Speaking notes for National Shipbuilding Procurement Strategy technical briefing—Updates on progress
February 27, 2013
Check against delivery
Thank you for joining us today for this technical briefing on the National Shipbuilding Procurement Strategy or NSPS. I will provide a brief update on the progress made since the umbrella agreements were signed one year ago, describe where we are today and talk about the way forward.
This month marks the one-year anniversary of the signing of the umbrella agreements with the shipyards. We have been working on providing an update for several weeks in conjunction with this important milestone as well as to be able to provide an update on another milestone—the completion of the first major definition contracts in both packages of work. I will refer to these in a few moments.
And of course we know that the Parliamentary Budget Officer will issue a report tomorrow and we want to ensure that there is an understanding of government processes in establishing project budgets.
First some important context with respect to the NSPS. The Canadian shipbuilding industry has had no substantial new build orders from the federal government since the mid-1990s. As a result, the Canadian shipbuilding industry has rationalized and downsized its capacity over the subsequent 15 to 20 years. This has resulted in boom and bust cycles for Canadian shipyards.
When we launched the NSPS, Canadian shipyards lacked modern infrastructure, design capacity, world-class productivity, and a cost-effective skilled labour force. The industry was not optimized to meet the challenges of our fleet renewal projects and unable to build NSPS ships efficiently.
Our project-by-project approach to shipbuilding was inefficient. This led to a number of failed procurements. The renewal of the federal fleet could not be accomplished unless a new way of doing business was adopted.
The NSPS is the result of extensive consultations with industry. The strategy involves a two-way strategic relationship with the shipyards through which the shipyards have made a commitment to improve their efficiency and to contribute to the health of the broader Canadian marine industry.
Establishing these relationships with the selected yards will provide significant benefits to each NSPS project. The build program will bring learning curve benefits, productivity improvements and infrastructure savings, which will ensure that the Royal Canadian Navy and the Canadian Coast Guard have the capability they need to do the work asked of them.
Industry analysts have estimated that government shipbuilding projects could contribute, both directly and indirectly, approximately 15,000 jobs across the country and over $2 billion in annual economic benefits over the next 30 years.
The NSPS is being implemented in five phases:
- Phase 1: Developing the strategy—Launched in summer 2009 with a Shipbuilding Forum, this phase led to the announcement of the strategy in June 2010.
- Phase 2: Selecting the shipyards—This phase was launched in summer 2010 and completed on October 19, 2011.
- Phase 3: Establishing the relationship—This phase is ongoing, but we achieved a major milestone by signing umbrella agreements with the shipyards in February 2012.
- Phase 4: Preparing the shipyards and finalizing the designs—This is where we are today.
- Phase 5: Constructing the ships.
For their part, Vancouver Shipyards and Irving Shipbuilding are undertaking significant infrastructure upgrades valued at some $200 million and $300 million, respectively. These upgrades are at no cost to Canada and will enable us to ensure the yards are ready to build ships efficiently. Having an optimized Canadian shipbuilding industry is at the heart of the NSPS and is one of the most significant benefits to Canada.
The approach we are using with respect to the vessels themselves is a “design-then-build” one. It is very important to understand that we need to get the designs and production details for each vessel right before the shipyards start cutting steel. The design-then-build approach reduces the risks of the actual ship construction process. Reducing design uncertainties up front also reduces risk for the Canadian taxpayer over the long term.
To date, a number of contracts have been signed. Most recently the Government of Canada announced a $13.2 million construction engineering contract for the Canadian Coast Guard's offshore fisheries science vessels or OFSV. This is the first project in the non-combat package.
The construction contract for this project is expected in 2014.
We also announced a significant step forward in the design process for the polar icebreaker, the John G. Diefenbaker.
For the Arctic Offshore Patrol Ships or AOPS, we have concluded negotiations and an announcement on a definition contract is expected soon. We expect to sign a construction contract and have construction begin in 2015. Delivery of the first AOPS is slated for 2018.
Although a considerable portion of the building of the large ships will be carried out by the two selected yards, it is estimated that over half of the value of the shipbuilding contracts could flow to the broader Canadian marine industry—companies that manufacture equipment used on the ships or that provide services essential to the project. Many of these, undoubtedly, will be small- and medium-sized enterprises.
