National Shipbuilding Strategy partners and shipyards: Standing Committee on Public Accounts—May 25, 2021

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Irving Shipbuilding Inc.

Introduction

Canada’s National Shipbuilding Strategy (NSS) is a long-term plan to renew the fleets of the Royal Canadian Navy (RCN) and the Canadian Coast Guard (CCG). The NSS aims to eliminate the boom and bust cycle of vessel procurement that has slowed down Canadian shipbuilding in the past.

Under the NSS, the Government of Canada is building large vessels at Irving Shipbuilding Inc. (ISI) in Halifax, Nova Scotia, and Seaspan’s Vancouver Shipyards (VSY) in Vancouver, British Columbia. These shipyards were selected in October 2011 following an open and fair competitive process.

ISI’s work package consists of 6 Arctic and offshore patrol ships (AOPS) for the RCN, 2 AOPS for CCG, and 15 Canadian surface combatants (CSC) for the RCN. As of the end of 2020, the government has awarded $3.82 billion in contracts to ISI for large ship construction and another $1.29 billion for repair, refit and maintenance work.

Umbrella agreement

The strategic relationship between the Government of Canada and ISI was established with the signing of the umbrella agreement in February 2012. The umbrella agreement is a long-term strategic sourcing arrangement that defines the working relationship and administrative arrangements under which the government will negotiate fair and reasonable individual contracts.

Target state

ISI has modernized its shipyard, at no cost to Canada. The infrastructure improvements completed by ISI were needed to achieve a pre-defined target state, by which the shipyards would:

The achievement of target state is being assessed by First Marine International (FMI), the government’s third-party expert. In November 2017, FMI conducted ISI’s interim assessment. Initial indications were positive with requirement for further action in order to meet target state at the time of final assessment.

Executive management and governance

Senior leadership within the Government of Canada and ISI is well engaged and a multi-level governance structure has been put in place, including the following committees:

ISI is currently undergoing a significant transition period with respect to its senior management team. Over the last year, ISI’s Senior Vice President and Program Vice President have left the company with replacements having been recently hired.

Kevin Mooney, recently hired as Chief Operating Officer, has been appointed as ISI President, succeeding Kevin McCoy who retired from that role in April 2021.

Irving Shipbuilding Inc. program updates

Table 1: Irving Shipbuilding Inc. work package
Ship class Project budget Awarded to date (as of end of 2020) Number of vessels Cut steel First delivery
Arctic and offshore patrol ships (1 to 6) (RCN) $4.3B $2.91B 6 September 2015 July 31, 2020
Arctic and offshore patrol ships (7 to 8) (CCG) $1.5Btable 1 note 1   $0.019B 2 2022 2025
Canadian surface combatants (RCN) $56B to $60Btable 1 note 1 $0.89B 15 2023 to 2024 Early 2030s
Total $61.8B to $65.8Btable 1 note 1 $3.82B 23 Not applicable Not applicable

Table 1 Notes

Table 1 Note 1

Estimated value

Return to table 1 note 1 referrer

Program schedule and COVID-19 impact

ISI initially suspended most industrial operations as of March 20, 2020, with special measures for working from home or within ISI’s offices implemented where possible. ISI has since conducted a gradual return-to-work, with a large proportion of production employees now in the shipyard while also ensuring physical distancing. COVID-19 safety measures continue to be implemented, in accordance with the Nova Scotia government’s Health Protection Act order and Public Health Directives.

Construction of the first and second Arctic and offshore patrol ships and maintenance of Her Majesty’s Canadian Ship (HMCS) Charlottetown gradually resumed in mid-April 2020, with a partial restart of AOPS 3 and 4 in late June and early July 2020.

On July 31, 2020, the first AOPS, the HMCS Harry DeWolf, was delivered and accepted by the Royal Canadian Navy. Schedules for the delivery of AOPS 2 to 6 remain under review. Due to COVID-19 related disruptions and other slippage, ISI indicated a 6 to 9 month delay to future AOPS, with these timelines at least partly dependent on whether COVID-19 measures are continued or enhanced. The AOPS 2 is expected in summer 2021, although there remains uncertainty regarding this target. AOPS 4 is also experiencing COVID-19 related impacts, specifically related to production ramp up. Cut steel on the fifth vessel is currently expected in May 2021.

