Bounded as it is by three oceans Canada must defend more coastline than any other country. In peacetime Canada must protect its maritime approaches from smuggling, trafficking and pollution, and also provide life-saving search and rescue as well as opportunities for scientific research. We must also be in a position to act internationally to meet our commitments and protect our interests.
Constabulary forces, such as the Coast Guard or the RCMP are not sufficient to achieve all these goals. Historically nations have relied on Navies to fulfill many of these roles and Canada is no different.
In order to maintain its navy Canada will be recapitalizing much of the naval surface fleet under the National Shipbuilding Procurement Strategy (NSPS). Most of the promised $38 billion for the program is earmarked for 15 Canadian Surface Combatants (CSCs)
Also known as the Single Class Surface Combatant Project, this procurement project is designed to replace the Iroquois-class and Halifax-class warships in the period beginning 2018–2020.
These ships are being procured in the wrong way.
On January 12, 2012, it was announced that the Government of Canada had reached agreements with Irving Shipbuilding Inc. and Vancouver Shipyards Co. Ltd. This set the course for construction of Canada’s combat, and non-combat, surface fleets under the National Shipbuilding Procurement Strategy (NSPS).
The strategic sourcing arrangements, called umbrella agreements, with each of the selected shipyards have been signed. Irving Shipbuilding Inc. has been selected to build the combat vessel work package. The combat package includes the Royal Canadian Navy’s CSC ships. Individual ship construction contracts will now be negotiated with the respective shipyards.
This creates a situation in which Irving Shipbuilding becomes the sole supplier to the Canadian Government, who in turn becomes the sole customer for the product. (No one reasonably believes that Irving will ever sell a major warship to any other country.)This is called a bilateral monopoly. In a bilateral monopoly there is both a monopoly (a single seller) and monopsony (a single buyer) in the same market. Most economics texts would advise that this is an extremely complex relationship and one that is highly resistant to any kind of downward price pressures.
An alternative procurement strategy can be found in the Canadian Patrol Frigate (CPF) procurement program, which can be viewed in retrospect as a reasonable successful program which procured the desired ships in the desired quantities within the desired price envelope.
The strategy used to procure those frigates is referred to as Most Capable Design (MCD). It entails an open competition for capability and price.
Under an MCD strategy Canada would fund or partially fund two teams to come forward with a ship design and combat system in competition with each other. Under the terms of an MCD contract, each team would have to deliver a complete proposal that would include ship performance, delivery timelines, industrial participation undertakings, commercial terms and, perhaps most important, price.
Unfortunately it would appear that Canada intends to use a variant of a procurement option referred to as Most Qualified Team (MQT).
This strategy would see Canada make its selection on the basis of how “qualified” a given team is. The decision-making process would be similar to that used in selecting the lead NSPS shipyards, and criteria for what’s “qualified” may be identified through arbitrary benchmarks.
This means that there would be no competitive commercial pressure brought on key members of the selected team. As the shipyard is already in place, all the pressure to cut costs would be downloaded to those bidding to supply goods and services to the prime contractor. The winners of those bids are less likely to invest in Canadian industry due to cost pressures. This makes in turn the MQT approach less likely to develop a sustainable marine industry, one of the primary goals of the National Shipbuilding Procurement Strategy.
The method to be used by the NSPS to enable the delivery of these shipbuilding projects in a timely manner includes a requirement for the selected shipyards to achieve a "Target State". The Target State is defined as the level of productivity and capacity needed to build Canada's ships efficiently. In this case, a third-party expert, First Marine International, will measure the shipyards' progress towards achieving this Target State. It is hoped that when the shipyards reach Target State, they will have the capability to build vessels at established international benchmark productivity levels.
Contrast that approach with that of the Australian government. In June of this year they announced that in light of the current low productivity of shipbuilders involved in the Hobart class Air Warfare Destroyers (AWD) program they would conduct a competitive tender process limited to Spanish and South Korean shipyards for the construction of two replacement replenishment vessels. It was even suggested that if Australian yards did not get their act together they would not even be considered for the upcoming frigate replacement program.
It is hard to imagine a Canadian government, of any party, putting anything like this kind of pressure on a Canadian shipyard. But until the buyer, in this case the Canadian taxpayer is in a position to bargain openly and responsibly with the supplier Canadians will continue to pay too much for too little.
Canadian Surface Combatant (CSC)
THE DUAL MONOPOLY DILEMMA
The Canadian Surface Combatant: Is Canada About To Launch A Flawed Procurement Strategy?
Backgrounder on the National Shipbuilding Procurement Strategy (NSPS) - Year 2: A Status Update November 2013
Australia’s Next Supply Ships: Serious about Success