Government Operations Committee on May 10th, 2022

[Kevin Mooney]

At the highest level, I think Canada has stood by us throughout this. The confidence remains. We fully open our books and we fully open our shipyard. We have Canadian representatives on the technical side and the operational side on site non-stop, working with us and watching us every step of the way, encouraging us where they can and criticizing us where necessary.

We are on this journey together—the country, the industry, the shipyard—to develop this industry, and we all have to stay focused on the end goal.

[Anthony Housefather, Liberal, Mount Royal, QC]

The goal is delivering on time and on budget as best as we can, and we're moving toward that. I appreciate the work that you guys are doing.

Ms. Cianfarani, I have a question for you.

First of all, thank you for your testimony, and thank you for reminding us that moving to a single source, a single department responsible for military procurement, is not a panacea. There has been a lot of simplistic testimony before this committee saying that this solution would somehow magically resolve all of the problems that plague defence procurement in Canada.

Could you speak a little bit to that issue, on why you feel that moving to a single department or a single person responsible is not the be-all and end-all solution, and the challenges that it may pose?

[Christyn Cianfarani]

Sure.

I'm mindful of the fact that I have a bit of a different opinion from one of my member companies at Irving Shipyards. I believe they are looking at it through an execution lens; I look at it through the lens of the complete procurement system.

One of the challenges that would be faced is the concept of smashing together four or three departments either into a single agency or under a single minister.

The easiest way I can describe it is that if you're in the manufacturing business, one of the first things you're going to do to make your operations more efficient is to map that process. You're going to map it all, in all its ugliness, its inefficiencies and its overlaps, and then you're going to start to take it apart. Changing who runs that beast and all the parts within it—changing the top—does not change the inefficiencies that lie underneath.

The idea that if we take this process in a single department like DND—in some cases of 200 steps—and either give it a new minister or blend it with another 200-step process in ISED, it would magically somehow become more efficient when we didn't actually look at the steps within the process would be quite remarkable in my point of view, having done continuous improvement for one company with the same kinds of inefficiencies with one boss.

That's certainly one aspect that I think is grossly oversimplified.

The second thing, and I've said this to these committees a number of times, is that most countries have governing foreign policies and governing industrial policies, and those—

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Ms. Cianfarani. Unfortunately, we have time commitments.

We'll now go to Ms. Vignola for six minutes.

[Julie Vignola, Bloc, Beauport—Limoilou, QC]

Thank you, Mr. Chair.

Mr. Mooney, I have a few technical questions for you, to get a clear picture of Irving Shipbuilding. I will put them to you one after the other, and then you could take two minutes to answer them.

First, how many halls and hangars are available for the building of ships and refit work at Irving Shipbuilding's shipyards in the Atlantic?

Second, who are your steel suppliers?

Finally, what is your weekly steel cutting capacity?

[Kevin Mooney]

The first question was on how many halls and hangars we have. We have three sites for construction in Halifax. Two of them are in Dartmouth, and they're focused on steel fabrication. Those parts are brought across the harbour into our main construction hall, which has two areas: an assembly hall and a module hall. Then the completed large modules go out onto the land level.

That is roughly how the construction process works at Irving Shipbuilding. It was designed with the assistance of a lot of international experts about 10 years ago.

The other questions were related to steel. I'm sorry, could you please repeat those?

[Julie Vignola, Bloc, Beauport—Limoilou, QC]

Who are your suppliers?

[Kevin Mooney]

We purchase our steel through a steel distributor called Stigterstaal, and the steel that they provide is sourced from various areas of the world. The steel used in construction for the AOP ships is a highly specialized steel. We intended at the front end of the program to use steel suppliers in Canada. Unfortunately, due to the special welding limitations and things like that, we had to source from different sources. Most of the steel in the AOP ships comes from outside of Canada.

On the Canadian surface combatant ship, that is still under review, but the initial look is that these are also extremely highly complex steel grades and quantities. We're working closely with BAE in the U.K. They're building the ship right now, and we will use grades of steel similar to what they're using.

I'm unable to comment on the CSC, as it's not yet under construction, but we will do everything we can, of course, to maximize Canadian content on CSC.

Then there was a third question about steel.

[Julie Vignola, Bloc, Beauport—Limoilou, QC]

What is your weekly steel cutting capacity?

[Kevin Mooney]

I'll have to get back to you with that exact number. That's just not a number that I keep on the tip of my tongue, I'm afraid.

[Julie Vignola, Bloc, Beauport—Limoilou, QC]

Thank you.

The cost of shipbuilding has increased. Mr. Paul‑Hus talked about that. We know about the COVID-19 pandemic. Everything was affected, from the extraction of natural resource to their processing and transportation, which may have impacted supply costs.

What have you implemented to try to address rising costs related to COVID-19 and inflationary impact?

What are the impacts of COVID-19 and inflation on costs?

[Kevin Mooney]

The impact of COVID on costs occurs in two ways in a shipyard.

One, it has affected the production hours that it has taken to complete the ship. That would be due to the disruption caused by not having all of the workers we needed on any particular day and in any particular week. There were periods of time, even when the shipyard was open, that we suffered 30% absenteeism. We've gone through a very detailed analysis of the additional costs associated with the production inefficiency. It was a study that was conducted by a third party, and that is under review with Canada right now. There was certainly an impact on the production side.

