National Defence Committee on Feb. 2nd, 2017

[Rachel Blaney, NDP, North Island—Powell River, BC]

Thank you so much.

Thank you so much for being here. I have the great honour of representing North Island–Powell River, so I am a very close neighbour and very happy to have a fellow B.C. resident here with us today.

Two days ago we had testimony by Davie Shipyard in which they clearly indicated their discontent with the national shipbuilding strategy. Canadian Marine Industries and Shipbuilding Association has also expressed some concern.

I have a couple of questions around that. As the main recipient of this strategy, do you both believe that Canada must look at more than one procurement or possibly look at procurement with a wider angle? If so, what do you think that would look like?

[Jonathan Whitworth]

Canada has already made that decision, and made that decision for us. Back in 2010 and 2011, when the national shipbuilding procurement strategy, the NSPS, was started, the government looked at it and asked if it should repeat the past, which would basically be to say it would give these ones three ships, these ones five ships, these ones one ship, and these other ones two ships, and then in eight years everybody would be bankrupt and lay everybody off. Alternatively, it could “right-size” the number of vessels to keep a number of centres of expertise alive. I will note that it never said it would pick one for the west coast and one for the east coast; it said that the number of combat and non-combat ships would justify work for two shipyards. That's how they stated it.

Then it opened this fair, open, and transparent policy to actually see who could win the rights to be one of those two winners. It ended up being one on the east and one on the west, but it could have been anywhere. It could have been any of the recipients who were trying to win the bid.

There were two winners, which have now rolled out hundreds of millions of dollars of their own money into our business to make sure that we can fulfill Canadians' needs.

As I mentioned in my speech earlier, I was fully aware that had we not won, we would have shut down our shipyards. There's only so much capacity in Canada for shipbuilding. There's a reason that there are now two.

[James D. Irving]

Could I just add to that, Jonathan?

We've been in the shipbuilding business as a family and a company for a long time. As a company, we've built about 80% of the warships in Canada's fleet today, and we've seen the booms and bust. We had a first-class shipyard built and paid for, to a large extent—or some part, anyway—but we modernized it, I should say, in the early 1980s, when the Canadian frigate program started up. We were fortunate enough to win that contract at that time. The government was going to continue to build ships. It was going to be a shipbuilding centre of excellence for Canada. About 1990, or in the early 1990s, the contract was completed, and there were no more ships. We fiddled around for five or six years. We built a few ships for ourselves. There were no ships from Ottawa, so we shut the thing down. We had 1,500 or 1,700 people on the payroll. Today we have a drywall plant. We've converted it to a drywall facility. We have 75 people. It's a nice little business, but it's not 1,500 people. All that was for naught.

We came to Halifax. When this contract was awarded in 2011, when we won, just as Jonathan said, we had a shipyard that was over 100 years old in Halifax, the first shipyard in North America. The British built it in the 1800s. We've been chugging along. We were just on the verge of going into the condominium business, I can tell you, because I was responsible for it. I said, “Enough of that. We're either going to do something else or get out of it.” You heard the same thing from Jonathan.

So we know the ups and downs. Both of our companies have made enormous commitments, and as far as I'm concerned, we should settle down. As a Canadian and a taxpayer and an employer, I see all the contracts. There are no surprises. Everything is fully transparent. You see the profit, you see our overhead costs, and you examine everything. We don't mind being held accountable.

I can speak for myself, and I'm sure Jonathan would say the same: as far as I'm concerned, we should build the ships on the east and west coasts, and we should maintain them there at the lowest possible costs and be accountable for our performance.

Some parts of this country have oil. Some parts of this country have automobile plants. Some parts of this country have aerospace. We on the coast have ships, because we're on the water. We have competitors. You mentioned Davie. I'm not going to talk about my competitor, but recently a half-built ship they'd been building up there for 10 years sailed away on another ship to Europe to be finished. It had to be carted away. Now they're bringing over a topside for a ship it's currently building for the navy, and the topsides are being built in Finland.

As far as I'm concerned, we're running our business and we're doing a darned good job for Canada. We want the business and we're going to earn the business, but we're going to give you good value for your money.

