Arctic ships face 'increased cost of ownership' in separate deal

Murray Brewster
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The Canadian Press

Canada's new patrol ships will cost more to maintain if National Defence signs a long-term service contract for the mini-icebreakers while the boats are under construction.

Last summer, Defence Minister Peter MacKay, pictured in this file photo, announced a $9.3-million contract with Halifax Shipyard for preparatory work, including a review of ship design and specifications. Ottawa has signed a preliminary construction contract with Irving, which owns the shipyard.

[OTTAWA, ON] — Canada's new Arctic patrol ships will cost more to maintain if National Defence signs a long-term service contract for the mini-icebreakers while the boats are under construction.

The ships are at least two years behind schedule, and could fall further behind if contract talks with the Irving shipyard building them hit a snag.

An internal briefing for Julian Fantino, former associate defence minister, noted last fall the project's financial uncertainty, including the price tag for building up to eight warships.

"Actual ship construction costs (are) unknown until negotiations are concluded," said the September 2011 slide presentation.

The presentation and associated documents were obtained by The Canadian Press under access to information.

The ships, announced in 2007, were projected to cost $3.1 billion to build and $4.3 billion to maintain over their 25-year life.

A revised schedule in the briefing says the first ship now is to be delivered in 2015, two years late, but the date was predicated on a contract in place with the shipyard by last spring.

Other internal documents show delay caused by the project's inclusion in Ottawa's larger shipbuilding strategy has driven up construction costs by a minimum of $40 million.

National Defence was prepared to go to Treasury Board last fall to ask for a more project money just for the definition phase, the documents show.

Last summer, Defence Minister Peter MacKay announced a $9.3-million contract with Halifax Shipyard for preparatory work, including a review of ship design and specifications. Ottawa has signed a preliminary construction contract with Irving, which owns the shipyard.

But the presentation to Fantino shows a plan to "separately compete" the multibillion-dollar maintenance contract "after the ships are in build" could drive up costs.

Among other things, the delay in a support contract would "increase the cost of ownership". And design changes that might be incorporated into the system for ease of long-term maintenance won't get done, said the partially censored presentation.

The report doesn't speculate on what the increased cost might be.

A spokesman for Associate Defence Minister Bernard Valcourt says no decision has been made about the support contract.

"Our government is also seeking to find additional ways to provide value to taxpayers," said Terence Scheltema in an email. "Canada is exploring options for in-service support contracts for the Arctic/Offshore Patrol Ships and the Joint Support Ships which could lead to the combination of the (in-service support) requirements of these two vessel classes in one single, cost-effective contract," he said.

"Canada will solicit industry input on the feasibility and potential benefits of this option, among others."

Waiting for a deal also raises a separate concern about the transfer of intellectual-property rights between the builder and the maintainer, an issue that has haunted National Defence in the past, notably with the purchase of its CH-149 Cormorant search-and-rescue helicopters.

The briefing recommended that the maintenance contract be awarded "as soon as possible".

Defence expert Rob Huebert said the concern is legitimate, noting when the Defence Department bought the Cormorants it refused to purchase a data package that contained intellectual property rights to spare parts and equipment.

The absence of that package has led to long delays in getting spares that have to come directly from the helicopter maker.

In the ultra-competitive shipbuilding industry, intellectual property rights have the potential to become a "nightmare where nobody wants to share because competitors have a chance to look at it".

The national shipbuilding strategy was supposed to ease the sting of competition by designating two yards, one to build military ships and the other for civilian-grade government vessels.

Huebert said the government needs to pay attention to the question of support for whatever vessels it builds, and ask itself whether it's a good idea to put contracts out for competition, considering the impact it's having on price.

"I'm wondering if this is a situation where the government is overreacting and drawing the wrong lessons," he said. "The government is being lambasted for the F-35 (jet fighter) for not making it competitive, so it's looking for ways to needlessly introduce competition when in fact this would be a circumstance where it's not needed."

Organizations: National Defence, Canadian Press, Treasury Board Joint Support Ships Defence Department

Geographic location: Arctic, Canada, Ottawa

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