Government Operations Committee on Nov. 22nd, 2012

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you.

First of all, I think you have done a good job, especially in relation to F-35, so I congratulate you on the success.

I do have a few questions. You talk about $35 billion over 30 years, I believe. Is this $35 billion in 2012 dollars? Is there an adjustment for inflation?

[Tom Ring]

The answer to that would come from the individual projects themselves.

Michel, do you want to speak that?

[Michel Vermette]

There is some inflationary coverage included in the numbers that I spoke to a little earlier, the $1.2 billion. We built those into our cost estimations. The polar icebreaker, for example, is a 10-year-long project, developed in 2008 for delivery in 2017. That number of $800 million is one of the components of the $35 billion, but the vast bulk of the $35 billion is obviously a Department of National Defence number.

[RAdm Patrick Finn]

Yes, sir. To answer your question, our budgets are also in budget-year dollars, so they were developed using escalation.

In the case of the three key...the joint support ship, Arctic offshore patrol ship, and Canadian surface combatant, all of which were part of the Canada First defence strategy, were all established with a degree of escalation included in those budgets.

[John McCallum, Liberal, Markham—Unionville, ON]

That means you have specifically assumed the years in which the construction would be begun and completed?

[RAdm Patrick Finn]

In developing the cost estimates, yes, sir, we did. We established the baseline, escalated it, and also included some contingency, recognizing that there was the reality of the economic uncertainty and also the schedule uncertainty. So there is some contingency included in there to try to offset some of that risk. I can't guarantee that we have offset all of the risk.

[John McCallum, Liberal, Markham—Unionville, ON]

If, for example, inflation turns out to be higher than you've assumed over the future years, does that mean the dollars would stay the same, and you would reduce the number of ships, like with the F-35s, or would you try to increase the number of dollars and keep the number of ships the same, if inflation is higher or any other negative contingency were to arise?

[RAdm Patrick Finn]

Sir, I think in every case, with these particularly complex procurements, we manage them within the envelope, but also would in fact return to government, as a policy question, to say: given the economic realities beyond our control, here were the assumptions going in, here's how we established the budget, there has been a significant increase in commodities and things have happened—which has occurred to us in the past. We would come forward with a question: do you want us to proceed within the existing budget, meaning fewer ships, less capability within a given ship, or do we want to revisit the budget allocation to continue forward?

It would really depend on, I would say.... If the degree of change is such that the contingency that we have established is insufficient, we would bring that back for decision to see from a policy perspective what the desired way forward is.

[John McCallum, Liberal, Markham—Unionville, ON]

That makes sense.

There's been some concern that the construction is somehow being delayed, and some concern that this might be partly related to government cutbacks through fiscal restraint.

Is there any truth in that? With regard to the time at which construction will begin, is it being delayed partly for fiscal reasons?

[Tom Ring]

Thank you for the question, Mr. Chair.

No, there is no delay. From the start point of the selection process of selecting the two shipyards, it was always envisaged that the next step in the process would be to examine what the shipyards needed to do to upgrade their own infrastructure in order to efficiently build the ships.

The concept here in NSPS was not just to select two shipyards and have them attempt to build complex vessels—as they were—but also to assess and benchmark what infrastructure upgrades those shipyards would need to do in order to efficiently build ships over 20 to 30 years. It was always understood that would take some time. Those infrastructure upgrades have commenced.

The other part of the answer to the question is wrapped in the design-then-build approach that we've adopted. Keep in mind that for many of these projects, sir, they're developmental projects. You have to develop a design, test it, and look at how you would construct it. In fact, with modern shipbuilding techniques, you essentially get to a full 3D design—you know virtually where everything is before you actually start the construction process. That way, you don't get design and engineering changes through the construction process that costs you more money, and you go back and forth, which was probably the traditional way of doing it. It was always anticipated that these steps in the process would take some time, and in fact allow you to more efficiently and more rapidly build a vessel when you actually got to the construction process.

[The Chair, NDP, Pat Martin]

Thank you, Mr. Ring.

Thank you, John, your time is concluded.

Bernard Trottier, go ahead.

[Bernard Trottier, Conservative, Etobicoke—Lakeshore, ON]

Thank you, Mr. Chair, and thank you, guests, for coming in today.

