Canada's navy to get 5 or 6 Arctic ships, not 8

Seven years after announcing a plan to buy Arctic patrol ships for the navy, the Conservative government announced Friday it has signed a contract guaranteeing delivery of five of the vessels, with the possibility of a sixth, if the shipyard can pull it off.

The announcement put an end — finally — to the pretext the government could buy as many as eight ships within the $3.1-billion budget set in 2007 for the Arctic/Offshore Patrol Ship program.

The questions of cost and quantity have been alive for years, and doubts about the program's ability to produce the required number of vessels without blowing the budget have featured in reports by the Parliamentary Budget Officer and the auditor general.

• Irving reaches shipbuilding deal with federal government

Friday, the government effectively bowed to those criticisms, announcing the program's $3.1-billion cap had recently been expanded to $3.5-billion to ensure a cash buffer for at least five, if not six, ships.

At a technical briefing, a senior government official said the contract marked a milestone in the government's high-stakes, $35-billion National Shipbuilding Procurement Strategy.

Rebuilding industry to rebuild the fleet

The strategy was launched in 2010 as a co-operative program with industry to provide access to qualified Canadian shipbuilding in rebuilding the fleet.

The government says it will create 15,000 jobs over 30 years.

The program includes new supply ships and warships for the navy, new patrol vessels and an icebreaker for the Coast Guard, and the Arctic/Offshore Patrol Ships to be built by Irving Shipbuilding in Halifax.

Observers have paid close attention to this program, seeing it as a barometer of success for the government's strategy.

"The fact an AOPS contract has been agreed is significant," the official said. "But there is still risk ahead."

"The AOPS is a new design and a new class of ship being built in a brand new shipyard. These factors bring risks with them," the official said.

"The challenge is to find the appropriate balance between risk and cost certainty."

6 ships or 8? How about 5?

That risk is already manifest in the re-evaluation of the number of ships to be delivered. The initial plan called for as many as eight vessels, and the program was designed to deliver between six and eight. Friday's contract with Irving Shipbuilding guarantees only five ships, but there is strong desire for a sixth if Irving can get it done.

Kevin McCoy, the president of Irving Shipbuilding, said Friday the company believes it will build that sixth ship.

"We expect to deliver six ships for the Royal Canadian Navy," he said.

Stated broadly, the contract includes costs for the ship and the shipbuilding, and a separate fee charged by Irving to account for profit. If Irving keeps its costs down enough to get the sixth ship built, the fees go up. If the costs go up, the fees go down.

"We are highly incentivized to reduce spending so that our overall profit fee is maximized," McCoy said.

But Irving's pursuit of low costs and higher profit has led to concern in some corners that subcontractors are being pushed to aggressively reduce their own bills to win Irving business.

McCoy said Irving is applying that tough approach inside its operations, too.

"We have brought in outside advisers over the last five months alone, twice, to challenge us internally on our costs and our assumptions," he said.

"We are doing the same approach with our subcontractors for the budget and to deliver six ships here."

A senior government official Friday praised that approach.

"We have been equally heavy-handed with Irving Shipbuilding on its costs," the official said. "There was a lot of back and forth about making sure that we could drive costs as low as absolutely possible and this is done in making sure we can maximize the amount of the budget that can be spent on ships."

Production to start just before election

Production is expected to begin in September, one month before the Oct. 19 date fixed for the next federal election.

The first ship is due in 2018, with subsequent ships following at nine-month intervals. However much effort is being spent on cost containment, defence economist Dave Perry believes paying too high a price at the front end of the patrol-ship process will likely lead to lower costs and more secure delivery later on.

The more costly and arguably more important combat-ship program will follow at Irving's Halifax shipyard.

That program is worth roughly $25 billion for some 15 new combatant ships to replace the Halifax-class frigates and Iroquois-class Air Defence Destroyers.

"If you take the approach that is not a $3-billion project in isolation, but $30-billion worth of work, then I think it makes an awful lot of sense to potentially spend a bit more money up front on the small project to get everyone up to speed, to make sure the workforce is in place," Perry said.

"NSPS is not just a shipbuilding strategy, it's a strategy to build the industry to build the ships."