Through the life extension and mid-life modernization program for Canadian Coast Guard vessels, on February 21, the Government of Canada announced over $360 million in work that will go to shipyards across Canada. Under the NSPS, all shipyards will be eligible to bid on this work.
Before closing, let me address the following questions:
Are the shipbuilding projects behind schedule?
We are on track to cut steel in 2014 and 2015 on the OFSV and AOPS respectively. The NSPS was developed and is being implemented to support the Canadian marine industry, to revitalize Canadian shipyards and to build ships for the Royal Canadian Navy and the Canadian Coast Guard.
The strategy will bring predictability to federal ship procurement and eliminate cycles of boom and bust, providing benefits to the entire marine industry.
We aligned the shipbuilding projects with the NSPS to benefit from a more strategic and more efficient way forward. This will result in variations in delivery timelines; however, the advantages of efficiently building the federal fleet far outweigh the disadvantages. Canadians and the Canadian economy will benefit from a more strategic approach to procuring ships.
A strategic, long-term approach to business planning and investing in infrastructure and human resources means jobs for Canadians and long-term prosperity for Canadian communities. This process does take time and the Government of Canada will take the time to get the job done right.
Are the Joint Support Ship project estimates still indicating the ability to deliver two ships?
The Joint Support Ship (JSS) project was announced in July 2010 at a value of $2.6 billion. This was for two ships, with an option for a third. Do we remain confident that we can acquire two vessels? Yes.
The project budget was established by applying the costing principles in accordance with Treasury Board guidelines. It includes a 15% contingency (approximately $300 million) and applies an escalation factor of 2.7% for the ship construction.
Through the NSPS governance process, all projects go through a series of assessments to validate that the required capability can be achieved within the established project budget.
In the case of the JSS, the next checkpoint is part of the ongoing design selection process. Through this process, with the support of an independent third party review, the cost estimates for the design options are being reviewed, and they confirm that the selected ship design remains affordable.
It is important to note that the NSPS is creating an environment in which the cost estimates can be done early in a process that will span multiple decades.
As we move through our review cycles, every indication continues to be that this project is affordable. This will be reconfirmed as the design selection analysis of the project is completed. The JSS design selection is expected to be completed in the spring of 2013.
Once this is confirmed, and a design is selected, the design is passed to the shipyard and refined to a production-ready state. Throughout this process, construction estimates will be refined until substantive costs are provided, again confirming project affordability.
At any time throughout this process, the project teams, along with the shipyard, have the ability to exercise design-cost trade-offs as a means to control project affordability while ensuring delivery of the required capability to the Navy.
In addition to the acquisition costs, the rough order-of-magnitude estimates for in-service support and personnel costs, and operating and maintenance costs, are $1.9 billion and $2.6 billion respectively based on 30 years. These cost estimates continue to be refined as the project and design choice evolve.
We remain on track to deliver the capability the Royal Canadian Navy needs—that is two joint support ships, within the cost envelope provided.
Are the other project budgets sufficient to build the number of ships that were announced?
The purpose of the definition and construction engineering contracts is to refine the design; to produce the construction plans, and determine requirements for materials, sub-contractors, and labour; and to develop substantive cost estimates.
This will allow us to determine the most efficient strategies that will ensure a seamless and timely transition between the design and build phases. Labour, manufacturing and material commodities such as steel can be volatile and fluctuate over time.
The Canadian Coast Guard and National Defence use costing methodologies to measure the impact of inflation on purchasing power, based on costing estimates specific to the ships being procured. In both instances, inflation factors are incorporated into project estimates.
Further, we include a contingency envelope on all projects to deal with uncertainties in cost estimations, including the impact of inflation.
These approaches have been validated and approved by Treasury Board and by domestic and international experts.
It is also important to note that the NSPS follows a design-then-build approach for vessels, after which cost and capability trade-offs can be made. As a result, construction costs can be understood before negotiations with shipyards begin.
This is an added benefit of the NSPS as it will foster these discussions with the shipyards earlier during the design process to build better cost estimates.
We will now take your questions.
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