I want to pursue what you're talking about in the design-then-build approach. These are long-term contracts, 30 years. Fifteen to 25 years from now, there might be new technologies that become requirements, there might be new threats, new economic circumstances. How do you incorporate emerging requirements into the design-then-build approach?

[Tom Ring]

Thank you for the question. I'll ask my colleagues to speak, because the answer will lie individually in the various projects.

Michel, do you want to start?

[Michel Vermette]

Thank you, Mr. Chairman.

The question is a really interesting one for somebody who is in the business of delivering an asset that could potentially have a life exceeding my own right now. We're operating the Louis S. St-Laurent, conceived of in the early 1960s, and it is still in operation, still a vital part of our fleet.

There are a couple of ways you do that. One is in setting your requirements at the outset and in thinking through the design, you have to think your program long term. What might we need in the long term? To give a specific example, as we're designing the offshore fisheries science vessel, the trawler fleet of the future, we're thinking of three vessels. One of our requirements is to trawl at a depth that our current fleet can't trawl at. That has to do with going to places in Canadian waters where we haven't been before, to see what is there. Very simply, we can trawl at 1,500 metres right now with our current fleet, but we're thinking of a capability of trawling at 2,500 metres in case we need that capability in the future. Bear in mind what Admiral Finn talked about in terms of a cost-capability trade-off. Trawling at a greater depth means more power requirement, an increased cost of the vessel. So we always have to have those considerations in mind.

The second piece of what we do is we think of a good, basic platform that we're going to deliver. A ship is a complex arrangement of hull propulsion and systems aboard. We do have the opportunity, and in our forward planning we think about what we call a “mid-life modernization” partway through the life of the fleet, to adapt new systems to the vessel, to upgrade technologies, and to do significant repair and maintenance work at that time so that the vessel continues to be a vital part of our fleet.

So, two pieces: one is good fundamental design that defines your requirements, and the second piece is taking a point in the life of the vessel to say we need to renovate this thing.

[Bernard Trottier, Conservative, Etobicoke—Lakeshore, ON]

Over the long term of these contracts there's a significant risk to the shipbuilding itself. How would you classify the different categories of risk, and which do you think are the most significant? What could possibly derail the whole program?

[Michel Vermette]

The way I would approach it is to come back to this question of the gradual approach to contracting that Mr. Ring outlined: the ancillary, then the design, and then the construction approach.

The ancillary contracts are about exploring some concepts with the yard to try to manage down the amount of risk and contingency that would be in any future part of the project. Right now we have ancillary contracts with the Vancouver Shipyards for both our science vessel project and polar icebreaker.

Admiral Finn spoke of the involvement of the builder in the design phase. It's having the builder sit with us as we're designing the hull form of the polar icebreaker, which we're currently doing, and testing it in the tank at the National Research Council, in St. John's. In understanding the structure that might be required for that hull form, the builder could say, well, if you did it this way, it would reduce our risk or fit better into our field of expertise or our knowledge or our technical approach.

Managing risk is about the spiral in terms of design, of increasing certainty around the project, down to the point that when you actually start to cut steel, you know exactly where every bolt and every cable tray goes, what systems are going to be aboard, and what engines are going to be in the vessel. You're not designing the vessel as you're building it. That's the last thing you want to do. You never want to be making changes to the structure of your house as you're building it.

[Bernard Trottier, Conservative, Etobicoke—Lakeshore, ON]

Still on that theme of risk, these are such large contracts—the largest contracts we've ever had for the navy and the coast guard. What led to building such large contracts? Would it have been possible to tender these as a series of smaller contracts being spread out over more time? Would that have diversified the risk and therefore reduced the risk somewhat?

[Michel Vermette]

There's not a huge amount of shipbuilding capability in Canada. In fact, what led to the NSPS was the knowledge that having the one-off approach for the big projects wasn't going to lead us to a productive environment where we could deliver ships with low risk and the kinds of ships we needed.

There is an investment that has to be made in the capability of the yard. It's not just the infrastructure of the yard, but also their intellectual property, how they build ships, which both Irving and Vancouver Shipyards are making now to handle these large complex projects.

Our smaller vessels are relatively more simple in terms of construction. They're good projects for smaller yards to get involved in. The don't have to have the complex systems. Breaking them down in terms of the 1,000-tonne large-small vessel made sense to us.

We need to have a consistent supply, and here's a perfect example. We have about three dozen large vessels in the Canadian Coast Guard fleet. If we built a ship every year to replace those vessels, we would never lower the average age of that fleet.

