NATIONAL SHIPBUILDING PROCUREMENT STRATEGY STRATÉGIE NATIONALE POUR L’ACQUISITION DE CONSTRUCTION...

NATIONAL SHIPBUILDING PROCUREMENT STRATEGY STRATÉGIE NATIONALE POUR L’ACQUISITION DE CONSTRUCTION NAVALE

Naval ShipbuildingNaval Shipbuilding

In CanadaIn Canada

Why Canada needWhy Canada needss a National Shipbuilding a National Shipbuilding Procurement StrategyProcurement Strategy

November 2009November 2009


2

OutlineOutline

• Naval Shipbuilding in Canada

• The Challenge of Geography

• The Challenge of Cost

• Strategic Requirement of Federal Fleet


3

Earliest Shipbuilding – New FranceEarliest Shipbuilding – New France

• The first sailing ships launched at PORT-ROYAL, Acadia, in 1606

• In 1732 a shipyard was established on Rivère St-Charles (Québec)

• The 10 merchant vessels built there that year may be termed the true start of the industry as a commercial enterprise in Canada

• Warships were also ordered for the French navy, including a ship-of-the-line mounting 70 guns built in 1750 Undated photo of building fishing

schooners

(Library and Archives Canada/C-8599)


4

Earliest Shipbuilding – Great LakesEarliest Shipbuilding – Great Lakes

• In 1677-78 a single-decked barque of 10 tons, and 3 other vessels were built on Lake Ontario

• In 1679, the GRIFFON, 20 m 60 tons was built on the Niagara River

• Between 1732 and 1745 a number of vessels were built, 6 for Lake Ontario and one for Lake Superior

• The WAR OF 1812 generated a flurry of shipbuilding. The ST LAWRENCE, built in Kingston in 1814, was a 3-decker mounting 102 guns, and was larger than Nelson's Victory

Construction of the "Cutty Sark", named for the famous British clipper, in the 1880s at Saint John in the 1880s

(Wilson Studios)


5

Early Shipbuilding in CanadaEarly Shipbuilding in Canada

• The heyday of Canadian shipbuilding was in the years 1840 to the early 1880s, when wooden sailing ships ruled the waves

• In the peak shipbuilding years during the 1870s Canada produced 500 to 600 vessels per year, making her the fourth largest producer of ships in the world

Ships of Saint John

(New Brunswick Museum)


6

The Great Naval DebateThe Great Naval Debate

• In the lead up to Canada acquiring a Navy, there were two trains of thought:

– Some favoured direct contributions to the British fleet

– Others preferred their own standing naval forces

• Within Canada, a great division over composition with the government favouring a force which could patrol both coasts and, in time of war, could support the Royal Navy

• Others argued that nothing more than an armed Fisheries Protection Service was needed


7

Best IntentionsBest Intentions

• The fleet plan of 1910:

1 Boadicea Class

Medium Cruiser

4 Bristol Class

Light Cruisers

6 River Class

Destroyers


8

Reality Sinks In …Reality Sinks In …

“Its original plan, much championed, was that this new fleet

would be entirely built in Canada and ready in three years. But the

Canadian shipbuilding industry had atrophied since the 1870s1870s.

Canada might still have made the transition to new technology,

[but] by 19101910 she possessed no yard capable of building large and

modern ships, especially such specialized ones as cruisers. Not

for the last time in Canadian naval history, the government realized

that, to build a fleet at home, it first had to build a shipyard.”

Marc Milner, Canada's Navy: The First Century, p. 24


9

WW I, interwar, and WW II Ship Projects WW I, interwar, and WW II Ship Projects Project Time-frame Shipyard(s)

Submarines Assembled for RN (10) Early 1915 Canadian Vickers

Trawlers Battle Class (12) Jun – Sep 1917 Various

Minesweepers Fundy Class (4) 1938

Collingwood Shipyards LtdBurrard Dry Dock Co. Ltd, Vancouver

Morton Engineering and Dry Dock Co, QuébecYarrows Ltd, Esquimalt

Corvettes Flower Class (64) 1940-41 Great Lakes, Up. St. Lawrence & BC

Minesweepers Bangor Class (24) 1940-41 Great Lakes, Up. St. Lawrence & BC

Corvettes Flower Class (6) 1940-41 Great Lakes, Up. St. Lawrence & BC

Minesweepers Bangor Class (10) 1940-41 Great Lakes, Up. St. Lawrence & BC

Destroyers Tribal Class (8) 1940-48 Halifax Shipyards Ltd (4)

