National Shipbuilding Procurement Strategy technical briefing on Offshore Fisheries Science Vessel

Ottawa, Ontario
June 12, 2015

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Good afternoon. With me are — and Brian Carter, President of Seaspan Shipyards.

We are pleased to be here today to update you on the implementation of the National Shipbuilding Procurement Strategy, and more specifically to brief you on progress on the non-combat program of work. The Offshore Fisheries Science Vessels are the first ships to be built under that program.

As you know, it has now been just a little over three years since the umbrella agreements with Seaspan Shipyards and Irving Shipbuilding were signed. We are at the beginning of a 30-year project and already significant progress has been made. The two shipyards have completely transformed themselves, investing hundreds of millions of dollars to modernize their infrastructure at no cost to the Government of Canada.

The National Shipbuilding Procurement Strategy has already generated significant economic benefits and jobs for Canadians. And it will continue to do so.

The Offshore Fisheries Science Vessels are part of the Fisheries and Oceans Canada/Canadian Coast Guard Fleet Renewal Program. And they are the first project for the non-combat work package under the National Shipbuilding Procurement Strategy.

We are pleased to tell you that the Government of Canada and Seaspan Shipyards have reached an agreement in principle that will see the construction and delivery of three Offshore Fisheries Science Vessels.

I will provide you with more details on this agreement in principle, but first, my collegue from Canadian Coast Guard (CCG) will provide you with an overview of the Offshore Fisheries Science Vessel budget and capabilities.

I am pleased to be here today with my colleagues to provide you with an update on the progress of the Offshore Fisheries Science Vessels.

The Offshore Fisheries Science Vessel project is the first to be built at Seaspan Shipyards in the non-combat package announced under the National Shipbuilding Procurement Strategy in 2010.

These new science trawlers will be operated by the Coast Guard and used by the scientists in the Department of Fisheries and Oceans to conduct trawl and acoustic surveys of fish and invertebrates in Canadian waters; to collect information on the distribution, abundance and biology of species to be used in stock assessments for new and existing fisheries; and to collect data to monitor changes in marine ecosystems and any impacts on fisheries resources and ecosystem health.

They will be able to fish in deeper waters than our current vessels, operate in the southern Arctic during the summer season, and provide modern marine laboratories to our Fisheries and Oceans scientists. Like all Coast Guard ships, they will respond to emergencies such as Search and Rescue cases.

In October 2014, work began at Seaspan Shipyards on the two initial blocks of the Offshore Fisheries Science Vessels. These two first blocks allowed the shipyard to test production capabilities and equipment in a shipyard that has received significant infrastructure upgrades aimed at better delivering the National Shipbuilding Procurement Strategy program, before moving to full rate production.

Seaspan has also procured the majority of the equipment and material for the first ship.

The Offshore Fisheries Science Vessel (OFSV) construction engineering contract was awarded in February 2013. The Canadian Coast Guard has been working with Seaspan since then to complete the engineering of the OFSVs. We’ve been learning together. This is the first large ship we’ve undertaken in almost a generation.

Each block of the OFSV will have its engineering and design fully completed before construction begins. This has been our approach from the outset—design, then build.

Full rate production will begin in the coming weeks and the delivery of the vessels is expected in 2017.

In a few minutes, my colleague from Public Works and Government Services Canada (PWGSC) will provide the details of the agreement in principle. With those details taken into account, and based on Seaspan cost estimates, the Canadian Coast Guard has determined that the total budget, including project management, design and engineering, spares, training and other costs to put the vessels into operation, as well as the construction of the ships will require a total budget of up to $687 million.

The total project budget of $687 million includes:

In order to meet this budget, CCG has reallocated funds from our helicopter and hovercraft projects where we have achieved significant savings. We have also reallocated contingencies from the future Medium Endurance Multi-Tasked Vessels and Offshore Patrol Vessels projects.

The original OFSV budget of $244 million was developed in 2004. It did not contain adequate provision for inflation, project management, engineering and design costs, and did not properly include contingencies required for a project of this magnitude. The current budget is based on detailed cost estimates provided by the shipyard. As my colleague from PWGSC will explain, these cost estimates were reviewed by an independent and expert third party that found the costing to be “fair and reasonable”.