The program schedule is further complicated by uncertainty surrounding the CSC design and construction timeline. DND has publicly stated that steel will be cut on the first ship in the 2023 to 2024 timeframe. Design work for the Canadian Surface Combatant continues to progress, with most staff employees having returned to work in the office.

Presently, ISI is working at reduced levels, with inefficiencies stemming from social distancing, staggered shifts, and challenges related to supply chain/vendor support. ISI has also indicated challenges with reaching the required production staff to which they are taking several steps to mitigate resource shortfalls.

Canada has acknowledged ISI’s request for excusable delays on the AOPS build and Halifax-class maintenance work. Interim agreements have been established to address ISI’s inability to perform industrial work at 100% efficiency due to required COVID-19 safety measures. ISI is seeking to claim for additional time and costs related to COVID-19, including schedule impact, production inefficiencies, and the retention of staff. ISI is working to compile the COVID-19 supply chain impacts for submission to Canada.

Workforce capability

At the end of September 2020, ISI’s workforce totaled 2,066 employees and 167 apprentices. There is currently a risk related to skills and labour shortage of workers and insufficient human resources (HR) capacity in the shipbuilding industry, which has resulted in strong competition for workers. This has created a workforce hiring challenge for ISI.

Canada would like to collaborate with both NSS shipyards on the development of a common capacity and capability strategy to address human resource challenges such as difficulty attracting talent to the skilled trades and gaps in management capacity. Canada also plans to engage with industry stakeholders to better understand challenges and potential for improvement.

Socio-economic benefits

NSS contracts awarded between 2012 and December 2020 are estimated to contribute over $20 billion ($1.82 billion annually) to the gross domestic product (GDP), and create or maintain more than 16,930 jobs annually, through the marine industry and its Canadian suppliers during 2012 and 2022.

The NSS’s value proposition (VP) obligates ISI to invest a value equal to 0.5% of strategy contracts to benefit the domestic marine industry over the long term. The investments are contributing to 3 priority areas:

ISI is on track in realizing its NSS VP commitments. ISI has approved investments of $19.9 million as of December 2020. Approved investments include credited investments (such as completed investment activities), and investments that will be made in future periods. Commitments include the Centre for Ocean Ventures and Entrepreneurship, workforce research and programs, and 18 marine and Arctic projects across Canada.

ISI is also on track to meet its obligations under the Industrial and Regional Benefits (IRB) Policy, which requires ISI and its major suppliers to undertake business activities in Canada equal to the value of the contracts they are awarded by the Government of Canada. These obligations will be equal to the final contract values. ISI has an IRB obligation of $4.14 billion, of which $2.56 billion has been completed to date and another $0.40 billion is underway.

ISI and the provincial government of Nova Scotia are increasing the number of naval construction internships and financial incentives to attract local apprentices and skilled workers. ISI has also created the Pathways to Shipbuilding Program, which targets populations underrepresented in shipbuilding such as women, Indigenous Peoples and African Nova Scotians. Formed under the Irving Shipbuilding Centre of Excellence with the Nova Scotia Community College (NSCC), pathways to shipbuilding provides cohorts of 20 students the opportunity to complete a 14-week career exploration program and a 2-year welding or metal fabrication diploma at NSCC. Two cohorts have graduated from the Pathways to Shipbuilding Women Unlimited program, with 28 apprentices now working at the Halifax Shipyard. In July 2018, 12 students graduated from the Pathways to Shipbuilding for Indigenous Students Program and 10 remain employed by ISI; a second class is expected to begin in 2021. The first Pathways to Shipbuilding for African Nova Scotians class began in September 2018 and graduated in June 2020. Of the 20 graduates, 19 are working at ISI. In addition, ISI has hired 42 Canadian Armed Forces veterans since 2018 and aims to hire 100 veterans by mid-2023.

