With the Joint Support Ship (JSS) and Coast Guard patrol vessels on hold, talk around Parliament Hill of building Canadian ships in foreign shipyards, and the economy in a tailspin, one might wonder about the future of an industry – with between 5000 and 7000 direct employees – that has seen its share of troughs and peaks. Despite the recent upheaval, Vice Admiral Peter Cairns (Ret’d) sees reason to be optimistic, albeit with some caveats. The president of the Shipbuilding Association of Canada, who served 37 years with the Navy, including duty as Commander of Maritime Command, spoke with associate editor Chris Thatcher.
How would you assess the current health of military shipbuilding in Canada?
On a scale of one to ten, I would say about five. Our history in Canada is to build ships at 20-year intervals and then everyone has a difficult time trying to figure out why the industry does not have some of the expertise it needs. We repeat this cycle of bringing in expertise to build up the yards, but once the building is over, we start laying everybody off. We’ve been in one of those down cycles, but the building programs are coming, starting with the Joint Support Ship.
Does Canada have a clear maritime policy?
We have a shipbuilding policy, which from a government point of view says that Canadian government ships will be built in Canada. Is there a maritime strategy? Not to my knowledge. It’s something we think the government should have, but we don’t appear to have one.
What would you like to see?
We believe the build-in-Canada policy is essential. But we would like to see industry and government sit down and figure out how to do this more logically so that we have a “continuous build” strategy – a more coherent strategy that eliminates the peaks and valleys. It comes down to this: does the government feel it needs to have a shipbuilding industry in the country to build its military ships? We, of course, think they do. With our large maritime frontier, and where we are situated in the world, I don’t think we can get away with not having a shipbuilding and ship repair industry. Now, it does not have to be large – we don’t have to take on Korea – but it has to be sufficient to meet our own domestic needs. There are enough ships in the Navy, Coast Guard and commercially that we could probably keep a modest but efficient shipbuilding industry ticking over if we replaced those fleets in a more calculated manner.
When the JSS was cancelled, the rumours rang loud and clear that it could be built cheaper offshore. We don’t believe it can. Material costs are the same everywhere. Though some countries are more automated and may have higher productivity at the moment, some also have larger wage packages then we do. The skill sets are equally high here; they just have more of them in some other countries. One of my biggest concerns with building offshore, apart from the loss of shipyard jobs is the downstream lifecycle cost. When you build a ship, say in Europe, you put European equipment in it. As an example, spare parts – the pumps, the seals, the shafts, the steel, the electrics, the plumbing etc, all the things that Canadians would normally supply on a day-to-day basis – now come from Europe with the added cost that entails over the life of the ship. In my view it still makes sense to maintain our own industry. We don’t need a big slice of the world pie. We can find our niche areas.
We’ve seen two contracts delayed recently because of cost. Do you have a sense yet of the impact of the financial crisis on those and future contracts?
This cash and credit crunch is not positive for anyone. Before the crisis, commodities were sky high and prices of copper and steal were going up exponentially – it is, in part, why the bidders on the JSS could not give the government the ships it wanted at the price it desired, and as a result, were found noncompliant. Now the bottom appears to be falling out of the commodity market, it’s also falling out of the credit market. And every company needs to have access to credit, particularly if you’re bidding on government vessels. You need to be able to access financial guarantees to win contracts. It is very worrying, and nobody knows exactly how it will affect industry, other than the fact that it may be very, very difficult to get access to credit. I might add that key suppliers are also affected, not just shipbuilders. The government requires the contractor to assume all the risk in a project and the insurance costs will certainly rise dramatically.
This has been a growing concern in industry for sometime. Is there a better way to reallocate or share risk?
Government has got to share some responsibility for risk. This industry is trying to get back on its feet and government can assist by assuming some of the financial risk. People may ask why? We haven’t been given 20 years of government subsidies like many of our competitors. We’re on a very un-level playfield. Also, these ships are probably the most expensive and complex things the government builds in its own country, and in some cases they’ve never been built before – the JSS has never been built by anyone in the world. There is an associated risk with that, and I think the government should shoulder some of it.
Because this industry has been characterized by feast and famine, do we have the shipyards and the capability to deliver now?
