CSC Shipbuilding Strategy a taxpayer fiasco
Were I the president of Irving Shipbuilding Inc. (ISI) or a representative of the shipbuilders of the Halifax Shipyard, I too would extol the virtues of the government’s shipbuilding strategy. After all, how often are you provided with the opportunity to build ships for the Canadian Navy with few cost constraints, minimal government oversight and license to modify the Navy’s requirements? Combined with the gracious donation of hundreds of millions of taxpayers’ dollars over and above the contract amounts, it is hard to imagine a more benevolent government.
However, viewed from the taxpayers’ perspective, this benevolence is incompetence and abdication. As a consequence of violating every sound tenet of procurement, Canada will be acquiring these ships for two-to-three times their true costs.
As proof, we need only look at a recent procurement by the U.S. Navy (USN) for its Constellation Class (FFG-62) ships. These ships are multi-mission guided-missile frigates, directly comparable to the CSC. The U.S. Congressional Budget Office estimates that the cost of the 10 FFG-62 ships would be about U$1.23 billion per ship. This equates to approximately C$1.66 billion per ship, or C$25 billion for 15 ships – less than one-third of Canada’s current estimated costs of C$84.5 billion to build the Canadian Surface Combatant (CSC).
To ascertain the reason for the disproportionate costs between the U.S. frigate program and Canada’s CSC program, one need only look at the differing procurement processes followed by each country:
- The USN demanded a ship design that had been through production and demonstrated in full scale at sea. For this reason, the Type 26 design chosen by Canada, did not even qualify in the U.S. competition.
- The USN specified the required off-the-shelf systems. Industry had no input into their Navy’s statement of requirements (SOR). In contrast, Canada allowed industry to assist in the formulation of the SOR, thereby permitting costly amendments.
- The USN signed a fixed price contract to build the ships, while Canada’s program has no budgetary controls.
- Lastly, the USN retained accountability for the procurement process. Canada, shockingly, devolved the accountability for the procurement process to Irving Shipbuilding.
As another example, in 2017, Naval Group (France) and Fincantieri (Italy), both world leaders in ship design and construction, submitted an unsolicited proposal to the Canadian government to build 15 CSC at a fixed cost of C$30 billion, less than half of the current C$84.5 billion cost estimate. Under the proposal, the vessels would still be built by ISI in Halifax.
The Government rejected the offer.
On 5 December 2017, CTV News reported: “In a strongly worded statement, [government] officials say accepting such a proposal would be unfair, establish a harmful precedent and ultimately threaten the government's ability to acquire ships for the navy.”
On 6 December 2017, Defence News wrote: “The program was originally estimated to cost CAN$26 billion, but that figure has been revised a number of times and has been climbing steadily over the last several years. Fincantieri and Naval Group had hoped the proposal of a fixed price tag of about CAN$30 billion for a new fleet might sway the Liberal government, as it would eliminate much of the risk and would offer a proven warship design. The proposal had the backing of the French and Italian governments and was made directly to Canadian Defence Minister Harjit Sajjan.
Some four years later, when Mr. Achille Fulfarro, Senior Vice-President of Sales at Fincantieri, appeared before the Standing Committee on Government Operations on 3 May 2022, he was asked to explain how Fincantieri could provide these ships at this cost. He explained:
“First of all, you need just to define in a clear way all your ‘end of user’ requirements. This is very important. So in the letter we've wrote clearly our concern regarding the program. We've wrote of the high level of risk is the scope of work. We've wrote the problem regarding the IP, the intellectual property, and the management of this important issue in the different phases of the program. It was very unclear also the different phases of the program, and the responsibility inside each of these phases. We were also very clear regarding the opportunity to have a fixed price, instead of having the risk to discuss and discuss, with the result that we have a higher price year by year. So whatever we put out was clearly what we saw in the following years.”
To put the obscene costs in perspective, it is interesting to note that according to published reports, the US Department of Defense has secured contracts for the construction of 10 new Arleigh Burke-class destroyers for a construction cost of U$14.58 billion or approximately C$20 billion. The Arleigh Burke – Class destroyers are the US Navy's most powerful destroyer fleet, more powerful than Canada’s CSC, yet will cost less than half of the projected CSC cost.
The capital costs of the CSC ships have more than tripled from about $26 billion to $85 billion (CAD) and their life-cycle costs are now estimated at more than $300 billion.
Forget about enhanced space surveillance, NORAD modernization, replacement of Canada’s maritime patrol aircraft or the many other needs of the Canadian Armed Forces. They are simply unaffordable. Without an injection of billions of dollars, the capital account is bankrupt.
Irving Shipbuilding placed an ad in The Hill Times (28 Aug 2023), in response to what they considered to be “inaccurate and misleading articles published about the National Shipbuilding Strategy and the Halifax Shipyard,” but did not address the actual criticisms.
Rather than platitudes, I think we would all benefit from a response to the actual concerns raised regarding the strategy and its impact on the construction of Canada’s Surface Combatants.