Halifax-class work period contract

PSPC has awarded 3 contracts for maintenance support services of Canada’s 12 Halifax-class frigates to ISI, Chantier Davie and Seaspan Victoria Shipyards for a total combined value of up to $7.5 billion (including taxes). These contracts will ensure that maintenance and engineering work continue on the frigates until their end of life, currently estimated to be 2043.

In August 2020, maintenance work on the first Halifax Class frigate, HMCS St. John’s, commenced at Chantier Davie. In August 2022, maintenance work on the second East coast frigate, HMCS Halifax will commence at ISI.

ISI is currently responsible for the maintenance of all 7 East coast frigates until the expiration of their current in-service support contract in 2021. However, third party analysis suggests that ISI will not have the capacity to maintain the entire East coast fleet simultaneously with CSC construction. The work periods on the ships are also growing in size as the frigates age. It was therefore decided that maintenance work on the East coast fleet should be split between 2 shipyards, ISI and Chantier Davie.

It is estimated that the Halifax class work period contract will generate steady work activity for between 250 and 300 workers for ISI. In addition, through the AOPS and joint support ship in-service support contract, ISI may also be selected to provide shipyard support for sustainment activities for the AOPS.

Seaspan’s Vancouver Shipyards

Overview

Canada’s National Shipbuilding Strategy is a long-term plan to renew the fleets of the Royal Canadian Navy and the Canadian Coast Guard (CCG). The NSS aims to eliminate the boom and bust cycle of vessel procurement that has slowed down Canadian shipbuilding in the past.

Under the NSS, the Government of Canada is building large vessels at Irving Shipbuilding Inc. in Halifax, Nova Scotia, and at Seaspan’s Vancouver Shipyards in Vancouver, British Columbia. These shipyards were selected in October 2011 following an open and fair competitive process.

VSY’s original work package consisted of 3 offshore fisheries science vessels (OFSV), 1 offshore oceanographic science vessel (OOSV) and 1 polar icebreaker for CCG, as well as 2 Joint Support Ships (JSS) for the RCN. In May 2019, Canada decided to remove the Polar icebreaker and add up to 16 multi-purpose vessels (MPV) for CCG. On May 6, 2021, Canada announced that it will move forward with the construction of 2 Polar icebreakers. VSY will engineer and construct 1 vessel while the other will be engineered and constructed at Chantier Davie, pending the successful completion of the ongoing selection process to select it as the third strategic partner for large ships construction under the NSS.

As of the end of 2020, the government has awarded $4.41 billion in contracts to VSY for individual large ship construction projects and another $8.14 million for repair, refit and maintenance work.

Umbrella agreement

The strategic relationship between the Government of Canada and VSY was established with the signing of the umbrella agreement in February 2012. The umbrella agreement is a long-term strategic sourcing arrangement that defines the working relationship and administrative arrangements under which the government will negotiate fair and reasonable individual contracts.

Target state

VSY has modernized its shipyard, at no cost to Canada. The infrastructure improvements completed by VSY were needed to achieve a pre-defined “target state” by which the shipyard would:

The government’s third-party expert, First Marine International, conducted an interim assessment in 2015 and a final assessment in July 2018. The July 2018 assessment showed that there were certain areas where VSY had not yet achieved target state and thus there was a requirement to develop a Corrective Action Plan (CAP) to address these elements. The shipyard is now in the process of implementing the elements of the CAP.

The government will continue to assess progress and look for opportunities to improve shipyard performance.

Executive management and governance

Senior leadership within the Government of Canada and VSY is well engaged and a multi-level governance structure has been put in place, including the following committees:

Seaspan’s Vancouver Shipyard program updates

Table 2: Seaspan’s Vancouver Shipyard work package
Ship class Project budget Awarded to date (as of end of 2020)   Number of vessels Cut steel First delivery
Offshore fisheries science vessel—CCG $788.5M $0.74B 3 June 2015 June 2019
Joint support ships—RCN $4.1B $3.30B 2 June 2018 2023
Offshore oceanographic science vessel—CCG $966.5M $0.32B 1 March 2021 2024
Multi-purpose vessels—CCG $14.2Btable 2 note 1   $0.004B Up to 16 2025table 2 note 1 2028table 2 note 1
Polar icebreakertable 2 note 2 To be determined Nil 1 Not applicable 2030
Total $20.1Btable 2 note 1 $4.36B Up to 23 Not applicable Not applicable

Table 2 Notes

Table 2 Note 1

Estimate

Return to table 2 note 1 referrer

Table 2 Note 2

Not yet included in umbrella agreement

Return to table 2 note 2 referrer

This table does not include the Horizontal Engineering and Program Plan (HEPP) valued at $47.8M.

