Mr. Chair and honourable members, thank you for the invitation to speak to you today on the national shipbuilding strategy.
I am here as chairman of the Canadian Marine Industries and Shipbuilding Association, or CMISA. CMISA's purpose is to represent and champion the advancement of the marine and shipbuilding industry across Canada. We represent 80% of Canadian shipbuilding production capacity. Our membership reflects a diverse group of successful businesses of all sizes in a range of marine industry sectors all across Canada. Our board therefore comprises directors from all major sectors across Canada, including partners in our NSS.
In the spirit of full disclosure, all our directors have day jobs in the industry. In my day job I am senior vice-president for commercial and government programs at Davie shipbuilding.
Personally, I have more than 45 years of experience in Canadian shipbuilding. Serving in executive positions in the private and government sectors, I worked on many contracts for the government and later for the shipbuilders. I was deeply involved in the original NSPS, the national shipbuilding procurement strategy, having been part of the successful Irving proposal. I hope I can offer unique insights on behalf of our CMISA members.
Let me start by commending Canada for its foresight and political will in creating our national shipbuilding strategy. The key to any successful strategy is to plan, execute, monitor and adjust. I emphasize “adjust”. This current review should be applauded for seeking to improve our NSS.
NSS projects either completed or under way, supported by many CMISA members, will benefit Canadians for decades to come. However, our NSS is not perfect. Its main goal is to replace our aging federal fleet, yet nearly 12 years into the large ship programs we have delivered only five large vessels. In the 1980s, over a similar period, Canada delivered 15 large ships.
The difference is easy to define. We transitioned from a commercially influenced model, emphasizing on-time delivery, to an approach that promotes process, governance and control over that of ship delivery. In the 1980s, we estimated the internal government cost of managing new ship construction at between 4% to 6% of contract value. Today it is around 14% to 16%. To replace roughly 36 large ships, Canada must budget now for 40.
Canadians live in volatile and worrying times, yet we struggle greatly to provide our Canadian Armed Forces and Coast Guard with essential tools and capabilities. We desperately need to fast-track ship construction to address growing threats to Canada's sovereignty and other vital interests. Our NSS should be a unique, made-in-Canada solution to the growing challenges we face. It should also help create a stable and sustainable domestic industry, with export potential.
In our time of great need, Canada's procurement process hampers agility, innovation and execution. This has contributed to well-documented cost overruns and delivery delays. The backlog means we are performing vessel life extensions on ships up to 50 years old.
We can fix this with pragmatic and proven solutions that combine the best of government and commercial practices. A real-world example is the United Kingdom's refreshed national shipbuilding strategy. It seeks to build competitively priced ships today to create future exports. A more commercial approach is paying off. The U.K. has developed a warship for a fixed price of U.S. $336 million. Five have already been sold to foreign governments.
Canada can, and I would say should, do the same. Canada is able to build competitively, and there is increasing demand for the high-quality products, including complete vessels, that Canadian shipbuilders and our supply chain can produce. Major global fleet renewal is an export opportunity for Canada. Other nations empower industry to drive shared success, and we should consider doing the same.
A key step is to rationalize government oversight on projects with more control, delegation and responsibility given to the contractor, who is, after all, the shipbuilding expert and responsible for delivering the vessels.
For example, one of our members had a recent major project that used a commercially based procurement strategy and project management approach whereby only the classification society and a single overseer were used by Canada to monitor shipyard performance. The project finished on time and on budget, meeting all contractual requirements. While this may only be one element, it speaks volumes as to what can be done with a more commercial approach that uses industry norms rather than government norms.
Let's look at the ship design stage. Canada has a high-quality design capability, and there is ample domestic capacity for the earlier steps in the design cycle. These early stages form a material contribution to innovation in Canadian shipbuilding. This capacity must not be allowed to stagnate due to project delays. Deepening the Canadian capability for early-stage design will, over time, provide capacity and cost reductions in the later stages of the design process.
On the same topic, establishing and freezing the vessel requirements and build specifications at the earliest possible time will prevent design changes, which we all know lead to delays and cost increases.
In terms of the specification setting and the design change process, the optimal outcome will always be a trade-off between government's operational, regulatory and performance requirements and the shipyard's capability to procure for and build the design to a competitive price and on schedule. It is essential to contract in such a way as to achieve these objectives. The design of an affordable ship will always be a compromise. Much as when we go to a car dealer asking for every option and getting exactly what we want, it's no different with ships.
The shipyard that will build the ship should be contracted to undertake the full design process. Doing less than that adds delays, since the shipyard will always take any design and run a second exercise—often lengthy and expensive, and avoidable—to ensure that the resulting ship is buildable.
As I mentioned, CMISA also encourages locking in the ship requirements at an early stage. From that point on, it needs to be about delegating the project to the shipbuilder and limiting customer approvals to those that are strictly necessary, such as those associated with safety and with meeting the requirements of the classification society.
Coming back to what we said about embracing commercial practices, we must look at fixed or effective target price incentive mechanisms instead of just cost-plus-profit contracting, where achievable. With fixed or target incentive prices, the shipbuilder is held to account and/or incentivized on its ability to deliver projects on cost and on schedule against specifications and performance criteria that have not been unnecessarily changed. This thinking is aligned with commercial contracting and has had a positive impact on shipyard efficiency and responsiveness to customers' needs in cases where it has been applied.
Fixed or effective target incentive contracting can be achieved within PSPC's existing framework. It does, however, mean a change to today's norms and standards. In fact, if our industry is to succeed, it means a reset of certain specific shipbuilding contracting standard practices used by Canada. By “succeeding”, I mean delivering performing ships on the original schedule and budget agreed to by the shipbuilder.
Our members also want more involvement in the build process. To this end, there are other innovations Canada should consider adopting, such as the distributed block assembly method. This is successful in other countries, and CMISA members support more direct involvement in the production of ships and build strategies that create multiple build sites—