As is always the case in procurement, factors such as inflation, world commodity prices and exchange rates affect budgets set years in advance.

However, as my colleague from PWGSC will also explain, we have developed an agreement structure that creates incentives for the shipyard to keep costs down, and this will help ensure we stay well within our budget. And as our experience with helicopters and hovercraft shows, any surplus funds could be used in future projects.

All of this preparation will stand us in good stead. Lessons learned from the engineering and construction of the OFSVs will serve to increase productivity and efficiency in constructing the Offshore Oceanographic Science Vessel and the vessels beyond, such as the Polar Icebreaker.

The men and women of the Canadian Coast Guard and the scientists of the Department of Fisheries and Oceans have been looking forward to this day: this is certainly the largest of the projects undertaken to modernize the fleet of the Canadian Coast Guard in almost a generation, and we are looking forward to 2017 when we receive these new ships.

Thank you —

Under this agreement in principle, Seaspan Shipyards has committed to deliver three OFSV ships at a total ceiling price of $514 million. This amount includes two previously awarded contracts. A $54 million contract for the Long Lead Items. And a $4 million contract for the Initial Block. In addition to the agreement in principle that we are announcing today, the ceiling includes fees and an allowance for contingencies that may or may not be required to address the risks associated with building a new class of ships in what is essentially a brand new shipyard.

Similar to the Arctic Offshore Patrol Ship build contract, this agreement will include incentives for Seaspan Shipyards to deliver the vessels below the set target cost and within a set timeframe.

Generally speaking, under the incentives, three cost bands have been established. If the shipyard’s final actual cost comes in under the $400 million target cost Canada will pay the shipyard a fee and Canada and the shipyard will share the savings between the actual cost and the target cost. If the actual cost exceeds the $400 million target cost, Canada will reimburse properly incurred costs up to the ceiling price of $514 million but no fees will be paid on any costs exceeding the target.

Finally, if the shipyard incurs costs above the ceiling amount they are obligated to complete the work and deliver the 3 ships entirely to the shipyard’s account.

A Performance Incentive Fee is also payable to the shipyard if it meets the schedule for delivery.

Full production of the vessels is expected to begin shortly, with delivery of the first vessel scheduled for spring 2017, the second vessel to be delivered 5 months later, and the third 3 months after that.

As part of our due diligence, before drafting this agreement in principle we hired SPAR Associates—an independent third party expert on shipbuilding production costing—to review Seaspan Shipyards’ build cost estimate. SPAR’s comments informed our negotiations and were largely consistent with Seaspan’s projection. The agreement in principle with the shipyard is consistent with SPAR’s advice, which included the recommendation that appropriate contingencies be provided to address risks to be expected in this first project with Seaspan.

To help ensure value for money under this agreement and to mitigate risks, we’ve retained SPAR Associates to provide ongoing oversight and to report to Canada on the shipyard’s performance. Officials from the Canadian Coast Guard and Public Works and Government Services Canada will also maintain a strong presence at the shipyard to support Seaspan’s efforts to contain costs and drive production efficiencies.

We’re confident that this agreement will protect the interest of the Crown and Canadian taxpayers while also being beneficial to Seaspan Shipyards.

I will now ask Brian Carter, President of Seaspan Shipyards, to update you on the infrastructure investment at Seaspan Shipyards, the state of readiness for building the OFSV, and the upcoming milestone under this first project at Seaspan.

Thank you — this is an important day for Seaspan Shipyards and its proud workforce.

We estimate that this agreement will create and sustain 500 jobs. We will also be generating work across Canada with related subcontracts to suppliers. To date, even before construction, Seaspan Shipyards has awarded National Shipbuilding Procurement Strategy related work to 137 Canadian companies totaling $211 million.

We have been working towards this moment since we were selected as Canada’s shipyard to build the Non-Combat fleet. Last year, we completed our $170 million upgrades at our shipyards in Vancouver and Victoria, at no cost to the Government of Canada. The shipyard modernization was delivered under budget and ahead of schedule.

This brand new facility shown in the photos here is the most modern in North America today and is tailor made to both deliver non-combat vessels to the men and women of the Canadian Coast Guard and Royal Canadian Navy and very importantly to deliver on the National Shipbuilding Procurement Strategy’s goal of returning a truly sustainable shipbuilding industry to Canada.