Program schedule and COVID-19 impact

Operations at VSY continue but are being closely monitored. A number of non-production staff have returned to the office while others continue to work from home. Approximately 650 tradespeople are working in shifts at the shipyard. Measures being taken include following self-isolation guidelines, additional social distancing measures, cancelling large gatherings and increased cleaning. VSY continues to work closely with WorkSafeBC in implementing these practices, and has adjusted and escalated actions in response to new regulations and guidance.

The third offshore fisheries science vessel, the Canadian Coast Guard Ship (CCGS) John Cabot, experienced some slippage due to COVID-19, but was delivered and accepted by the Canadian Coast Guard on October 9, 2020. Quantification of the COVID-19 impact on the OFSV project has been received from VSY and discussions with Canada continue to reach a mutually agreeable settlement.

Early block construction of the first Joint Support Ship continued throughout the pandemic and work transitioned to the full build following the build contract award in June 2020. COVID-19 related shut-downs of subcontractors’ facilities have resulted in the delay of some design work and equipment deliveries which have had or will have an impact on the completion of several key milestones. VSY is attempting to mitigate these impacts. VSY has prepared a preliminary analysis of the impacts of COVID-19 on the JSS project and discussions of this with Canada are ongoing.

The offshore oceanographic science vessel build contract was signed on January 29, 2021 and a successful production readiness review took place on March 1, 2021, clearing the way for cutting steel (start of construction) on March 25, 2021. The multi-purpose vessel project is also progressing, with the ancillary contract awarded in August 2020 and work on the hull form currently underway.

VSY has experienced more significant COVID-19 impacts during the second and third waves of the pandemic and has reported impacts on labourers and subcontractors which is lowering efficiency.

Changes to work package

The complexity of VSY’s original program of work, which included 4 classes of vessels each with short production runs, provided limited opportunities to leverage economies of scale. Typically a run of more than 3 ships is needed to drive efficiencies. Third party experts have reported that such a work package would be difficult for the most seasoned yards in the world. In May 2019, Canada decided to remove the Polar icebreaker and add up to 16 MPV, to be built after JSS 2. This substitution will break the cycle of short production runs in VSY’s work package by making it more viable with a longer program horizon, consistent with the NSS programmatic approach to projects.

On May 6, 2021, Canada announced that it will move forward with the construction of 2 Polar icebreakers. Seaspan’s Vancouver Shipyards will engineer and construct 1 vessel while the second will be built and engineered at the shipyard that will be selected as the third strategic partner for large ships under the NSS.

The chosen approach will involve a concurrent engineering and construction effort at each shipyard with contractual incentives to promote commonality between the 2 ships.

Workforce capability

VSY’s workforce consists of approximately 1,125 employees. There is currently a risk related to skills and labour shortage of workers and insufficient HR capacity in the shipbuilding industry, which has resulted in strong competition for workers. This has created a workforce hiring challenge for VSY, compounded by the high cost of living in the region.

Canada would like to collaborate with both NSS shipyards on the development of a common capacity and capability strategy to address human resource challenges such as difficulty attracting talent to the skilled trades and gaps in management capacity. Canada also plans to engage with industry stakeholders to better understand challenges and potential for improvement.

Socio-economic benefits

NSS contracts awarded between 2012 and December 2020 are estimated to contribute over $20 billion ($1.82 billion annually) to GDP, and create or maintain more than 16,930 jobs annually, through the marine industry and its Canadian suppliers during 2012 and 2022.

The NSS’s value proposition obligates VSY to invest a value equal to 0.5% of strategy contracts to benefit the domestic marine industry over the long term. The investments are contributing to 3 priority areas:

VSY is on track in realizing its NSS VP commitments. VSY has initiated (completed and in-progress activities) $9.45 million in new activities related to these obligations as of December 2020. VSY has invested $2 million to support innovative teaching and research for the Naval Architecture and Marine Engineering programs at the University of British Columbia’s Faculty of Applied Science.