We have a significant amount of capability. But we also have to have some investment. The investment will come if the contracts come. Companies will invest once they have something solid to invest in. And the companies that we are talking about are stable. It’s not as though everybody has red on their books and is willing to build at any cost just to get the contract. That’s not happening. You can’t make a lot of profit in this business. Up until this crash, commodities were 60 percent of the ship’s cost, so that left you with 40 percent for all the rest – labour, profit, taxes.
What about people and the expertise? Has much of that migrated elsewhere or retired?
We have good technology and good technicians in Canada. They may be distributed in the wrong places, like the Alberta tar sands – the high wages they pay are a challenge for everybody. So it may be difficult to lure them back, but I think it can be managed. We will have to import some process engineers and the like, but the bid teams, on the JSS for example, are structured to allow that transfer of technology and people from other countries. The technology and what is learned will stay, even if the people eventually return home.
Given how dormant military shipbuilding has been, are there concerns about innovation? The team approach to contracts might mitigate some of that, but do you run the risk of losing industrial innovation over time if this pattern does not change?
I suspect you might. Canadians have always been innovative, but these projects are structured to reduce innovative thought and ideas. Some people may argue with me, but the government is so risk averse that it’s not willing to try anything that isn’t proven. We’re not likely to see someone inventing a new widget – that could be a world-beater – and putting it on these ships because of the risk-aversion process.
You’ve mentioned eliminating the peaks and valleys of the build cycle. Has there been any discussion of sharing the “wealth” amongst the yards to contain build-in-Canada related costs?
That’s one of the next big problems that has to be addressed. Government policy right now is competition for everything. The question is, is there enough work to have it competed all the time, and in the present manner? If you reduce the peaks and valleys, is the volume such that you can keep four or five builders alive bidding on projects? Or do you do what most other nations have done – and this is where the hard questions are – by assigning types of projects to specific builders. There are no answers to those questions yet, but I see this as something that has to be addressed because there are only a few shipyards that can build the Navy’s ships. You can’t keep yards alive hoping there is a future. There has to be some clear expectation of what the market is going to be. The government is articulating an Arctic policy, so the actual maritime requirements are getting larger, not smaller. We used to be the world’s experts in icebreaking technology. There is no reason why we could not be again.
You’ve called the procurement process too long, laborious and complex. Is that still the case from your perspective?
I think it’s in bad shape. It’s designed to produce ships for the Navy and the government while looking after taxpayers’ money, and all of those are good. But every time something goes wrong it gets a new set of regulations. Over time it has become incredibly ponderous and difficult. So the question is, can it be cleaned up and made neater? Ultimately, it’s the customer – the Coast Guard and the Navy – who suffer because they do not get the ships they need in a timely manner. The U.S. Littoral Combat Ship (LCS), despite it’s complexity, innovation and cost escalations, from idea to sailing took six years. The JSS, from idea to where we are now, and we are not in contract yet, has already taken about 13 years. There has to be a way of doing it better.
You have both Navy and industry perspective on this. How should the process be changed?
I would like to see the yards pre-qualified so that you don’t have to go through a costly song and dance to prove you’re capable. Also, the size of the requests-for-proposal are gigantic. There has to be some elimination of red tape across the bureaucracy. That said, one has to remember that in departments like PWGSC, Industry Canada and the Navy, they haven’t built anything like this in a long time. Consequently, the people who administer these programs and write these documents are also feeling their way and learning as they go. Everybody is inexperienced in this game.
Is there a way to collaborate and share limited resources?
I think there is. There is lots of talk about working together. But you can’t partner until you both accept risk and reward. Partnerships with government, in my experience, have always been one-sided: we consult, then Government tells you what to do and you do it.
Is industry involved early enough in the process?
I don’t think so. It’s not because industry and government do not want it. It can be difficult because, depending on the amount of involvement, a company can eliminate itself from bidding on the program. That said, I think everybody has to get involved much earlier just by virtue of the fact that there is much less experience now. I sense that this is an important item for government too.
Is there reason to be optimistic these days?
I think it’s a time to be very optimistic because the Navy and the Coast Guard need new ships. Now is also the opportune time to streamline the system. All it takes is the will to do it. I’m far more optimistic than I was 10 years ago, that’s for sure. The industry can respond, it always has.
An interview with Peter Cairns