Corvettes Flower Class Mod (36) 1942-43 Great Lakes, Up. St. Lawrence & BC

Frigates River Class (45)(Plus Ships for Export)

1941-44

Canadian Vickers, MontrealDavie Shipbuilding & Repair, Lauzon

Morton Engineering and Dry Dock Co, QuébecYarrows Ltd, Esquimalt

Minesweepers Algerine Class (12) 1942-44 Port Arthur Shipbuilding Company Ltd


10

Cold War Ship ProjectsCold War Ship Projects

1Six were transferred to the French Navy in 1954. These ships were replaced by six of the same name in 1956-1957.

Project Time-frame Shipyard(s)

Destroyer Escorts

St. Laurent Class (7) 1950-1957 Halifax Shipyard (4)

Davie Shipbuilding (2)

MIL (Sorel) (3)

Canadian Vickers (4)

Burrard Drydock (4)

Victoria Machinery Depot (2)

Yarrows (1)

Restigouche Class (7) 1953-1959

Mackenzie Class (4) 1958-1963

Annapolis Class (2) 1960-1964

Minesweepers Bay Class (20)1 1951-1957

Davie Shipbuilding (5)

MIL (Sorel) (2)

Kingston Shipbuilding (1)

Canadian Vickers (1)

Victoria Machinery Depot (4)

Yarrows (2)

St. John Shipbuilding (2)

Port Arthur Shipbuilding (3)

Auxiliary Oiler Replenishment

Provider Class (1) 1958-1963 Davie Shipbuilding

Hydrofoil HMCS Bras d’Or (1) 1960-1968 MIL (Sorel)

Auxiliary Oiler Replenishment

Protecteur Class (2) 1966-1969 St. John Shipbuilding

Destroyers Iroquois Class (4) 1969-1973Davie Shipbuilding (2)

MIL (Sorel) (2)

Note: Other projects included the hydrofoil Bras d’Or and Icebreaker Labrador.


11

Post-Cold War Ship ProjectsPost-Cold War Ship ProjectsProject Time-frame Shipyard(s)

DestroyersTRUMP Iroquois Class

(4)1991-1994 Davie Shipbuilding

FrigatesHalifax Class

(12)1987-1996

St. John Shipbuilding (9)

MIL Davie (Lauzon) (3)

Patrol VesselsKingston Class

(12)1995-1999 Halifax Shipyard (12)

Joint Support Ship ? ? ?

Arctic Offshore Patrol Ships

? ? ?

Canadian Surface Combatant

? ? ?


12

UNCLOS CLAIMS AREA

TERRITORIAL WATERS

EXCLUSIVE ECONOMIC ZONES

Canada’s Ocean EstateCanada’s Ocean Estate


13

Federal FleetFederal Fleet

• Navy– Generate and maintain combat-capable, multi-purpose maritime

forces for employment both at home and abroad

• Department of Fisheries – Canadian Coast Guard– Directly supports the DFO mandate to ensure safe and accessible

waterways for Canadians and plays a key role in the sustainable use and development of Canada’s oceans and waterways

• Transport Canada - Marine Atlantic– Provide and maintain an essential line of communication

between Newfoundland and Nova Scotia


14

The ChallengeThe Challenge• GoC has announced fleet renewal projects for DND and DFO

worth approximately $43B in acquisition costs, but two ship acquisition processes were terminated prematurely in 2008

• Canadian Shipbuilding Industry has had no substantial large/complex new build orders since the mid-1990s creating a “boom/bust” cycle

• As a result, Canadian shipyards have not been able to maintain appropriate modern industrial infrastructure, design capacity, marine supply lines, and assured, cost-effective skilled labour

• Although the “Build in Canada” Shipbuilding Framework was intended to create a robust Canadian shipbuilding capability, this has not been achieved with the “boom/bust” outcome of sporadic Federal Fleet ship acquisition projects


15

Ship Project Cost & BudgetShip Project Cost & Budget – A Model – A Model

Note:The red line represents the available budget.

