National Shipbuilding Procurement Strategy technical briefing on Canadian Surface Combatant—speaking notes
May 1, 2015
Check against delivery
My colleagues and I are pleased to be here today to update you on the National Shipbuilding Procurement Strategy.
As you know, we have provided regular updates on the progress of the National Shipbuilding Procurement Strategy. We are now just a little over three years after signing the overarching umbrella agreements with Vancouver Shipyards and Irving Shipbuilding. This is a 30-year project and we are just at the beginning. In this short time, significant progress has already been made. The two shipyards have completely transformed themselves, investing hundreds of millions of dollars to modernize their infrastructure. These modernizations are nearly complete. The National Shipbuilding Procurement Strategy has already generated significant economic benefits and jobs for Canadians. And it will continue to do so.
This year we will see construction start on the first ships in the lead projects: the Arctic Offshore Patrol Ship in Halifax and the Offshore Fisheries Science Vessel in Vancouver. While the shipyards have been preparing to cut steel in Halifax and Vancouver, we have been setting the stage for upcoming National Shipbuilding Procurement Strategy projects. Today we will be focusing on the Canadian Surface Combatant project.
The Canadian Surface Combatant is one of the most significant projects undertaken by the Government of Canada to date. A budget envelope of $26.2 billion was established to build up to 15 vessels to renew the Canadian Surface Combatant fleet for the Royal Canadian Navy. In order to meet the Navy’s needs, while ensuring that Canadians get value for money and significant economic benefits, we have adopted a comprehensive procurement strategy. Let me tell you more about the “Most Competitive Procurement Strategy”.
Canada engaged industry to help inform the development of the procurement strategy for the Canadian Surface Combatant. With input from industry, we short-listed two potential approaches. The first was to competitively choose and fund a single design team. The second was to competitively select and fund two design teams. Each of these approaches had some industry support; however, there was no consensus across the industry.
In addition to consultations with industry, we also assessed our recent experience with naval design-and-build procurements which, like the Canadian Surface Combatant project, started with ambitious technical requirements and a constrained budget and for which, like the Canadian Surface Combatant project, a significant driver for the procurement strategy was the ability to successfully reconcile requirements with budget.
Our most recent project of this type was our first attempt at the Joint Support Ship procurement project where we utilized the two competing design teams approach. In this project, we were unable to successfully work with two competing teams to reconcile requirements with budget. These cost/capability trade-offs are not easily done because the two teams and the government officials with whom they work must be kept firewalled from each other to ensure fairness in the competition. This does not allow the government to modify requirements based on innovative design approaches proposed by the companies, without being exposed to considerable legal risk. Ultimately, in the case of the Joint Support Ship project, an inability to do those trade-offs resulted in bids that were well over budget.
As we continued with our procurement strategy assessment, and in light of the Defence Procurement Strategy, it also became evident that we needed to focus on the strategy for competitively selecting the systems and equipment that would be incorporated into the Canadian Surface Combatant ships. We want to maximize competition for the opportunities that the project creates for Canadian business or work to be done in Canada, as well as maximizing value and innovation.
This led to an evolution of the strategy to competitively choose and fund a single design team through the “Most Competitive Procurement Strategy”.
The Most Competitive Procurement Strategy facilitates the competitive selection of systems and equipment and enables us to incorporate Value Propositions into these selection processes. One key advantage is that after we have selected the Combat Systems Integrator and the Warship Designer, we will then work with Irving Shipbuilding to competitively select the equipment, systems and sub-systems suppliers throughout the process. This is in contrast to a two team approach where we would expect extensive teaming arrangements early in the process, which would limit our ability to compete those equipment and systems throughout the process. This also drives costs down and ensures value for money.
In summary, to maximize the potential of the competition, we determined that the best approach would be to complete the reconciliation of requirements and budget. Then, knowing the requirements, Irving Shipbuilding, the Combat Systems Integrator and a Warship Designer will be able to effectively conduct the competitions to select the systems, sub-systems and equipment for the ships and complete the designs.
Constructing warships is no easy task. In fact, it is a long, difficult and complex endeavour. So while we have chosen Irving Shipbuilding to build these vessels, we will need the expertise of a Warship Designer as well as a Combat Systems Integrator. These roles are critical to this project.
The role of a Warship Designer is to provide and adapt a platform design. The degree of customization possible for existing designs will inform the approach best suited to choosing a Warship Designer and obtaining best value and best fit in this role. By using an existing design, we can reduce developmental risk and time in the design phase.
The Combat Systems Integrator, on the other hand, designs and integrates the combat system, primarily made up of the sensors (for example the sonar and radar), the weapons (for example the missiles and guns) as well as the various communications systems. These systems will enable the Navy to fulfill its missions and are essentially the raison d’être for the warship. It is also the area of highest complexity and greatest cost.
