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Ship contract changes queried
Ottawa assumed up to $500 million of liability from Irving Shipbuilding and Seaspan Marine Corporation during shipbuilding negotiations, according to a new report by federal auditor general Michael Ferguson.
The report also found the government did not budget enough money to build the planned 15 surface combat ships in Halifax.
Auditors were generally positive about the way the procurement is being managed, but raised questions about a “significant change” to the deal.
When Irving and Seaspan won the two major shipbuilding contracts in the fall of 2011 they assumed the financial risk of upgrading their shipyards.
But the government later approved what’s known as a backstop provision, which means Ottawa will pay infrastructure costs if a contract is cancelled or delayed.
These backstop agreements were not mentioned in the original bid documents.
“The changes to the umbrella agreements create a risk that Canada will have to reimburse shipyards for infrastructure upgrades,” says the report.
The backstops are based on total upgrade costs of $300 million for the Halifax shipyard and $200 million for the Vancouver shipyard.
If a contract for one type of ship is delayed, cancelled or reduced, the government would reimburse a shipyard through a formula based on how much money the company had spent on upgrades.
Without the backstop, Irving and Seaspan would have had to start upgrades before building contracts were signed.
Government officials say the shipyards would likely have had grounds to sue if government cancelled the program at that point. The backstop is a way of quantifying and sharing the risk, said the officials.
Auditors said the backstop deals could be viewed as reasonable, but that there was no sign they were anticipated during the bidding process.
Treasury Board rules prohibit negotiating significant post-bid changes, but auditors could not determine whether those rules apply in this case.
Irving’s upgrades are being paid for by a $260-million loan from the province of Nova Scotia that will be completely forgiven as long as Irving hits hiring targets.
Federal officials said the backstop was designed so Irving could not receive federal compensation for costs that were actually covered by the province.
However, between the backstop and the provincial money, Irving is well guarded against being hit with upgrade costs. Seaspan is financing its own shipyard upgrade.
Auditors also found that the government’s own projections show they have not budgeted enough money for the next generation of surface combat ships.
The plan is to replace Canada’s three destroyers and 12 frigates with 15 new warships at a cost of $26.2 billion.
A government project team analyzed this and found there wasn’t enough money to build 15 ships once inflation and other costs increases are factored in.
Ottawa has continued to say it will build up to 15 surface warships. Officials said Tuesday it is too early to say if that number will be reduced.
According to the report, the government is looking at cutting costs by using the same hull for the next generation of both frigates and destroyers.
However, it’s not clear whether that plan will result in ships that meet the navy’s requirements.
The audit said it is too early to predict how many ships could be built. Designs are not finalized and construction isn’t scheduled to start until 2020.
But auditors warn that politicians will be faced with the choice of approving more money or buying fewer or less capable ships.
“Canada may not get the military ships it needs if budgets are not subject to change,” said the report.
Auditors found that the Arctic-offshore patrol ships, which are scheduled to start being built in Halifax in 2015, have had their capabilities scaled back but are not currently over budget.
But the report says the program is bumping up against its $3.1-billion budget and there is little room for error.
“To remain within the current budget, either the ships’ capability may need to be once again reduced or the number of ships to be built may have to be reduced,” says the report.
Though the government has publicly stuck to the line that it is buying six to eight Arctic-offshore patrol ships, internally they have already given up on building more than six.
The audit did praise the government for setting up a bidding process that was efficient and free of political influence.
Source: The Chronicle Herald
The report also found the government did not budget enough money to build the planned 15 surface combat ships in Halifax.
Auditors were generally positive about the way the procurement is being managed, but raised questions about a “significant change” to the deal.
When Irving and Seaspan won the two major shipbuilding contracts in the fall of 2011 they assumed the financial risk of upgrading their shipyards.
But the government later approved what’s known as a backstop provision, which means Ottawa will pay infrastructure costs if a contract is cancelled or delayed.
These backstop agreements were not mentioned in the original bid documents.
“The changes to the umbrella agreements create a risk that Canada will have to reimburse shipyards for infrastructure upgrades,” says the report.
The backstops are based on total upgrade costs of $300 million for the Halifax shipyard and $200 million for the Vancouver shipyard.
If a contract for one type of ship is delayed, cancelled or reduced, the government would reimburse a shipyard through a formula based on how much money the company had spent on upgrades.
Without the backstop, Irving and Seaspan would have had to start upgrades before building contracts were signed.
Government officials say the shipyards would likely have had grounds to sue if government cancelled the program at that point. The backstop is a way of quantifying and sharing the risk, said the officials.
Auditors said the backstop deals could be viewed as reasonable, but that there was no sign they were anticipated during the bidding process.
Treasury Board rules prohibit negotiating significant post-bid changes, but auditors could not determine whether those rules apply in this case.
Irving’s upgrades are being paid for by a $260-million loan from the province of Nova Scotia that will be completely forgiven as long as Irving hits hiring targets.
Federal officials said the backstop was designed so Irving could not receive federal compensation for costs that were actually covered by the province.
However, between the backstop and the provincial money, Irving is well guarded against being hit with upgrade costs. Seaspan is financing its own shipyard upgrade.
Auditors also found that the government’s own projections show they have not budgeted enough money for the next generation of surface combat ships.
The plan is to replace Canada’s three destroyers and 12 frigates with 15 new warships at a cost of $26.2 billion.
A government project team analyzed this and found there wasn’t enough money to build 15 ships once inflation and other costs increases are factored in.
Ottawa has continued to say it will build up to 15 surface warships. Officials said Tuesday it is too early to say if that number will be reduced.
According to the report, the government is looking at cutting costs by using the same hull for the next generation of both frigates and destroyers.
However, it’s not clear whether that plan will result in ships that meet the navy’s requirements.
The audit said it is too early to predict how many ships could be built. Designs are not finalized and construction isn’t scheduled to start until 2020.
But auditors warn that politicians will be faced with the choice of approving more money or buying fewer or less capable ships.
“Canada may not get the military ships it needs if budgets are not subject to change,” said the report.
Auditors found that the Arctic-offshore patrol ships, which are scheduled to start being built in Halifax in 2015, have had their capabilities scaled back but are not currently over budget.
But the report says the program is bumping up against its $3.1-billion budget and there is little room for error.
“To remain within the current budget, either the ships’ capability may need to be once again reduced or the number of ships to be built may have to be reduced,” says the report.
Though the government has publicly stuck to the line that it is buying six to eight Arctic-offshore patrol ships, internally they have already given up on building more than six.
The audit did praise the government for setting up a bidding process that was efficient and free of political influence.
Source: The Chronicle Herald
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