Warship Project At Risk as Shipbuilders Threaten to Withdraw from Bidding

By: David Pugliese, The National Post 

Canada’s multibillion-dollar project to buy a replacement for its frigates is so poorly structured that Italian shipbuilder Fincantieri, one of the world’s largest shipbuilders, has warned the Liberal government it won’t bid unless changes are made.

A number of other ship designers are also considering backing out because of the problems plaguing the project to spend more than $26 billion on a new fleet of Canadian Surface Combatants.

Italian shipbuilder Fincantieri sent Procurement Minister Judy Foote a detailed outline of why the acquisition process is in trouble, warning that, “Canada is exposed to unnecessary cost uncertainty,” according to the Oct. 24, 2016, letter obtained by Postmedia.

There is also a belief in industry circles that the federal government is favouring a design from the British firm BAE, which is offering the Royal Canadian Navy the Type 26 warship.

Foote had previously said only proven warship designs would be considered to reduce the risk of problems. But the Liberal government retreated on that and will now accept a Type 26 bid, even though the vessel has not been built yet, which is causing other shipbuilders to reconsider their bids.

Preparing a bid for the Canadian Surface Combatant or CSC will cost companies between $10 million and $20 million. If they see their chances of winning a contract as slim, firms could decide not to enter the competition, further narrowing the choices for the Liberals on a new vessel for the navy.

The government announced Oct. 27, 2016, that Irving Shipbuilding, its prime contractor, had issued a request for bids from companies on the design of the new ships.

The firms have until April 27 to provide those bids, which must not only include the design but details of teaming arrangements with Canadian firms.

Irving Shipbuilding Inc.A keel unit of an Arctic Patrol Ship is lowered into place at Irving Shipbuilding’s Halifax Shipyard in an undated photo.

In its letter to Foote, Fincantieri pointed out that the current structure of the procurement limits the role of the warship designers to simply providing engineering and design services to Irving, which will then build the vessels. In return for that small role, the companies are being asked to provide valuable intellectual property to their designs, access to their established supply chains and transfer technology to Irving and Canada.

In addition, the warship designers have to provide a warranty on the integration of technology into their designs, even though they are not responsible for buying that equipment.

The project as it is structured now leaves little incentive for warship designers and builders such as Fincantieri, which has designed and constructed ships for the navies of Italy, the United Arab Emirates, India, Iraq, Malta and Malaysia.

“If the current proposed procurement approach is retained, then it will be very difficult for Fincantieri to obtain approval to bid from its board,” the company warned Foote.

Fincantieri declined to comment on the letter.

Fincantieri instead proposed to Foote that a fixed-price competition be held, with the winning shipyard building the first three warships, complete with Canadian systems, and delivering those to Irving. The ships would then be run through evaluations and after any technical issues were worked out, Irving would begin to build the remaining 12 vessels.

That way work on the new ships could get underway faster, the vessels will be fully tested, and the risk to the Canadian taxpayer significantly reduced. The “winning team can be held accountable for the overall performance of the finished ship,” Fincantieri added.

“Companies are also given incentive to make long-term investment in Canada because they can expect to get a fair return from the greater value of their work responsibility,” Foote was told.

The minister responded by suggesting Fincantieri approach Irving with its concerns. Foote’s response further worried the Italian shipbuilder as it had believed the Canadian government and its ministers were ultimately responsible for the program and the spending of billions of tax dollars.

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Foote’s spokeswoman Annie Trépanier did not comment specifically on Fincantieri’s letter but repeated previous government comments about how industry was consulted extensively and those shaped the final documentation used to solicit bids. An independent fairness monitor is also involved in the process, she added.

Irving spokesman Sean Lewis said the contract for the CSC design will be awarded to an existing warship design that best fits the requirements of Canada’s navy. “I can assure you that the procurement process is being conducted in a way that ensures that all bidders are treated equally, with no unfair advantage given to any individual bidder, and under observation of an independent fairness monitor,” he added.

The surface combatants will be the backbone of the Royal Canadian Navy’s future fleet. The project has seen repeated delays, with the navy at one time expecting the ships by 2015. The first vessel is now planned for sometime in the early 2020s.

Initial cost estimates for the project were set at $26 billion. But that could potentially rise to more than $40 billion, depending on the number of ships constructed.