The National Shipbuilding Procurement Strategy is focused on delivering the equipment that our men and women in the Royal Canadian Navy and the Canadian Coast Guard need to do their jobs, developing and sustaining a robust domestic shipbuilding industry, creating highly skilled jobs for Canadians and maximizing opportunities for Canadian industry, including export opportunities. The benefits must flow far beyond the shipyards, and extend across Canada. The Canadian Surface Combatant procurement strategy reflects these priorities.
To make the best decision and meet our objectives, we relied on the same key characteristic that made the shipyard selection process a success: early and ongoing consultation, ensuring sound governance.
This strategy will ensure the greatest degree of competition throughout the supply chain and maximize opportunities for Canada, while ensuring value for the Navy and taxpayers.
We will be working with Irving Shipbuilding, who, as the Canadian Surface Combatant prime contractor, will be ultimately responsible for the successful delivery of the ships. However, throughout the process, Canada will set the requirements. I want to be clear on this point: regardless of who is executing any particular competitive process, it will be Canada who is setting the standards and ensuring that the processes are being conducted properly in a fair, open and transparent way.
The Canadian Surface Combatant procurement strategy will begin immediately.
First, Canada, working in consultation with Irving Shipbuilding and other firms with warship expertise, will immediately commence initial reconciliation of the Royal Canadian Navy’s requirements with the budget.
Starting next month, we will establish a short list of qualified designers and integrators. In order to pre-qualify, these firms will have to demonstrate their experience and capability in warship design and combat systems integration. The prequalification should be complete in early Fall 2015. We expect to have a Combat Systems Integrator and a Warship Designer by early 2017.
The next stage will be for Canada, Irving Shipbuilding, the Combat Systems Integrator and the Warship Designer to undertake multiple design spirals to design the ship within our budget, under a design-then-build approach. This is the same approach that we have used successfully for the Arctic Offshore Patrol Vessels.
Throughout that design process, there will be a series of competitive processes to source the required equipment, systems and sub-systems. We fully expect that Canadian companies with expertise in those areas to be able to compete on and in many cases win those sub-contracts. My colleague from Industry Canada will talk more to how we will maximize opportunities for Canadian companies in a couple minutes.
Throughout the strategy, there will be a strong emphasis on using open, fair and transparent competitive processes. Canada will set the standards for these competitions whether the processes are conducted by the Shipyard, the Combat Systems Integrator or the Warship Designer. The standards will include applying the principles of the Defence Procurement Strategy to ensure that Canadian companies are able to do meaningful work on these ships.
In order to provide an additional layer of independent oversight, we have engaged a fairness monitor to oversee the entire Canadian Surface Combatant procurement process to ensure fairness and transparency.
One of the key objectives of the National Shipbuilding Procurement Strategy has been the avoidance of a boom-bust shipbuilding cycle. Mitigating this risk is a significant focus for Canada and Irving Shipbuilding.
We are of course also looking forward to delivering the first ship of the new fleet of surface combatants to the Royal Canadian Navy. Under the Most Competitive Procurement Strategy, we will be able to reach a Canadian Surface Combatant construction start 12 months sooner than under the dual design team option which, in turn, will enable us to take delivery of the first ship 12 months sooner. It is imperative to ensure there is no production gap between the last Arctic Offshore Patrol Ship and the first Canadian Surface Combatant. Therefore, we are also examining options to get to cutting steel sooner by streamlining the procurement processes, performing the first phase of requirements reconciliation this summer, two years earlier than originally planned, and by using off-the-shelf equipment wherever feasible to reduce developmental risk. These are a few examples of how, under the National Shipbuilding Procurement Strategy, Canada, Irving Shipbuilding and the industry will be able to plan ahead and seek out ways to better manage the overall shipbuilding program of work.
For an undertaking as important and complex as this project, proper governance is vitally important. The governance committees for the National Shipbuilding Procurement Strategy will oversee the timely implementation of this strategy. This includes a National Shipbuilding Procurement Strategy Ministers’ Working Group that will ensure that decisions are being made in a timely manner and in the best interests of Canadian taxpayers.
Through these strong governance structures, important decisions on costs, capability, requirements, evaluation criteria, procurement strategies for equipment, systems and sub-systems, Canadian benefits and timelines will be made at the appropriate levels in a timely manner.
The design and construction of the Canadian Surface Combatant is expected to span 20 to 30 years, which is good news for the industry. As with any long-range project, we appreciate that technology will evolve over time and, consequently, the first Canadian Surface Combatant will not be fitted with the same equipment as the last one off the production line. Applying what we’ve learned so far through National Shipbuilding Procurement Strategy and utilizing the Most Competitive Procurement Strategy will allow us to apply knowledge and expertise to make decisions at the appropriate times in the process. It will also offer the flexibility to work with our partners to discuss strategy and trade-offs and make the necessary adjustments. This will provide the Royal Canadian Navy with a renewed warfare capability and versatility allowing it to deploy worldwide on short notice.
