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What is best value for the Canadian Surface Combatant?

The National Shipbuilding Procurement Strategy (NSPS), a $38.3 billion program to renew the aging fleets of the Royal Canadian Navy and Canadian Coast Guard, is designed to meet a multitude of federal government needs. These include sovereignty projection, participation in international coalitions and meeting international commitments, and ensuring respect for Canadian law in our own waters.

The NSPS, however, is also becoming an action plan for economic investment.

One of the strategy’s commitments to the Canadian shipbuilding industry is to build the vessels in Canada. This commitment wants to relegate the old “boom and bust” cycle to the scrap heap by ensuring a sustainable shipbuilding program of steady work that allows the yards to retain an experienced workforce (a struggle in the past) while providing the RCN and CCG with the vessels they need to do their missions.

In short, NSPS will be the biggest defence program in Canadian history. To ensure full value for taxpayer dollars, a “best value” procurement approach has been touted by the government as the preferred approach to this program.

When Irving Shipbuilding won the combatant package and Seaspan Shipyards won the non-combatant package, they agreed to not only spend their own resources to upgrade their facilities, they also committed to national “value propositions.” This included ensuring a sustainable marine industry – leading many to assume other smaller shipyards would also benefit from the down flow of these large programs, and that workers would receive training and incentives to enter the workforce. Interestingly, the competition did not include a cost evaluation.

The crown jewel of the NSPS is the Canadian Surface Combatant, a project valued at $26 billion for 15 ships that are expected to be the new workhorses of the RCN. The CSC is intended to replace three Iroquois-class destroyers long past their expected service life and a fleet of 12 Halifax-class frigates to be retired by the end of next decade. The new fleet would become the major surface component of maritime combat power for Canada, operating independently or as part of a Canadian Task Group to provide the government a range of options for any number of maritime missions.

Amidst the recent federal budget announcements, including the deferral of $3 billion, questions swirl about the impact on the NSPS and what it might mean to shipbuilding programs. To date, there appear to be no direct effects, although the CSC program has landed squarely in the bulls eye of the new Public Works and Government Services (PWGSC)-led Defence Procurement Strategy, which outlines new industrial requirements and enhanced value propositions for economic development.

So what does “best value” mean to the various stakeholders in the NSPS process? And, for the purposes of this article, what does best value mean for the construction of the CSC, the centerpiece of the NSPS program?

For the RCN, the end user of the CSC, best value might mean the most replacement vessels possible for their very specific requirements. The navy has developed a Statement of Operational Requirements which they will expect industry to achieve. It will require cost-benefit tradeoffs during the design cycle whereby the RCN and the government, leveraging the shipyard (Irving) and the ship designer, will help get the most “bang for the buck,” recognizing that not all requirements will be affordable – requirements may have to be adjusted to acquire the optimal number of vessels. These tradeoffs, normal for complex warship construction, will be difficult but necessary to achieve a final design.

But they will come with challenges. As a senior naval officer recently asked: “Where is the ‘sweet spot’ between capability and cost?” How do you find the balance between quantity and quality of ships, as well as ensuring lowest long-term in-service support costs, all while maximizing the federal investment in the navy? It is a hotly debated question at the moment.

There are many cost issues to contend with, some of which are being discussed, others which remain cloaked in uncertainty. The RCN high level requirement is 15 combatants in two variants: an Area Air Defence and Task Group Command and Control (AAD/TG) variant and a General Purpose (GP) variant. In short, two types of ships, with multiple areas of commonality across platforms, and one shared hull design.

The exact number of ships to be built is speculative at this point as there are too many variables to even guess at a rough order of magnitude. The Crown and the RCN have only the most rudimentary idea of what those high level requirements will cost without an RFP or cost indicators for non-recurring engineering available. (It’s worth noting that fewer and fewer federal websites or public engagements discuss the number of ships. Fifteen, the number that was once the cornerstone of the NSPS competition, has been replaced by buzzwords about maximizing Canadian industrial participation, increased economic development, and shifting the focus from developing a war-fighting navy to job creation programs.)

However, cost is the driving issue, regardless of how best value is defined, because the buying power of the government will be the most critical factor to achieving success.

Associated with that are other key cost factors such as the importance of adhering to a shipbuilding schedule and keeping labour costs low to facilitate maximum value and, more importantly, to encourage competition in the future international market.

In commercial shipbuilding, best value is simply defined as the product that provides the owner the highest technical merit, or quality, at the lowest possible price. Consequently, commercial shipbuilders take a “design and build to cost” approach and deliver the quantities ordered based on the budget and schedule provided. They will use innovation, sub-contracting and competition at all levels of production to deliver best value.

Naval shipbuilding under NSPS should be no different. Owners (the taxpayers) have a budget limitation that must be respected. To achieve best value, the shipyards must be provided a target number of ships to build, and then deliver the quantities of ships as defined in their assigned work packages, through build strategies that include competitive pricing beyond the component level to the block and even ship level, if that is what is needed to meet their commitments.

This is based on an assumption that Canada meets its commitments in the packages brought to the shipyard, and that the shipyards are held accountable to achieve cost and performance targets. Both the government and the shipyards must be tied to this effort through the Umbrella and Construction Agreements and held to comply. Only then can best value be achieved through naturally occurring value propositions driven by competition, as happens in commercial shipbuilding. Otherwise it’s a guessing game.

For the other government stakeholders, there are different considerations for “best value.” For PWGSC, the government’s contractor for this program, a best value competition requires a fair, open and transparent process – open not only to all Canadian industry, but also to “offshore” industry willing to invest in Canada. This ensures the RCN can benefit from the best technology available in the world. PWGSC must also now provide a “challenge” function to validate the RCN’s requirements, ensuring all are necessary before they are delivered to industry.

For Industry Canada, best value means applying the new Industrial and Technology Benefits policy, which will reward competitors for bringing key industrial capabilities (KICs) to their teams, and conducting evaluation of bids that must incorporate regional distribution of work and Canadian content value.

Finally, Treasury Board will have to be vigilant to ensure that all government policies, plans and procedures are followed and that expenditures are managed in accordance with government regulations.

All of this to say, the discussion about value for money is not linear. It’s not just about military requirements, and it’s not solely about the defence procurement policy. Best value can only be achieved in a competitive environment when the purchasing party and the supplier community are put into a scenario where, in the end, the ship designs meet the combat and government requirements, within a recognized budget.

Best value for Canada is a complex and balanced equation that includes capability, price, jobs, technology, regional distribution of benefits, and competitive fairness. It’s hard to say at this stage in the process if NSPS, with all these demands, can be all things to all people. However, the goal remains to get “most bang for the buck” for the navy, leveraging as much economic impact as possible and developing a sustainable marine industry.
Louise Mercier is a senior defence procurement associate with Hill & Knowlton.

Author: Louise Mercier (from Feb/Mar 2014)

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