Ottawa was warned about Arctic patrol ships' high price

Two days before signing a contract to begin work on a $3-billion shipbuilding project, the federal government was warned by its own advisers that the contract was overpriced — but signed it anyway.

The warning was contained in a previously confidential independent review of the initial phase of the government's plan to spend $3.1 billion on a fleet of Arctic offshore patrol ships, known as AOPS.

The report, by International Marine Consultants of Vancouver (IMC), was commissioned by the Department of Public Works and obtained by CBC News under the Access to Information Act. It says the number of man-hours quoted by Irving Shipbuilding of Halifax was "very high and considerably more than we would have expected for a shipbuilding program for vessels of the size and complexity of the AOPS."

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Although the report was delivered on March 5 of this year, the government signed the contract at Irving's Halifax shipyard two days later, on March 7 — leaving no time to do anything about the report's findings.

"Their job is to protect the taxpayers' interest and clearly they missed the boat here," said the NDP's defence critic, Jack Harris, MP for St. John's East.

"It's pretty disturbing to hear that we've got a process that the government itself set out — of having an independent review — and then didn't take seriously the recommendations that were put there."

'A bit like the Three Stooges buying a car'

The government's ambitious shipbuilding program has been touted as a model of business-like efficiency, following a string of procurement fumbles involving fighter jets, trucks and helicopters.

Even so, the consultants' report on the Arctic ships says that earlier drafts of its findings, delivered in January, failed to produce substantive changes in the planned contract. Irving did respond with some amendments on Feb. 25, but the final report in March said the estimates remained "very high."

"The (amended) February 25 submission has only a very nominal reduction in costs on the part of ISI (Irving Shipbuilding Inc.) and does not reflect any consideration by ISI of the comments in our earlier report that the overall man-hours for this Contract Definition Phase are very high compared to the actual recorded man-hours and costs of earlier Canadian Government building programs (the Type 11 Radisson-class and Type 1200 Henry Larsen-class Icebreakers) and to a number of comparable sized and much heavier and higher-powered commercial icebreakers that have been built in Canada."

The report found some of the costs for integrating the electronic systems and engines were "extraordinarily high," adding that IMC "recommends that further explanation be sought."

Those estimates were based on "informal quotes" from two U.S. defence contractors — Lockheed Martin, which is doing the systems integration, and General Electric, which is producing the engines. IMC said these costs were not significantly changed in response to its recommendations, and seemed high considering that the systems were not custom-made but off-the-shelf or commercial grade.

"It is recommended that Canada requests further details of … the makeup of the associated costs before committing to these two items," IMC advised.

"In the case of the Command and Surveillance System, the costs of the Integrator (Lockheed Martin) will far exceed the costs of the actual hardware, all of which is specified as having commercial interfaces."

The actual design of the ship is also being subcontracted offshore, to OMT of Denmark, whose cost estimate IMC describes as "quite generous."

Liberal Joyce Murray, the MP for Vancouver Quadra who is her party's defence critic, said that "hardly a day goes by that there isn't yet another debacle with this government's military procurement."

"It's a bit like the Three Stooges trying to buy a car."

'No expertise in government'

Some details — including dollar figures and man-hours — were redacted in the version of the IMC report released to CBC News. A spokesman for Public Works Minister Diane Finley said the minister was not available for an interview.

Both the government and Irving responded with written criticisms of the IMC report. One, from the Department of Public Works, said "the comparisons made of man-hours and costs are not valid," and the other, from Irving Shipbuilding, called them "inaccurate." Both said the Arctic patrol ship program is well-managed and will create jobs.

IMC's report was overseen by its president, Tom Ward, a veteran of the industry who was in charge of building the Canadian Coast Guard icebreaker Henry Larsen. Ward declined to comment on his report or to say why it had so little impact. But shipbuilding experts say that the moribund state of the industry in Canada means that government officials know little about shipbuilding — so expert, third-party reviews of such massive contracts are essential.

"There's no expertise in government," said business professor Michael Whalen of Mount Saint Vincent University in Halifax.

"Who's going to look at those issues and the proposals from the Irvings and their subcontractors? We don't have anybody, because they haven't worked in that area for 30 or 35 years. So we're going to go out to third-party consultants who do have that kind of expertise and can advise us. Are we getting value for money? Are we getting the right ship for the money?"

'Not a complicated vessel'

The government's March 7 announcement committed $288 million to a "contract definition" phase in which Irving will complete the design of the new Arctic patrol ships and prepare to actually build them — which it will then do under a separate contract. It's not yet clear how many ships Ottawa will get for its $3.1-billion budget, although the original plan was for at least six and as many as eight. Most experts doubt it will get that many.

IMC's report also undercuts official claims that the planned Arctic patrol ships are more expensive because of their complexity. It says the specifications do not call for breaking thick winter ice or for advanced weaponry.

"The AOPS is not a complicated vessel," says the report. "It has a relatively low ice class, a well tried AC-AC diesel electric propulsion system and fairly pedantic accommodation and on-board services and equipment.… It is not fitted with sophisticated weaponry and even its naval situation room outfitting is limited and not intended to be functional on a year-round basis."

The consultants' report compares the Arctic patrol ships with an Alaskan research ship, the Sikuliaq, recently designed and built in Wisconsin for the U.S. National Science Foundation for $200 million. The report says the Sikuliaq, "though smaller than the AOPS vessels ... is ice-capable and has more outfitting and systems than the AOPS due to its research capabilities. The ship is being built to high commercial standards using advanced outfitting techniques.… The entire cost of designing and constructing the Alaska Vessel is less than the cost of just the Contract Definition phase of the AOPS."

But Ken Hansen, a former naval officer now at Dalhousie University in Halifax, said the report's comparison of the patrol ships with the Sikuliaq is not fair, because Marinette Marine, which built the Alaskan ship in Wisconsin, already has a suitable shipyard up and running, whereas Irving must first build one, using a $300-million loan from the Nova Scotia government.

"It's an unfair comparison because Marinette Marine is a well-established, completely up to date, modernized company with a consistent flow of work going through its yards."

'Way more to produce in Canada'

Other experts say that doesn't change the fact that it would be much cheaper to buy offshore.

"It means basically that it really costs way more to produce in Canada," said Jean-Christophe Boucher, a professor at MacEwan University in Edmonton who studies military procurement. In this case, he says, the IMC report shows "that some tasks are over-staffed and cost way more they should."

One reason for that, IMC argues in its report, is Irving's "flawed" method for estimating man-hours. Instead of adding up each task to produce a total, IMC says, Irving began with an estimated total of 30 months and divided that into tasks. However, IMC says, "no explanation has been presented on why 30 months has been determined to be the appropriate length" of time for the preparatory work — at the end of which the building of the first ship has not even begun.

By contrast, it says, the Sikuliaq was designed and built in just 40 months, from contract signing to sea trials.