The construction of the Canadian Surface Combatant is expected to begin in the early 2020s. Canada will continue to work closely with Irving Shipbuilding, the selected Warship Designer and the Combat Systems Integrator to ensure the successful delivery of vessels.
I will now turn to my colleague from DND.
It is anticipated that Canada will acquire two ship variants to replace the capabilities of the Iroquois-class destroyers and Halifax-class frigates.
Both variants will have the necessary combat capabilities to operate in air, surface and sub-surface threat environments. A small number of ships will have the ability to provide area air defence (to protect against threats at greater range).
The remainder of the Canadian Surface Combatants will replace the capabilities provided by the current fleet of multi-role frigates. Ultimately, the surface combatant fleet will provide the Government of Canada with the capabilities necessary to control and defend Canada’s maritime approaches, defend North America and lead a wide range of international operations.
The National Shipbuilding Procurement Strategy will enable ongoing discussions between the government, Irving Shipbuilding Inc., and qualified Combat System Integrators and Warship Designers regarding the Canadian Surface Combatant requirements. The project will continue the review of its high-level requirements and specifications. It is a complex undertaking to determine how to allocate capabilities across each of the two variants within the budget. As the procurement process and design work progresses, this analysis will be essential to ensure that the design solution is affordable and that there is a valid cost proposal for building the ships. Throughout the analysis, our procurement approach is set up to recommend to Government to revisit capabilities, if appropriate. Furthermore, we intend to consult with the Independent Review Panel for Defence Acquisition, as well as other potential third parties and stakeholders.
We fully expect that the Canadian Surface Combatant project will benefit from shipbuilding efficiencies and lessons learned during the building of the Arctic/Offshore Patrol Ships that precede it.
I will now turn to my colleague from Industry Canada to talk about the strategy to maximize benefits for Canadian companies throughout the process.
The Canadian defence sector plays an important role in the Canadian economy—including over 650 firms—contributing to the employment of more than 65,000 full-time workers and generating $9.4 billion of revenues annually.
Industry analysts have estimated that government ship projects could contribute 15,000 jobs across Canada and over $2 billion in annual economic benefits over the next 20 to 30 years.
To further strengthen the economy, the Industrial and Regional Benefits Policy and the Industrial and Technological Benefits Policy will apply to this procurement. Irving Shipbuilding Inc, as prime contractor, will be required to ensure that it, and all the companies it subcontracts, together undertake business activity in Canada equal to the value of the contracts they secure. An additional investment in Canada must be made in skills, technology and industrial development equal to one-half of one percent of the contracts secured.
The Industrial and Technological Benefits Policy includes a Value Proposition that will require bidders for the Combat Systems Integrator, Warship Designer, and related systems, sub-systems, equipment and services to compete not only on price and technical merit, but also on their economic contribution to Canada as contained in their Value Propositions.
Earlier industry engagement is a cornerstone of the Defence Procurement Strategy. We will be working closely with industry to define the Value Proposition evaluation frameworks in order to leverage significant economic benefits to Canada.
Applying these policies will strengthen Canada's defence sector and support the growth of suppliers across Canada, including small and medium-sized enterprises.
The Industrial and Technological Benefits Policy is a powerful investment attraction tool for Canada. The policy will encourage firms to grow their existing presence in Canada and make new investments in order to generate growth and high-quality jobs for Canadians.
Industry Canada has completed significant analysis of Canadian capabilities related to direct opportunities for Canadian suppliers on the Canadian Surface Combatant project and mapped these capabilities against international market opportunity. The data highlighted areas where Canada has significant strengths and where there is significant opportunity for growth in international markets—these include communications, sonar and command and control. This illustrates the importance of developing unique value propositions in order to maximize economic benefit to Canada when competing systems, sub-systems, equipment and services.
In conclusion, I would like to reiterate a point I made at the beginning: the procurement of these ships is an incredibly complex undertaking. We have held 15 industry engagement sessions on the Canadian Surface Combatant project since 2012. We have engaged independent experts throughout the process. And we have established a robust and effective governance structure. All of this has been the result of a lot of hard work by a lot of people. And it has all informed the decisions that I have outlined to you today. However, with complexity comes uncertainty. Therefore, I am not here telling you that we have found all the answers and that the path forward is cast in stone. Rather we recognize that we will need to make adjustments as we progress. We will adjust and evolve as warranted and continue to engage with industry and the public. This is why we have developed a strategy that provides us with such flexibility and married it with a robust Governance Structure to ensure risks are well managed.
Thank you, my colleagues and I will now take your questions.
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