To this end, I presented a few relevant questions, and FrontLine contacted Irving Shipbuilding, who advised them to ask the Department of National Defence (DND) and Procurement Canada (PSPC). My subsequent comments are below each answer.
(Amounts below are all Canadian dollars.)
Q1. According to the Office of the Parliamentary Budget Officer, the 15 CSC ships will cost about $85 billion to build or about $5.6 billion each. Is this figure correct? If not, what is your estimate?
DND: As the cost to build a ship is based on engineering specifications, production plans, and schedules developed during the design phase, project costs will evolve throughout the duration of a project, especially for a first-of-class ship. The full cost for the project will continue to be refined as design work progresses and construction of the ships begins.
As the CSC project is currently in the design phase, the overall cost estimate for the project remains at $56-60 billion.
However, as we progress through this phase, the cost estimate will be updated. A formal update will be completed in advance of entering the Project Implementation phase, currently forecast for 2024.
Like all large-scale procurement projects, the project cost will remain under close review, and we will continue working with our partners to actively manage and monitor this cost over the duration of the project to ensure the best value is provided to Canada and taxpayers.
However, it is important to recognize that DND’s current cost estimate for the CSC is based on a project schedule that has evolved since the estimate was initially developed. Further, the DND estimate was established prior to the realities of the global COVID-19 pandemic, which has impacted the CSC schedule specifically, and the global economy more broadly, with associated impacts to CSC costs.
Accordingly, it is reasonable that the difference in costs between DND and PBO estimates are largely driven by schedule, and the impacts of escalation and inflation.
Alan Williams: At first glance, it appears that DND is disagreeing with the PBO’s estimate, claiming their cost is significantly less, at $56-60 billion. However, in reading the rest of DND’s response, that is not really what they are saying. Rather, the $56-60 Billion figure will be updated to reflect many factors including schedule and escalation. Interestingly, the PBO had no problem in updating their cost estimates. DND’s unwillingness to be open and transparent to the public is insulting. After all, it is our money. We are entitled to know how much is being spent on these ships.
Q2. The costs to build the ships have escalated from $26 billion to approximately $85 billion. Is ISI under any contractual budgetary controls by the federal government?
PSPC agreed to answer this question but has yet to respond, despite an extended deadline. See addendum below.
Q3. It has been reported that the statement of requirements has continued to evolve and change over the past few years. Is this correct?
DND: No, the operational requirements for the CSC have not changed. The RFP for the CSC design selection included a list of stringent and comprehensive operational requirements determined by the RCN.
While there are usually some changes to equipment as part of the design process, the requirements did not change. Each proposed change is carefully considered by the project team in order to ensure that the ship design remains compliant with the operational requirements determined by the RCN.
Alan Williams: The statement of requirements (SOR) is the foundation document, signed off by the Chief of Defence Staff that drives a procurement. It is provided to industry in a final form and must be met by any successful bidder. Allowing industry to modify the SOR is an easy way to drive up costs. With respect to the CSC, Ian Mack, one of DND’s procurement process architects, wrote the following in a paper entitled, “Launching the Canadian Surface Combatant Project”, published by the Canadian Global Affairs Institute (CGAI) in December 2009:
“For something as complex as CSC, the SoR remained designated as preliminary for an extended period of time. ISI assisted with an initial reconciliation of requirements in identifying companies that could conduct a comprehensive review and in contracting two reputable companies to execute an independent analysis. That work led to refinements of the HLMRs [High-Level Mandatory Requirements] in the SoR, which enabled consideration of an improved procurement plan.”
Mr. Mack is quite clear that the SOR was provided to Irving Shipbuilding Inc (ISI) in a preliminary, not final, version and that it was “refined”.
Q4. What terms and conditions, if any, were attached to the $460 million gift to ISI by the federal government?
PSPC agreed to answer this question but has yet to respond, despite an extended deadline. See addendum below.
Q5. It has been reported that one of the objectives of this gift from the federal government was to accelerate production of the CSC program. If so, could you please provide specifics regarding the old and new dates for construction to begin, and for the first ship to enter service?
DND (from previously approved MQ response):
The Canadian Surface Combatant project will ensure that the Royal Canadian Navy has modern and capable vessels to monitor and defend Canada’s waters, continue contributing to international naval operations for decades to come, and rapidly deploy credible naval forces worldwide.
This investment to expand and improve the site and facilities of Irving Shipbuilding Inc.’s Halifax Shipyard for the CSC project will enhance the efficiency of construction, mitigate project costs and deliver best value for Canadians.
Working with the shipyard, it was assessed that, without the infrastructure upgrades that are currently being pursued, build timelines for the CSC Ship 1 would likely exceed the required build timeline. This would in turn delay the delivery of subsequent CSC ships, such that they would no longer meet the schedule required to effectively transition from the RCN’s aging fleet of Halifax-class frigates. Specifically, without upgrades that enable process improvements and a more efficient build strategy, the shipyard would be unable to achieve the agreed target of delivering 15 ships by 2050.