Canada’s non-combat requirements are such that there are no long production runs of the same class of ship. We will be building three OFSVs, followed by a single Offshore Oceanographic Science Vessel, followed by 2 Joint Support Ships, followed by a single Polar Icebreaker. It is only after the Polar project that we get into a true production line with up to five Medium Endurance Multi-Tasked vessels and up to five Offshore Patrol Vessels.

It goes on from there, but this is a challenging build program. It would be a challenge for any shipyard in the world, but we look forward to meeting this challenge head-on and creating a legacy of shipbuilding excellence on the West Coast for decades to come.

As CCG mentioned, we recently completed the engineering and design of the OFSV. OFSV is a complex vessel and, while challenging, we are fortunate to have this vessel first in the series. It has fostered a level of discipline and technical preparation that has rapidly advanced the capability of the Vancouver Shipyards team.

Here are a few renderings of the OFSV and the 3D model we used in finalizing the design of the ship. In these renderings you can see both the technical complexity and the completeness of the ship design.

Last October, we began construction of the first two initial blocks that will form part of the first vessel. This has allowed us to test our new infrastructure, new processes and new systems—lessons that we will now apply to construction and to the management of our other vessels in the Non-Combat package. Here is one of the nearly complete initial blocks in our new pre-outfitting shop.

Let me give you an example of the types of lessons we learned during the construction of this block. You can see curved side shell of the vessel in the photo. This shell plating is formed in multiple dimensions using the state of the art new portal press we installed last year.

This is complex steel work and we were not as efficient as we expected in this process. Understanding that through the building of this block has allowed us to bring in additional training from the equipment manufacturer as well as an experienced shipbuilder from Finland to help our production workforce become more efficient in this work.

We also purchased a software upgrade that allows further automation from our 3D model directly into the portal press to assist the operator with the work. This training is complete and our workforce is now ready to start forming plate on the remaining OFSV blocks.

Our production timelines are for the delivery of the first Offshore Fisheries Science Vessel to the Canadian Coast Guard in 2017. Our shipyard is ready to go. The OFSV design is complete. Our staff and labour force are ready to begin full rate construction in the days to come.

Thank you Mr. Carter.

I will now ask my colleague from Industry Canada to speak about the drivers behind the National Shipbuilding Procurement Strategy which is how it maximizes opportunities for Canadian companies.

Industry analysts have estimated that government ship projects could contribute 15,000 jobs across Canada and over $2 billion in annual economic benefit over the next 20 to 30 years.

The Industrial and Regional Benefits Policy will apply to this procurement. Seaspan Shipyards, as prime contractor, will have to ensure that it, and the companies it subcontracts, undertake business activity in Canada equal to the value of the contracts they secure.

An additional investment must be made by Seaspan Shipyards in skills, technology, and the industrial development of the marine sector equal to one half of one percent of the contracts it secures.

These requirements will strengthen Canada’s marine sector and support the growth of suppliers across Canada, including small and medium-sized businesses across the country.

We are already seeing benefits to Canada. Seaspan Shipyards has signed over 200 contracts with 137 companies in Canada, with half of the value of those contracts going to small and medium-sized business. They expect to create and sustain approximately 500 jobs as a result of this contract.

In addition, Seaspan Shipyards plans to invest $1.9 million in the development, design, and delivery of quality training and employment programs through the Coastal Aboriginal Shipbuilding Alliance. This is a partnership between the yard and employment and training organizations dedicated to facilitating the entry of Aboriginal peoples into the marine sector workforce.

Thank you —

The National Shipbuilding Procurement Strategy has several phases.

At the outset, we developed the strategy, competitively selected the shipyards and signed the umbrella agreements. The shipyards were prepared and the ship designs finalized. We are now entering the final phase: building the ships.

This phase will span many years to come and generate thousands of skilled jobs in communities across the country. In the process, it will renew the Canadian shipbuilding industry.

In conclusion, the Government is committed to procuring the equipment necessary for the men and women of the Canadian Coast Guard to continue to make the safety of mariners and the protection of Canada’s marine environment our top priority and do the jobs we ask of them.

Thank you.

My colleagues and I would be happy to take your questions.