[Rachel Blaney, NDP, North Island—Powell River, BC]

Thank you so much.

Earlier you outlined some of the serious issues with having to deal with multiple departments, and that key point of being able to talk to one person to get some decisions and to move forward.

From your industry's standpoint, are there other ways in which the national shipbuilding strategy could be improved?

[Kevin McCoy]

Thank you.

We have a very close working relationship with the Canadian government. We're the prime contractor. We're proud to be the prime contractor for both the Arctic ships and the Canadian surface combatant. What we highlighted in our testimony was really to keep the CSC urgency out there, because we can undermine the stability of the shipbuilding program and bring back the boom and bust if we don't do that. The costs will spiral if we continue to delay that program. Then it's the speed of decision-making, as we just talked about, somebody who can say, “Okay, we're going that way.”

We've done a good job so far on CSC, but the tough work is ahead of us. The tough work is to decide, once we pick a ship, how much of it we'll change, in what areas and to what end, as was brought out about Canadian content. It's going to take speed, it's going to take somebody in charge, and it's going to take leadership, somebody who's credible enough within the government to be able to get that through the individual departments.

Last, we do think the current strategy for maintenance, particularly on the major combatants, the Halifax class, is undermining the shipbuilding strategy. In my last job in the U.S., one of my big responsibilities was to load the big shipyards that were building ships with plenty of maintenance to drive the cost of shipbuilding down and take that overhead. If you take the Halifax class out of Irving Shipbuilding and put it somewhere else, you will pay that other place's overhead and you will pay for the full cost of the overhead on the AOPS and then the CSC program. There are other reasons, but there's also the stability of the workforce.

Those are the areas. We'd say you should look at maintenance as a strategic enabler of shipbuilding. Keep CSC on the road, and let's have speed of decision-making by somebody who can make the hard decisions in a very timely manner.

[The Chair, Liberal, Stephen Fuhr]

Thanks for that.

I'll now give the floor to Mr. Spengemann.

[Sven Spengemann, Liberal, Mississauga—Lakeshore, ON]

Thank you, Mr. Chair.

Gentlemen, thank you for being here. I think it goes without saying to note that the level of interest represented in the audience underscores the importance of this discussion this afternoon. Canada has a long and proud history of shipbuilding, and it's certainly a reasonable proposition, given that we have the world's longest coastline and the history and the experience, that we should always strive to be among the global leaders in this field.

I wanted to pick up on the questions that my colleague Ms. Alleslev brought to you just a little while ago. Maybe to backpedal a bit, just for the benefit of the committee and Canadians, taking a look at the surface combatant vessels, could you give us an idea, in terms of the overall value of one of these ships, how much of it would be the hull, the engines, the superstructure, and how much of it would be the weapons systems, the communications systems, the high-tech aspect of it? If you were to break that down, even in approximate terms, what would that come out to?

[Kevin McCoy]

Thank you for the question.

About half the cost of the ship will be associated with the mission systems. The combat systems and the communication systems are about half the cost of the ship. It'll go plus or minus 10%, but it's somewhere in that range.

I'll also say that a good amount of the ship.... I'll give you AOPS as an example. AOPS is a $2.3-billion contract. Of that $2.3 billion, $1.2 billion is for material. That's material that's spread out throughout Canada and other places. About half of the combat system, half the cost of the ship—material, overhead, labour, and all—is for the base platform.

[Sven Spengemann, Liberal, Mississauga—Lakeshore, ON]

All things being equal, what's the trend on that? Ten years down the road, would weapons systems be an even greater component?

[Kevin McCoy]

I can tell you that the higher inflation area—I used to look at these areas in my previous role—is the combat systems area. It really goes to signal processing, the computer system and all the advances in weapons, with weapons seekers and the integration of all of it.

I will tell you that a cost driver that we'll have to deal with on CSC particularly is the radar. Canada's navy needs a very high-end radar. I understand it. We did the war-fighting analysis to make sure they didn't buy more than they needed. We actually started out the analysis needing a very high-end long-range radar and a high-end medium-range radar. We settled on a high-end medium-range radar, as that's all we needed to buy, so that will be a driver on the ship.