UncertaintyUncertainty

(CY $)(CY $) AmmoAmmo

TrainingTrainingSparesSpares

InfrastructureInfrastructureProjectProject

ManagementManagementOfficeOffice

EscalationEscalation

ForeignForeignExchangeExchange

Communications/Relationship With

Industry

State ofState ofShipyardsShipyards

LabourLabourUncertaintyUncertainty

WarrantyWarranty

LimitationLimitationOfOf

LiabilityLiability

LiquidatedLiquidatedDamagesDamages

InsuranceInsurance

SHIPSSHIPS(CY $)(CY $)

CompetitiveCompetitiveProcessProcess

Etc.Etc.


16

It’s a VUCA World – In Security & EconomyIt’s a VUCA World – In Security & Economy(Volatility, Uncertainty, Complexity and Ambiguity)(Volatility, Uncertainty, Complexity and Ambiguity)

• Nobody could predict the economic situations of the past year:– Natural Disasters:

• Earthquake in China drives spike in escalation of price of steel

– Piracy:

• Somalia's status as a haven for pirates has created unprecedented ship seizure activity which is driving cargo shipping to avoid the Suez Canal and navigate around Africa, adding millions of dollars to the cost of materials and commodities

– Economic Bail-outs:

• Multi-billion dollar bail-outs in most industrialized nations, unexpectedly triggered by bad mortgages in the US, have created a world recession and market uncertainty for years to come.

– Energy Prices:

• $147 a barrel last year, to below $33 a barrel recently, with its impact on steel and other shipbuilding material manufacturing

– Interest Rates:

• Jan 03 - 3.0%; Jan 04 - 2.75%; Jan 05 - 2.75%; Jan 06 - 3.75%; Jan 07 - 4.5%; Jan 08 - 4.25%; Jan 09 - 1.0%; Jan 10 - ?


17

Overseas Markets & Components Cost UncertaintyOverseas Markets & Components Cost Uncertainty

Source: Peter Kiewit Sons Co., Canadian Shipbuilding Competitiveness, 14 July 2008

Major Component Cost Index

60

80

100

120

140

160

180

200

Jan-

90

J ul-9

0

J an-

91

J ul-9

1

J an-

92

J ul-9

2

J an-

93

J ul-9

3

J an-

94

J ul-9

4

J an-

95

J ul-9

5

J an-

96

J ul-9

6

J an-

97

J ul-9

7

J an-

98

J ul-9

8

J an-

99

J ul-9

9

J an-

00

J ul-0

0

J an-

01

J ul-0

1

J an-

02

J ul-0

2

J an-

03

J ul-0

3

J an-

04

J ul-0

4

J an-

05

J ul-0

5

J an-

06

J ul-0

6

J an-

07

Ind

ex (

Jan

uary

20

02

=1

00

)

Canadian Consumer Price Index AHTS UT 722L 18,000 BHP

Aframax / Crude (110,000 DWT) Handysize / Product (35,000 DWT)

4,500 TEU / Gearless

European New-build Cost Index

60

80

100

120

140

160

180

200

Canadian Consumer Price Index AHTS UT 722L 18,000 BHP

Aframax / Crude (110,000 DWT) Handysize / Product (35,000 DWT)

4,500 TEU / Gearless


18


UNCERTAINTYUNCERTAINTY

Major Major ComponentsComponents

MarketsMarkets

LabourLabour


MaterialsMaterials Raw materials, basic components

Inability to predict future escalation

Major components are purchased in the global marketplace. Timing of purchase is a major cost contributor

Global market activity will dictate costs regardless of where ships are built. Big impact on currency

Labour uncertainty and mobility have large effect on both cost and schedule

Insurance, bonding, price of financing, etcRiskRisk


19

Cost Escalation Rates for Battle Force ShipsCost Escalation Rates for Battle Force Ships1950-20001950-2000

Ship Type Annual Growth Rate (%)

Amphibious Ships 10.8

Surface Combatants 10.7

Attack Submarines 9.8

Nuclear Aircraft Carriers 7.4

Source: 2006 RAND Report: Why Has the Cost of Navy Ships Risen?