While the details of the schedule savings are subject to commercial confidence, the upgrades enable more efficient processes, opportunities for concurrent and parallel work, leading to quicker construction and reduced time between individual ship start and delivery dates.
Construction is set to begin in 2024 (low rate production with full rate production in 2025), the first ship is scheduled for delivery in early 2030s, and the final ship is set to be delivered by 2050.
Following an assessment of the efficiencies gained through the upgrades and the resulting build schedule improvements, we determined that this investment in shipyard infrastructure would deliver substantial commercial benefits to Canada. This investment will expand shipbuilding and support facilities on our East Coast – significantly boosting and accelerating the capacity of Canada’s shipbuilding industry. This investment is expected to create or maintain over 800 jobs annually across various industries in the Canadian economy during the work period. It also supports Halifax shipbuilders as they build back critical supply chains and develop their advanced skills to produce the future cornerstone of Canada’s naval fleet.
Our government will continue to make landmark investments in our military, while supporting good jobs for Canadians.
Alan Williams: DND provided a 361-word response, totally avoiding answering the question.
Q6. Were all of the systems selected for use on the CSC fully marinized and already operational on other ships? If not, what systems on board the ship have required further development, and what will be the cost to the Canadian taxpayer?
DND: The RFP for the CSC design selection included a list of stringent and comprehensive operational requirements determined by the RCN. As part of the design selection process, bidders were required to provide information and identify the major equipment and systems that would be integrated into their design in order to meet these requirements.
The use of the T26 platform and an Aegis combat system enables the CSC program to benefit from proven marinized systems with robust supply chains. For example, the AN/SPY 7 Radar, although derived from a land-based US Government radar, was marinized for the use in the Spanish F110 and Japanese ASEV shipbuilding programs which will be delivered prior to CSC.
Alan Williams: As with Q5, DND did not answer the question. To its credit, they only used 113 words to avoid responding to this question.
Q7. In tonnes, how much bigger is the ship that the original Type 26 design? If the ship is indeed bigger – as rumours suggest – what effect will this have on the propulsion system and will the ship be able to maintain its required speed?
DND: Canada’s requirements for the CSC outlined in the RFP did not specify weight. Instead, we included specifications that would enable the ship to perform its assigned missions during its operational service life. As the CSC are upgrading and replacing the capabilities of the Halifax and Iroquois classes of ships, it was expected that its overall size and displacement would be larger than that of either of these two classes of ships, but the exact weight wouldn’t be known until a design was finalized.
The CSC ship is the same dimensions as the UK’s T26 ship. While the final weight of the CSC is evolving as the design matures, and will be expected to be marginally different from the T26, owing to different systems within the respective country designs and needs of the RCN, the CSC design is expected to maintain a very similar hydrodynamic performance as the T26 ship, meeting the needs of the RCN.
Alan Williams: Again, a non-answer. DND’s response is that the weight is evolving. As if to placate the reader, DND threw in the gratuitous and irrelevant observation that the CSC will have the same dimensions as the UK’s T26 ship.
I look forward to reading the responses from PSPC. Perhaps they will be more forthright in their answers.
You have to give full marks to DND for their creativity and obfuscation. With respect to truthfulness and clarity, not so much.
Alan Williams, Ottawa
(former assistant deputy minister of materiel at DND, president of The Williams Group)
== ADDENDUM ==
The submitted response from Public Service and Procurement Canada (PSPC) arrived after this article had posted. Here it is:
PSPC: The Government of Canada is committed to ensuring that members of the Royal Canadian Navy (RCN) have the equipment they need to do their jobs and protect Canadians, while maximizing economic benefits for the country. The Canadian Surface Combatant (CSC) project is one of the largest, most complex shipbuilding initiatives undertaken by the Government of Canada.
Public Services and Procurement Canada SPC on behalf of the Department of National Defence, amended its definition contract with Irving Shipbuilding Inc. for an additional $463 million for the CSC project.
The Government of Canada’s investment in infrastructure at Irving Shipbuilding Inc. will enhance and accelerate vessel construction, with an associated positive impact on project costs as well as the creation of good, middle-class jobs across the country. It does not affect ISI’s existing contracted infrastructure commitments, which remain in force, and the investment is subject to additional Industrial and Technological Benefits (ITB) obligations equivalent to the investment.
PSPC continues to administer the definition contract, including the recent infrastructure investment by conducting regular progress reviews, supporting DND’s review and verification of work progress, conducting financial monitoring of all work requirements, and performing cost verifications to help ensure sound stewardship on behalf of all Canadians. The specific terms and conditions of the contracts between Canada and ISI are subject to commercial confidence.
Alan Williams' reply: "First, all Canadians should be concerned that PSPC needed three days to answer two basic questions. Second, having taken all this time to respond, I expected a substantive answer to my questions. Instead, PSPC provided a boilerplate response that avoided answering the questions and that could have been delivered to Frontline Magazine within one hour of the request. Frankly, this lack of openness and transparency smacks of arrogance and entitlement and reflects a deeply disturbing culture within the public service."