[Sven Spengemann, Liberal, Mississauga—Lakeshore, ON]

That's helpful.

If you were to take that same breakdown of 50/50, how would that line up in terms of jobs—how many jobs in the yard, and how many jobs in the offices around the country that build software weapons systems?

[Kevin McCoy]

I would say that certainly for every job in the shipyard—we think we'll be at about 2,500 people in the shipyard—there will be an equal number of contractors and other support folks, mostly supporting the combat systems piece. The combat systems piece is where we anticipate the Canadianization to be. The propulsion, the galley, and all that kind of stuff will be pretty much what it is. It's really the combat system that involves tailoring the ship to how Canada's mission requirements will direct them to fight.

[Scott Jamieson]

Can I expand on that? A study we had done by PricewaterhouseCoopers looked at the economic benefits of shipbuilding in Canada. One of their conclusions was that for every billion dollars spent in Canada on shipbuilding, Canada receives $1.8 billion's worth of value in return through the directs and the indirects. If you compare that to the return you'd get if you were to build your ships offshore and buy them and bring them to Canada, for every billion dollars that you spent in shipbuilding offshore, you would get maybe $600 million's worth of benefits, up to at most $1.1 billion. That's largely driven by the indirects.

[Sven Spengemann, Liberal, Mississauga—Lakeshore, ON]

Sure, and that's well noted and appreciated.

Who holds the intellectual property on the development of software under your structure?

[Kevin McCoy]

The RFP, the request for procurement, as it is currently structured, gives Canada the ownership and the rights to the intellectual property.

[Sven Spengemann, Liberal, Mississauga—Lakeshore, ON]

You mean the Government of Canada.

[Kevin McCoy]

Yes, the Government of Canada.

[Sven Spengemann, Liberal, Mississauga—Lakeshore, ON]

In your view, is that the right structure?

[Kevin McCoy]

That is the right structure. This is going to be Canada's main naval battery for 50 years. It will be modified several times, and Canada needs to own that IP.

[Sven Spengemann, Liberal, Mississauga—Lakeshore, ON]

Okay. That's very helpful.

Mr. Chair, I have about two and a half minutes left, if I'm right, and I'm going to delegate the remainder of my time to my colleague Mr. Rioux.

[Jean Rioux, Liberal, Saint-Jean, QC]

Thank you.

Since I have only two minutes, my question will be very direct.

You said that only two naval shipyards should be maintained for all of Canada. Are we talking about eliminating competition? I have the impression that you're talking about oligopoly or trust. It is obvious that you have developed great expertise and shouldn't worry about the other sites.

Mr. McCoy, what do you think?

[Kevin McCoy]

Does that eliminate competition? I think all of us up here would say that Canada has already held the competition, and the shipyards that are sitting up here have won that competition. The decision was made to invest heavily for the long term in these modern shipyards, and now that you have them, you need to feed them with work. Trying to sprinkle work among too many industrial facilities will only seriously undermine that strategy, and you'll wind up with underutilized capability and capacity and a boom-and-bust cycle. That's the reality that Jonathan talked about. We would take you back to your point that you held that competition already. Now you have incredible capability. You have two world-class shipyards in the country, so now let's work with the Government of Canada on how to deliver the best value, not only for the citizens but also with products for the men and women of the Coast Guard and the navy.

Thank you, sir.

[Scott Jamieson]

I would just add that the strategy was well devised. It looked at the capability required and determined it needed two centres of excellence based on the number of ships the navy has requirements for. Unless that requirement has changed dramatically, the answer is already there, and it's two.

[The Chair, Liberal, Stephen Fuhr]

That's your time.

We're going to move to five-minute questions.

First we will go to Mr. Robillard. You have the floor.

[Yves Robillard, Liberal, Marc-Aurèle-Fortin, QC]

Thank you, Mr. Chair.

I would like to thank the witnesses for being here today.

My first question is for both the representatives from Irving and Seaspan.

Are there adequate human resources assigned to the national shipbuilding strategy contracts to supply new vessels for the Royal Canadian Navy? Could you tell us how you established your diagnosis on this?

More importantly, how do you try to retain your workforce?