VSY is set to meet its commitments under the Industrial and Regional Benefits (IRB) Policy, which requires VSY and its major suppliers to undertake business activities in Canada equal to the value of the contracts they are awarded by the Government of Canada. These obligations will be equal to the final contract values. VSY has an IRB obligation of $1.75 billion, of which $1.02 billion has been completed to date and another $0.25 billion is underway.

Seaspan and VSY actively promote training and recruitment for groups underrepresented in the shipbuilding industry, such as women and Indigenous Peoples. For example, in 2016, the Dennis and Phyllis Washington Foundation, an organization associated with the group that owns Seaspan, donated $2.9 million to institutional trades training programs, including the British Columbia Institute of Technology to support Aboriginal people in trades, Camosun College to support women in trades, and the Canadian Welding Association Foundation for both new welding equipment and teacher professional development. This donation was a direct result of IRB obligations under the NSS.

Also, in 2020, Seaspan Shipyards announced a $300,000 investment in Let’s Talk Science, an award-winning national charitable organization that has been providing Canadian youth and educators with engaging science, technology, engineering and math (STEM) programs for more than 25 years. Seaspan’s 3-year commitment will support the roll-out of new Kindergarten to Grade 12 programming across Canada designed to educate and inspire youth about STEM careers in the marine and shipbuilding industries.

Chantier Davie Canada Inc.

Overview

Canada’s largest shipyard, Chantier Davie Canada Inc. (Davie) is one of the subsidiaries of Inocea group of companies that provides a wide range of services including marine technical development, along with its sister company Federal Fleet Services. Located in Lévis, Quebec, Davie provides shipbuilding services for oil and gas, offshore fabrication, passenger transportation, maintenance and dry-docking and defence manufacturing. In addition, it also offers shipbuilding, conversion, refit and vessel life extensions.

In 2011, following an open and fair selection process, Irving Shipbuilding Inc. and Seaspan’s Vancouver Shipyards were selected to build Canada's combat and non-combat large vessels under the National Shipbuilding Strategy. At that time, Davie was under bankruptcy protection and was therefore not permitted to bid under the conditions set out in the request for proposals (RFP). The day before bid closing, Davie changed ownership and met the RFP’s condition to bid on the non-combat package. That bid was evaluated and was not successful.

Relationship between Canada and Davie

Although unsuccessful in its bid for the NSS non-combat work package, Davie is eligible to compete for opportunities to win contracts under the NSS for small ship construction, and for ship repair, refit and maintenance.

Since 2012, Davie has been awarded more than $2.19 billion in NSS contracts of which approximately $1.5 billion is for repair, refit and maintenance contracts. Contracts include interim auxiliary oiler replenishment (iAOR) work of $691.6 million (including taxes) and interim icebreaker capability (medium icebreakers) at $843 million. In addition, Davie is one of 3 shipyards (along with Irving Shipbuilding Inc. and Seaspan’s Victoria Shipyards Limited) selected for the maintenance support services of Canada’s 12 Halifax-class frigates. The combined value of the contracts awarded to these 3 shipyards could exceed $7.5 billion (including taxes) by the time the vessels are retired. These contracts are expected to remain in place until 2041. The contract awarded to Davie in July 2019 for an initial period of 5 years is for the maintenance and refit of 3 frigates valued at $574 million (including taxes).

In November 2019, the Government of Canada awarded an initial ancillary contract to Davie to establish a project management office and initiate various studies to support design and construction of 2 ferries for Transport Canada (TC). As of September 14, 2020 the contract is valued at $3.334 million (tax included).

An advance contract award notice (ACAN) signaling our intention to enter into a contract with Davie for required vessel life extension work on the CCGS Louis S. St-Laurent, Canada’s largest icebreaker, closed November 19, 2020. Davie has been identified as the only facility in Eastern Canada capable of performing this work during the specified time period. Contract award is anticipated for fall 2021 with work scheduled to begin in spring 2022.

