Next big ship deal on tap: Maintenance contract will be worth billions

Source: The Chronicle-Herald
Author: Paul Mcleod
Published: November 7, 2013

Ottawa is starting the ball rolling on the next big shipbuilding lottery that could ultimately be more lucrative than the national shipbuilding program.

The $35-billion figure for that program only covers designing and building Canada’s next generation of combat and non-combat vessels.

Once they are built, they will need routine maintenance and upgrades. That work is contracted out for years at a time under what’s called an in-service support contract.

Ottawa is going big by merging the in-service support contract for the Arctic-offshore patrol ships being built in Halifax and the joint support ships being built in British Columbia.

No one knows exactly how much the contract will be worth, but low-end estimates are 60 per cent of the sticker price.

However, several experts interviewed by The Chronicle Herald expect maintenance costs to be at least double the cost of building the ships.

Either way, it means billions of dollars will be spent maintaining the ships over the expected 35-year length of the contract.

Experts are split on whether Irving Shipbuilding Inc. and Seaspan Marine, who are building the ships, have a leg up on getting the in-service support contract or are at a disadvantage.

There are two holders of big support contracts in Canada: SNC Lavalin, for dozens of smaller navy ships, and Babcock Canada Inc., for submarines.

The winner of the upcoming bid would be in charge of maintaining the newly constructed vessels for a period of eight years, and then the contract could be renewed for five-year periods.

It’s too early to bid because the ships are still years away from being built. But this week, the government took the first steps toward putting together a working group, which will evaluate prospective bidders, by issuing a call for people to join the group that it will assemble during the next year.

But as the work progresses, some are questioning if the high cost of the ships could threaten to kill the program.

Jack Granatstein, a historian and Canadian Defence and Foreign Affairs Institute fellow, has publicly warned that a future government could easily balk at the cost of the program and shut it down.

He expects the $35-billion program to double in cost when support contracts are factored in.

And since Canadian shipyards can’t compete against foreign shipbuilding powers like South Korea, he expects the industry to atrophy as it lives off the support contracts.

“We’re recreating the wheel when we’re never going to make wheels that are really efficient,” he said.

Others accuse Granatstein of inflating the cost of building the ships in Canada.

Defence security consultant Ian Parker said the most thorough data comes from a Defence Department study that shows Canada is only paying a seven per cent premium for building the ships at home.

Along the same vein, an Industry Canada study showed buying abroad was likely to increase maintenance costs.

While Parker supports the idea of rebuilding a national shipbuilding industry, he says “politics and preventionism” will prevent Canada from ever selling a warship to the United States or a European country.

He also agrees with the assessment that a future government could pull the plug.

In fact, it might not even be a question of pulling the plug. A future government may have to step in to save the already-underfunded program, said Dan Middlemiss of Dalhousie’s Centre for Foreign Policy Studies.

“The money just isn’t there at the moment,” he said. “That’s not saying that future governments might not pony up the money, but the way things are going, it’s doubtful at best.”

Retired commodore Eric Lehre said Irving and Seaspan might be at a disadvantage when it comes to bidding on the in-service supply contract because during the shipbuilding bid process, the government promised to spread the remaining work out to other companies that did not win the $25-billion combat package or the $8-billion non-combat package.

(Another $2 billion in smaller contracts was divided among several other outfits.)

Whether that applies just to shipbuilding or includes future in-service support contracts is open to interpretation.