Lion’s share of combat ship contracts to go outside Halifax: defence management expert

OTTAWA – The Halifax yard that won the shipbuilding jackpot this week stands to hold on to only 20 per cent, or $5 billion, of the $25-billion contract, said one expert and one insider.

Part of the balance will be spent in Canada, but upwards of $15 billion may go offshore.

The Irving-owned shipyard in Halifax won a three-way competition to build the Canadian navy’s next troop of warships. But of all the components these types of ships require, Halifax will primarily benefit directly from building the hull and installing parts built elsewhere, said Ugurhan Berkok, adjunct chair of Defence Management Studies at Queen’s University in Kingston, Ont.

A source with one of the bidders confirmed the lion’s share of the contracts will be going to a “tier one partner” – a company the shipyard will subcontract to build parts such as guns, missiles, launchers, big engines and navigation systems, Berkok said.

It is still too early in the process to say where all the components of the ships will be built, but Lockheed Martin, an American company, has been rumoured to be trying to partner with the Halifax yard.

The only certainty right now is that Halifax won the contract to build 21 combat ships over the next 30 years. Irving Shipbuilding and Ottawa still have to settle an umbrella agreement outlining the process. That is expected to be completed by the end of this calendar year, at which point negotiations will start on individual contracts. Work is expected to start on the ships in a little more than a year.

“But it’s important to understand that Halifax, out of the $25 billion, can only expect a few billion,” Berkok said. “The hull of the ship, to cut the steel and weld it, that’s about 10, maybe 15, per cent of the value of the ship. Then the chairs, lifeboats, piping, the electrical wiring, and other small parts, perhaps there are some industries in the Halifax area that will benefit. But we’re looking at 20 per cent — or 25 at most — of the total value.”

Berkok said that approximately half the value of a warship lies in the combat system — guns, missiles and launchers, for example.

“None of these can be produced in Halifax or anywhere else in Canada,” Berkok said. “So no other regions of the country will directly get that 50 per cent of the value.”

Many elements of the second-largest component of the ships, the navigational system, aren’t produced in Canada either, he said.

“If Lockheed Martin is the partner, they can build the items where they see fit, then bring them back to Canada to be installed,” Berkok said.

The shipyard, however, has already agreed to Canada’s Industrial and Regional Benefits Policy.

That policy guarantees that for every dollar a company is given to spend outside Canada, it has to generate one dollar worth of business inside Canada. The new business does not have to be related to shipbuilding.

If Lockheed Martin becomes the subsidiary company, it could build some components at its Canadian factories, said Vice Admiral Peter Cairns, president of the Shipbuilding Association of Canada.

“A lot of this will come and be built or assembled in Canada. And it’s the shipyard that employs people to install the parts,” he said, hazarding a guess that a majority of the contract’s value will stay in Canada. Where in Canada this money will go, however, he couldn’t say.

“No one knows for sure. These are really our best guesstimates,” he said, pointing to some companies in Quebec and Ontario that built parts during the government‘s ship acquisitions in the 1980s and 1990s. Some of those companies, which received at least half the funding in that procurement, are still equipped to build parts of the ships, he said.

“That’s the beauty of this program, when they say the program runs straight across the country, it really will,” Cairns said.

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