Thank you.
Mr. Chair and honourable members of the committee, my name is John Schmidt, vice-president of commercial with Federal Fleet Services. Thank you for giving us the opportunity to speak here today. It is a great honour to be before the committee.
Having spent over 30 years in government managing marine programs for DND, Transport Canada, the Canadian Coast Guard, and Public Works—where I finished as the director of marine procurement on the Halifax class modernization program—and then moving across, first to Irving Shipbuilding and then to Davie Shipbuilding, I've worked on various shipbuilding strategy concepts throughout their evolution.
The concept of building Canada's warships, Coast Guard vessels, and crown corporation ferries in Canada by Canadians has always, and rightly so, received all-party support and is reflected by our “build in Canada” shipbuilding policy for the federal fleet. When one considers that up to 50% of the shipbuilding costs are related to labour, it is easy to understand why any country would want to build its federal fleet domestically. Given that the labour rates in Canada are similar to those in Europe, where shipbuilders export their naval vessels worldwide, there is absolutely no reason why we cannot do the same here in Canada.
Unfortunately, the current strategy requires adjustment, as it is lacking shipbuilding capacity. That is the source of the delays and cost overruns that we all see today. To date, we have retired four large federal vessels without a replacement, and many more vessels that are in service are operating well beyond their life expectancy.
First, I would like to explain how Canada ended up where we are today, for I do not believe that what we have today is what was originally envisaged during my period in the government—far from it.
In 2009, the Shipbuilding Association of Canada submitted a letter signed by all major shipyards in Canada, including Halifax and Vancouver, which made a clear recommendation to the former prime minister as to how industry could successfully deliver on federal fleet renewal. It was simple and made total sense: build large ships at the large shipyard, medium-sized ships at the medium-sized shipyard, and small ships at the small shipyard, and all shipyards would have to work together to deliver this plan. In other words, use all the capacity that we have, building ship sections at shipyards throughout the country to ensure that schedules and budgets can be met. A copy of that letter has been provided to you.
In 2010, during the bidding for the national shipbuilding procurement strategy, I was the director of government initiatives for Irving Shipbuilding. Early on in the process, there was much emphasis on shipyards working together to deliver the new fleet for Canada. It was all about collaboration and co-operation. In fact, Irving and Davie had previously signed a teaming agreement to ensure that there would be enough shipbuilding capacity to construct that fleet in Canada. Anyone who understands the size and capacity of Canada's main shipyards understands why that collaboration is needed. Davie single-handedly constitutes over half of all Canadian shipbuilding capacity today.
Ironically, the question going around the industry circles at that time was, would there be any work for any smaller shipyards, or would Davie just build everything? In reality, the renewal of the federal fleet in a timely manner will require the combined capacity of all major shipyards in every region of Canada. Fast-forward a year or so, and the industry experts were surprised to see that the advice from all of Canada's shipbuilders had seemingly fallen by the wayside.
Instead, what transpired was a process that was largely based on promises of future capability, whereby factors such as experience, existing infrastructure, labour availability, and schedule counted for less than 36%, one third of the entire NSPS bid evaluation. If you can believe it, the price of building ships was not even a consideration when determining which shipyard would do it. Of course, it doesn't cost the same to build ships at every yard in Canada—far from it. The cost of a ship varies exponentially depending on infrastructure, experience, skilled labour cost and availability, build methodology, and regional cost of living. That wasn't even evaluated.
With Davie bankrupt at the time of the shipbuilding competition, and with only a third of the evaluation criteria based on normal industry parameters, there was a very real chance that a shipyard or even a greenfield site that did not possess the experience of building large, highly complex military vessels might end up being tasked to do so.
The rest is history. The smaller shipyard ended up being earmarked to build the largest of the ships, and the largest shipyard, which still single-handedly constitutes over 50% of the entire Canadian shipbuilding capacity, would be left unused in a program now desperately lacking capacity. It's like leaving your top line on the bench in the finals in the Stanley Cup. Your probability of a successful outcome becomes severely diminished.
No one questions the fact that there was an open and independently evaluated competition, free of all political influence. What has never been assessed is whether the design of the competition, the evaluation criteria, if you will, has produced the solution to the problem, which is the successful renewal of our federal fleet. As I mentioned, only 36% of the evaluation criteria was based on previous experience, existing facilities, and so on.
What was the 74% based on? A full 24% was based on the shipyards' plans to upgrade their facilities. Each shipyard required different levels of upgrades, the least of which, of course, was Davie, which was already delivering and exporting some of the world's most complex vessels for the oil and gas market and had already been significantly upgraded to build Canada's frigates in the 1990s as well as ship sections for the U.S. Navy in the early 2000s.
Ten per cent was given for the shipyards' current financial situation, which didn't really matter much considering that those who won had the chance to negotiate billions of dollars of contracts.
Another 10% was for the value proposition for Canadian industry and economic development, and a full 20% was awarded for simply agreeing that any cost the shipyards incurred to prepare to build the stated classes of ships would come at no future cost to Canada. Let me repeat: at no cost to Canada.
All shipyards received the 20% in their bid evaluations by simply ticking the “no cost to Canada” box. However, subsequent to the award—and as is now public record—we know that the government agreed to directly fund post-bid capability shortfalls, which, critically, in a competition where less than 20% separated the three bids, has now delegitimized the entire process.
The clearest example of this was the opaquely termed horizontal engineering program plan, or HEPP, handed to Vancouver Shipyards. Frankly, it is quite incredible that a government website states, “Both large vessel shipyards proceeded with their plans for infrastructure modernization and capability improvements (at no cost to Canada)”. However, Marty Muldoon, assistant deputy minister and chief financial officer of the Department of Fisheries and Oceans, testified in 2014 during a parliamentary committee, talking about the new program HEPP, “It's called horizontal engineering program plan. Basically, what we're doing is investing in the shipyard's capability to get itself up to capacity, to start churning out vessels.”
That doesn't appear as “no cost to Canada” to me.
It is obvious that there are gaps that need to be filled. Why not fill them with capacity from other Canadian shipyards, rather than applying band-aids to programs that have yet to produce a single ship?
Back in Quebec people ask how it is possible that the government changed such a key tenet of the bid, post-award, something that would have altered the course for thousands of skilled shipbuilders, had they known then what they know today. I simply don't have an answer for them, other than to say to you that we need to add capacity to this program if we are to renew the federal fleet in a timely and cost-effective manner.
Thank you. I'll turn it over to Mr. Fraser.