Also, on the materials side, the impacts have been significant. I mentioned the skyrocketing price of steel. That has certainly affected us. The price of steel has gone up by over 150% since April of 2021. The price of copper has gone up by over 100%. Those increases in prices affect not only the commodities—the raw material we use—but also the finished products, because all the suppliers are using them. The shipping costs have also been significant for us.

All of these costs are on the order of millions of dollars per ship, because the increases have been so significant and so sudden.

In terms of what options we have to reduce those costs, on the materials side, I'm open to ideas on that. It is extremely difficult. We are dependent on our suppliers. All of our suppliers on AOPS at this point are single source. I'm not in a position to change suppliers in most cases. We always do that as part of our process anyway, to try to get the cost of material down, but it's not something that I can just instantly do. The material we buy is very highly specialized. It requires engineering approvals and it has to be approved by Canada, so we're in a tight position there.

Regarding the productivity—

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you very much, Mr. Mooney.

[Kevin Mooney]

Okay.

[The Chair, Conservative, Robert Gordon Kitchen]

We'll go to Mr. Johns for six minutes.

[Gord Johns, NDP, Courtenay—Alberni, BC]

Thanks. I'm going to keep going with the thread from Ms. Vignola.

First, thank you for being here today.

Mr. Paul-Hus talked a bit about the $60 billion the department had projected to be the cost of the 15 new warships. The PBO suggested that it was going to be more, at around $77 billion. Given that you've talked about the major challenges because of COVID and global supply chains, would you say that we're looking more on the side of the PBO forecast?

I'll start with you, Mr. Mooney, if I could.

[Kevin Mooney]

Yes. As I mentioned earlier, it's difficult for me to comment on those numbers that are being provided because I don't know precisely how they come up with them. I don't know exactly what they contain, but I think in a general sense.... As I said, I can't comment on that $77-billion number or that $60-billion number for ships that are not going to be built for 20 or 30 years. There are so many factors that go into that. If I knew that....

What I would say is that the effects of inflation are real, and they certainly don't help.

[Gord Johns, NDP, Courtenay—Alberni, BC]

What does it look like in terms of all overall impacts from inflation right now? You talked about one product being 100% or more, and different variations. What is it overall? What are you seeing as the increase overall on your part of the projects that are right now being procured by your company?

[Kevin Mooney]

Are you asking for what it would be overall or in certain areas, as a percentage?

[Gord Johns, NDP, Courtenay—Alberni, BC]

That's right. What would be the overall cost increase—labour, the challenges, all of it.

[Kevin Mooney]

We recently had price estimates from all of our suppliers for AOPS seven and eight, and we were able to compare those to the prices we paid for AOPS one through six. In those cases, the prices have gone up anywhere between 15% and 40% on AOPs seven and eight from what it's going to be for AOPS one through six.

Another thing we notice is that suppliers give quotes that are valid for only a short period of time, because they are subject to inflation as well, and their sub-suppliers won't give them firm quotes that have price validity. There is significant price pressure across the supply chain.

[Gord Johns, NDP, Courtenay—Alberni, BC]

Ms. Cianfarani, you talked about boom and bust, and this is something we're hearing a lot about at the committee.

Seeing this happen before in the history of shipbuilding in Canada, what do we do as a nation to make sure that we use this as an anchor, not just for the national shipbuilding strategy but beyond that, as a shipbuilding nation?

Can you speak about the importance of getting this right in terms of the future of Canada being a shipbuilding nation?

[Christyn Cianfarani]

As I mentioned, I think that in creating a specific strategy around shipbuilding, you have done, to some extent, some of the work. It's called the NSS. It's almost as though it's a rallying call, so that it becomes harder and harder for partisan politics to play out and for subsequent governments to overturn what I think is the goodness that has been started.

It sounds a bit easy to say that we just have to have the willpower to keep going at it, knowing that it is an incredibly complex thing we're doing. As I said, most nations, certainly in the G7, have quite directly articulated industrial and foreign policies. I would argue that these are two things that Canada misses that would anchor such a strategy.

If we had a national industrial policy that talked about the fact that we want to have long-lasting capability in shipbuilding, and then over top of that we plunk the NSS, it gives us longevity. We start to educate ourselves about the fact that it's not simply the initial recapitalization of any type of equipment; it is the tail end of this equipment that will last 50 years and will have billions and billions of dollars of maintenance, repair, overhaul and technology insertion, not to mention evolution for our Canadian Armed Forces.

Those are the principles.

[Gord Johns, NDP, Courtenay—Alberni, BC]

Great. You don't need to convince me. I'm on board on that. Thank you.

In terms of the policies, we used to have a 25% tariff, as you'll recall, on ferries being built outside of Canada.

What kind of policies could you suggest would help ensure that we're building ships here in Canada to ensure that we're continuing to build a robust shipbuilding strategy?

We know that the Conservatives removed that tariff. Can you speak about policies that might help to support shipbuilding in the long run?

[Christyn Cianfarani]

I can't speak to the ferry situation. I am not educated on it per se.

There are many types of policy frameworks and mechanisms that are used. You would be familiar with the industrial and technological benefits policy in Canada. Basically, for every dollar spent on a federal procurement of a certain level, it mandates that a dollar is spent here in Canada, which I think is, to some extent, a very passive policy.

Other countries, as I said, have an industrial policy or, ingrained within them, the notion that they will purchase and maintain their national security through their defence economics. In the United States, for example, you will never see a fighter plane that does not come out of Lockheed or Boeing, simply because it is deeply ingrained within the Americans that they will look to home first.

Those are some examples of what you can do from a policy framework perspective.