving’s and Seaspan’s existing involvement in the HCM and FELEX programs, plus the creation of the two oceans-related centres of excellence can create a dynamic tension that can only be solved by a division of the combat component between the two of them. This will appease political interests but may run counter to the government’s policy of developing centres of excellence. However, with two such centres already in existence, the competition resulting between them from a distributed plan could be viewed as both productive and desirable.

Beyond the political and potential industrial advantages, duplication provides reserve capacity for increased production if a strategic threat arises. The unplanned way that Canadian shipbuilding expanded, through a series of emergency shipbuilding programs during the Second World War, resulted in mediocre vessels and the inability to keep pace with the rapidly advancing technological demands of modern naval warfare. If another major global conflict emerges, the long development and construction times of modern warships will preclude the kind of emergency building programs of earlier eras. It will be necessary to have facilities extant that can accelerate output through pre-planned measures. A decision to divide the combat portion of the strategic building program would be of enormous value if such a threat is perceived. The problem with this assessment is that no public discussion is underway that could rationalize such a move.

The Need for Dialogue
The NSPS merely perpetuates the existing Cold War navy fleet structure, with one-for-one replacement of similar (but improved) versions of the ships in the fleet.

Nowhere has there been a serious discussion about what roles Canadian seapower should play in the future. Is the navy to have the same type of fifth generation capability that is being acquired for the air force via the F-35 fighter program? Is it to have a frontline combat capability with the best navies in the world? The kinds of weapon developments being pursued now may actually be beyond the capabilities of Canadian industry: free ion lasers, electromagnetic rail guns, and anti-ballistic missile systems – to name only a few. The costs of such weapons will be astronomical and will result in a much stronger case of sticker shock than that caused by the projected costs of the Joint Support Ships and the Arctic and Offshore Patrol Ships programs. If the skyrocketing cost of major surface warships makes the equivalent of a fifth-generation surface warship unattainable, but frontline combat capability is still a goal, perhaps the role of submarines in Canada naval force structure needs to be re-examined. The NSPS is notably silent on the issue of submarines.

The Royal Canadian Navy may be headed for its own version of the Avro Arrow fiasco, which resulted from a strategic goal of building frontline combat aircraft in this country. Canada no longer does this. As the strategic choices of the government seem to come with a finite supply of cash, another strategic principle, providing best value for money for Canadian taxpayers, may drive the government to purchase its frontline naval assets offshore, as many other countries do, or to abandon altogether the aspiration of being at the forefront of future naval wars.

There is no doubt that Canadian shipbuilders should be able to build vessels capable of meeting the needs of constabulary and diplomatic roles of the navy. The major question to be answered by the NSPS is how much of the combat role of the navy can be satisfied by a built-in-Canada approach? The government seems to have accepted the naval leadership’s view that the combat role should dominate the other two and that a combatant shipbuilding program should consume that bulk of the resources.

Although the maritime industry is very pleased with the openness of dialogue surrounding the NSPS process (starting with the original forum held in July 2009), the Canadian public remains uniformed. Will this come to a head when the costs of the proffered solutions come to light and the same questions about roles and capability flair up all over again?
Ken Hansen is a Resident Research Fellow with the Centre for Foreign Policy Studies at Dalhousie University and a member of the Science Advisory Committee for Maritime Security at the Halifax Marine Research Institute.
© FrontLine Defence 2011