20

The ImpactThe Impact


(CY $)(CY $)AmmoAmmo







Industry



WarrantyWarranty


LiabilityLiability


InsuranceInsurance



Etc.Etc.

The red line represents the available budget

- Budget established too early – costs changed

- Inflation cost of materials

- Government imposed risks

- Shipyard inefficiency risks


21

Strategic Requirement - RenewalStrategic Requirement - Renewal

Notes: 1. Involves DND ships, and all CCG ships of 1,000 tons or more.2. While the funding for the DND vessels has been approved within the

Canada First Defence Strategy, only 5 out of 29 CCG vessels forecasted for renewal have been allocated funding

DND/CF DFO/CCG

Ship Class Announced Build # Ship Class Announced Build #

Joint Support ShipCanadian Surface CombatantArctic Offshore Patrol Ship

Totals

315

6-8

24

315

6-8

24

Polar IcebreakerMedium IcebreakerHigh Endurance Multitasked VesselMedium Endurance Multitasked Offshore Oceanographic Science Offshore Fisheries Science VesselOffshore Patrol Vessel

1

13

5

243823

7

29


22

A Case for Load-LevellingA Case for Load-Levelling

Federal Fleet New Build Demand

0

1000

2000

3000

4000

5000

6000

20

10

20

12

20

14

20

16

20

18

20

20

20

22

20

24

20

26

20

28

20

30

20

32

20

34

20

36

20

38

Year

Per

son

-Ho

urs

of

Wo

rk

(x10

00)


23

Halifax Shipyard(ISI)Employment – Low:

600 PYEmployment – High:

1,700 PYEmployment – Current:

450 PY

Kiewit Offshore ServicesPeter Kiewit & SonEmployment – Low:

2-300 PYEmployment – High:


300 PY

Newdock – St John’s Dockyard

Seaway Marine & IndustrialUpper Lakes Marine and IndustrialEmployment – Low:


400 PYEmployment – Current:

200 PY

East Isle Shipyard(ISI)

Vancouver Shipyard(WMG)

Victoria Shipyard(WMG)

Hike Metal Products

Allied Shipbuilders

Nanaimo Shipyard

Davie YardsEmployment – Low:



900 PY

AF Therriault & Son

Vancouver Drydock Company(WMG)

Major yards in Red

Source: Industry Canada, Shipbuilding and Industrial Marine: Industry update, 11 March 2008

Groupe Maritime Verreault

Shipbuilding Capacity in CanadaShipbuilding Capacity in Canada

Washington Marine Group (WMG):Employment – Low: 200 PYEmployment – High: 950 PYEmployment – Current: 800 PY


24

What Our Allies Have DoneWhat Our Allies Have Done• The practices of eight allied countries were examined. All have

some type of alliance or strategic relationship with their shipbuilding industry

• The majority of our allies believe that to protect their long-term national security interests, they must have the capability to construct, sustain, repair and upgrade their naval vessels

• The work available has caused many to rationalize to a single supplier

• Canada is unique in its approach, relying predominantly on a competitive, project-by-project, market-driven procurement process to acquire vessels

• The international environment dictates the need for Canada to establish a long-term procurement strategy similar to the ones employed by our allies


25

Strategic RequirementStrategic Requirement

• Government commitment to a long-term shipbuilding strategy would provide an opportunity to:– Take advantage of a long-term planning horizon– Provide more predictable work for industry through:

○ Elimination of Boom/Bust

○ More optimal load-levelling

– Allow for incremental infrastructure improvements– Address Labour requirements in order to:

○ Stabilize, grow and renew workforce

○ Maximum benefit of labour learning curve

– Rebalance risk between industry and Government

• Thus, could enable redevelopment of world class shipbuilding capability once in place


26

An Integrated SolutionAn Integrated Solution

(CY $)(CY $)AmmoAmmo



Industry



WarrantyWarranty


LiabilityLiability


InsuranceInsurance


RiskRe-balancing

(Cost: )

Procurement Strategy(Shipyards [NSPS]; Early engagement of implementation contractor;

Better cost estimating; Use of economies of scale) (Cost: )


Note:The red line represents the entire budget

Etc.Etc.







27

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