On December 24, 2020, the contract with Federal Fleet Services for provision of an iAOR capability for the Royal Canadian Navy was amended to $691.6 million. This amendment follows a thorough review of the budget forecast, as well as all costs incurred since Motor Vessel (MV) Asterix was put into service, and remains within the approved budget ceiling for the program. This will provide the RCN the deployed operational support it needs for its assigned missions through the contract’s full 5-year service period.

The more than $2.19 billion in NSS contracts awarded to Davie represents the majority of the approximately $2.51 billion in NSS contracts awarded in the province of Quebec to date.

Note

Quebec’s share represents approximately 14.33% of the total approximately $17.49 billion in NSS contracts awarded across the country since 2012.

Third National Shipbuilding Strategy yard selection

In May 2019, Canada identified the need to select a third Canadian shipyard under NSS. The selected yard will build 6 program icebreakers for the CCG. Steps in the selection of the third shipyard:

Key messages:

Polar Icebreaker Procurement Strategy

In February 2020, Canada issued a request for information (RFI) to Canadian shipyards to assess their capacity and capability to build the CCG Polar icebreaker which closed March 13, 2020. Davie responded to this RFI and expressed their interest in building the Polar icebreaker.

In November 2020, Davie announced that they were partnering with Vard Marine Inc. and Serco Canada Marine in their bid to build the Polar icebreaker, which they had launched earlier in August 2020 at the same time as their National Icebreaker Centre.

On February 2, 2021, Chantier Davie announced that it was welcoming GE as a strategic partner in its Polar icebreaker program, which is the flagship of Canada’s National Icebreaker Centre (NIC).

Key messages:

Interim icebreaker capacity for Canadian Coast Guard

Key messages:

Two Transport Canada ferries to be built at Chantier Davie

Key messages:

Interim ferry

Key messages:

Halifax-class frigates work period contracts awarded

Key Messages:

Program schedule and COVID-19 impact

On March 24, 2020, in response to COVID-19, the Quebec government published a list of essential industrial sectors, under which Davie qualified. Davie conducted on-site training for dealing with COVID-19, implemented a set of strict directives, and negotiated with their union to maintain intact squads instead of rotating employees through different teams. Davie also successfully implemented the appropriate personal protective equipment (PPE) and balanced shifts to ensure the reduced capacity of infrastructure (locker rooms, lunch areas, washrooms, etc.) is not limiting factors in their manpower loading. Davie has a protocol at their gate consisting of both thermal cameras and a standard questionnaire based on self-disclosure, which keeps at-risk personnel from entering the yard until test results are received and/or symptoms have passed. They also instituted a robust governance structure and rigorous contact tracing protocols.

As of December 2020, Davie is functioning in the 80% to 85% capacity range due to COVID-19. Overhead costs are being recovered through the negotiated rates and spread over the production labour hours realized at the shipyard.

Table 3: National Shipbuilding Strategy work awarded to Chantier Davie Canada Inc. (2012 to end of 2020)
Project Year(s) Value (including all amendments and taxes)
Vessel life extension, refit work and dry-docking of the CCGS Des Groseilliers October 2014 $6.2M
Vessel life extension and refit work for the CCGS Earl Grey March 2015 $16.5M
Vessel life extension and refit work for the CCGS Henry Larsen July 2015 $23M
Conversion work on the MV Asterix—iAOR (contracted under the Federal Fleet Services title) November 2015 to August 2017 $691.6M
Refit of CCGS Louis S. St-Laurent January 2017 to September 2017 $20.4M
Acquisition and conversion of 3 medium icebreakers for the CCG August 2018 to winter 2020 $843M
Dry-dock refit of the CCGS Louis S. StLaurent April 30, 2019 $7.9M
TC new ferries ancillary contract November 27, 2019 $3.334M
Sustainment work on the Halifax-class Canadian frigates 2020 to 2021 to 2041 (estimate) The combined value of the contracts for the 3 selected shipyards could exceed $7.5B ($575M awarded to Chantier Davie to date)
Total value (including all amendments and taxes) since 2012 Approximately $2.19B (including Halifax-class sustainment work and iAOR)

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