The NSPS shipbuilding strategy: what are the risks?

Ken Hansen’s article “Can the shipbuilding strategy withstand and economic recession?” on 15 October 2011 makes sobering reading.  Unfortunately, the announcement of the two National Shipbuilding Procurement Strategy ‘winners’ does not make his scenario any less possible.  Now that the NSPS has determined the two winning yards, the Arctic Offshore and Patrol Ship Project can begin preparation for awarding a contract for construction.  It is easy to get swept up in the euphoria in Halifax that the Shipyard won the big shipbuilding prize of the NSPS, but work still needs to be done to renew the fleet.

So, looking at Ken’s scenario, what are the risks and opportunities with this procurement strategy?  What do we know, what do we know that we don’t know, and what don’t we know?  We can plan for the first two; it is impossible to plan for something you don’t know will happen.  The economic situation is a known problem and Ken has painted a good picture of a possible consequence if shipbuilding has to compete with other federal priorities.  Let me posit a few other risks to the renewal of the naval fleet using the first two of the three categories I introduced earlier.

Known risks: Known but unquantifiable risks:
The cost and availability of materials Recession impact on Government priorities
The cost and availability labour Design or construction delays or disruption
Price, which affects the number of ships purchased or the capability of ships Contract Performance
Future change in the naval mission or threat causing cancellation of projects or future contracts

The known risks presented will be considered within the NSPS framework and the consequence of the risks arising will generally affect the resources available for ship construction.  If labour or materials are cheaper than anticipated, price drops and the navy may benefit with additional ships from the AOPS contract.  If labour or materials are more expensive costs rise increasing the price of ships.  A shortage of trained personnel could have the same increasing effect, as shipyards pay more for workers or the navy and contractors compete for a small pot of trained engineers and technicians.  Playing musical chairs with workers may give the illusion of activity, but this program of work will need new workers, and that takes time and costs money.  If the government and one of the shipyards cannot agree on an acceptable price for a particular ship project, would the government remove it from the NSPS program?  These risks are all known because to a greater or lesser degree they can be quantified by the parties involved or third parties and action can be taken now to mitigate them, such as training programs for new workers, for example.

The known but unquantifiable risks still exist, but they exist now within an NSPS context.  In fact, the NSPS has introduced new risks from the monopoly-monsopony (single supplier-single customer) context of the relationship.  Ken laid out one possible effect of recession on Government and how that may affect shipbuilding.  Others exist.  The cancellation of ship projects or future projects affects the underlying assumption of continuous build.  The NSPS contract is a long-term commitment to negotiate with a single yard for specific work.  What happens if the requirement changes?  How will the NSPS achieve its hoped-for economic benefits, and the navy its ships, if the continuous shipbuilding program suddenly has a few gaps?  The navy could also suffer if delay or disruption in a shipbuilding project begins to affect follow on work under the NSPS.

Contract performance could also cause similar problems if one or both parties lose confidence and trust in the other.  Nevertheless, opportunities also exist.  With a long-term relationship with two shipyards, the Government will be in a much better position to manage this sector of the economy.  It will also be in a much better position to estimate the price of ships once the rolling build program is up and running.  It is much easier to buy a product if the approximate price is understood before hand.

Now that the celebration is over, we must accept that the playing field has changed, but the game has not really started.  If ships for the navy and coast guard are the goal, a successful continuous shipbuilding program is a necessary precondition.  A continuous building program will go a long way to reducing many risks and maximizing opportunities, but we should not be naïve and think that risk has disappeared.  We already know the destructive effect that a boom and bust cycle has caused for shipbuilding and the national industrial infrastructure supporting the navy. A boom and bust could still occur if forces contrive to delay or affect the plan for continuous work.

For Halifax Shipyards, the winner of the largest share of the planned procurement, the first work will be the Arctic and Offshore Patrol Ship.  Work will not commence at the yard until a contract is signed, but indications are that negotiations will need to begin soon for a planned delivery date for the first ship in 2015.

As a postscript, the advantage of the NSPS context for prognosticators is that once the AOPS contract is signed, we should have a strong indication when the contract to build the next generation of Canadian warships, the Canadian Surface Combatant, will need to be in place to maintain a continuous stream of shipbuilding work.  Only time will tell….