[The Chair, NDP, Pat Martin]

Bernard, you're well over time. That was close to six and a half minutes.

Thank you very much. That's the end of our first round.

I'd like to ask Mr. Vermette to expand a bit on one comment that he made toward the end of his remarks.

You said that Canada doesn't really have a lot of shipbuilding capacity. We're a country with the largest coastline of any country in the world, and surely we used to be at the leading edge of shipbuilding, whether historically, in Lunenburg, or during the Second World War. My own union used to have 40,000 members working in the Burrard drydocks, cranking out a boat a week during the war efforts. We were at the leading edge.

Will this new commitment to building ships in Canada put us back at the leading edge of the nations that build ships? Will it revitalize our shipbuilding industry?

[Tom Ring]

Thank you, Mr. Chair.

If you don't mind, I'll respond to the question.

It's an excellent question, and in fact, you're quite right in noting that there has been a significant “evolution”, if I can put it that way, in the shipbuilding capability in Canada since the war years, as you've referenced.

Over the course of the last 30 years or so, what shipbuilding capacity there was in Canada was largely reliant on large federal government work. Because of the ebb and flow, if I can put it that way, of federal shipbuilding work, we experienced what was referred to as “boom and bust”. Shipyards would have work for a certain period of time but then not have work and would have to lay off skilled workers. Skills would decline. There would be an evolution in technology that the shipyard would not keep up with. When it came time to do additional work, it raised the cost of whatever federal shipbuilding there was.

It was a very poor boom-and-bust cycle, and it resulted in an erosion of shipyard capacity in Canada and in vastly more expensive ships whenever the federal government needed to construct vessels.

It was in about 2008 that the government said, “Oh. Hang on a second.” They talked to industry and said let's have a shipbuilding forum; let's get all of the shipbuilders around the table; let's have an understanding of how we break this cycle to more efficiently build ships.

Now, to get to your specific question, the process of NSPS will actually, we believe, result in two very capable, world-class shipyards in Canada for building large vessels. We certainly hope that those shipyards will be able to compete effectively for more work beyond federal government work, but first and foremost, we will have a vibrant shipbuilding industry and the related marine support industries in Canada to support those two world-class shipyards.

[The Chair, NDP, Pat Martin]

That's what I like to hear. Thank you very much.

Jean-François Larose.

[Jean-François Larose, NDP, Repentigny, QC]

Thank you, Mr. Chair.

I want to thank our guests for joining us today.

I will share my time with Denis Blanchette.

I have two questions. What will be the participation of suppliers—the SMEs in Quebec and across Canada—under the National Shipbuilding Procurement Strategy?

When will the maintenance contracts valued at $500 million be awarded, and what granting process will be used?

[Tom Ring]

Mr. Chairman, in general terms, we believe there will be extensive work for small and medium-sized enterprises throughout the country. This is an issue that we addressed in the request for proposals that we put to the yards. We wanted to see a broad distribution of the work, particularly to small and medium-sized enterprises, not just within the local areas but across Canada, and we believe there will be a strong distribution.

I'm going to ask Mr. Leslie if he has some specific figures on it.

On the second question, I'm going to ask Mr. Vermette and Mr. Finn to respond.

[Scott Leslie]

As mentioned, there will be considerable opportunities for small and medium-sized enterprises across the country. There has been an extensive engagement process conducted on both coasts with respect to that. ACOA and Western Economic Diversification Canada have been holding focused presentations, together with the shipyards, for those small and medium-sized enterprises to make them aware of the potential of the opportunities and to prepare them for those. Both shipyards have also initiated a process to register companies that are interested in participating in future requirements and those websites have been ongoing now for quite some time and have been successful.

The supply chain for building ships is a very long one. It will be extensive, and we do foresee considerable opportunity. At this time I'm afraid I do not have facts and figures on exactly what those will be.

[RAdm Patrick Finn]

As for the other contracts, the $500 million is an annual amount. Those procurement contracts are awarded on an ongoing basis for refit and docking periods, for replacement parts and updates. They are awarded through a competitive bid process.

We regularly have ships on the east shore and the west shore. We have a destroyer—HMCS Athabaskan—which is currently being repaired at an Ontario shipyard. Those contracts vary in value—from one million dollars to tens of millions of dollars—and are issued in a competitive manner throughout the year.