Canada’s $9.3-billion frigate program is under siege
Boats that may not float
Canada’s $9.3-billion frigate program is under siege
It is longer than a football field, accelerates from a dead stop to more than 30 m.p.h. within two minutes and carries enough electronics and weaponry to hunt down and destroy almost any military target. Canada has never before produced a warship like HMCS Halifax, the first of 12 patrol frigates being built as part of the largest military construction contract in Canadian history. But so far, the vessel, which last week was undergoing a routine maintenance check in Saint John, N.B., has won more attention for its construction delays and design problems than for its stateof-the-art technology. Now, Maclean’s has learned through a federal access-to-information application that delays on delivering the first three ships led Ottawa to withhold $8.1 million in payments to the program’s lead contractor, Saint John Shipbuilding Ltd., owned by New Brunswick’s powerful Irving family.
Commodore Dennis Reilley, who oversees the Canadian navy’s $9.3-billion frigate program, says that the criticism surrounding the program is exaggerated. He adds that it is a “classic case of a few problems overshadowing a remarkable achievement.” Still, with the program troubled by cost overruns and a bitter legal battle between two of the main contractors, its difficulties are far from over. The first six frigates are already more than two years behind schedule. At the same time, Saint John Shipbuilding and Quebec City-based MIL Group Ltd., which has a subcontract to build three frigates, have launched a series of suits and countersuits against each other because of conflicts over the program. The legal battle will likely keep lawyers for the two companies arguing in courts well into the next century.
But in the end, Canadian taxpayers may bear any added costs from the chaotic course of the 14-year-old program. For one thing, Maclean ’s has learned that Saint John Shipbuilding is trying to renegotiate provisions in its contract with Ottawa in order to get the federal government to assume responsibility for any cost overruns incurred by subcontractor MIL. Overruns related to the frigate program forced the Quebec subcontractor to the brink of bankruptcy in July, but it was saved by a $363-million Quebec and federal government rescue package. In that case, federal officials privately say that their hands were forced. Said one senior bureaucrat: “What would people say if we ended up with three unfinished ships? There wasn’t any choice.”
Despite the setbacks, the key participants in the program are optimistic that it will eventually be a success. Said Saint John Shipbuilding chairman James Irving: “Remember that this program was started from scratch. We have met this challenge in Canada and feel that HMCS Halifax is a tribute to the efforts made by all concerned.” In fact, both Irving and the armed forces’ Reilley publicly insist that the project will ultimately meet its budget.
But more than half of the total $9.3-billion budget has already been spent—and only the Halifax, the prototype for the 11 other ships, has been delivered. The Halifax took four years to build, was delivered two years late, still produces unexplained excessive noise—which could complicate its primary assignment of tracking submarines—and has problems with its weapons software. Even so, naval officials claim that the cost per vessel will fall dramatically as more ships are delivered. Said Reilley: “The project will be on schedule and on budget by the time the 11th ship is being built.”
Most military experts predicted at the outset that the program would face problems. For one thing, no Canadian shipyard had launched a warship since 1971. Politics also complicated the undertaking. When the defence department ordered an initial six frigates in 1983, it awarded the contract to Saint John Shipbuilding, but only after the company agreed to subcontract construction of three ships to Versatile Vickers Inc. of Montreal to provide work for Quebec shipyard employees. MIL, which is 65 per cent owned by the Quebec government, became a player four years later when it took over that $389-million subcontract. The same year, the government of Brian Mulroney ordered an additional six frigates, to be built by the Irvings.
For its part, Saint John, whose shipyard employs 3,500 people on the project, has encountered a steep learning curve. To overcome its technological gap before laying the keel for the Halifax in 1987, the company bought the latest in shipbuilding equipment and hired engineering consultants from around the world. Even with that expertise, the project turned out to be more complex than anticipated. Tens of thousands of changes had to be made in the ships’ designs. As well, Saint John executives acknowledge that they made mistakes, such as storing the first shipment of steel outside—where it rusted.
But the Irving company also blamed its subcontractors for delays. Locked into fixed-price agreements, a number of those companies lost all their profits as costs soared. Indeed, two companies, Kanata, Ont.-based Leigh Instruments Ltd. and Wagner Engineering Ltd. of Vancouver, declared bankruptcy largely as a result of their involvement in the frigate project. Meanwhile, in 1988, Saint John cancelled a $68-million subcontract with MIL Systerns Engineering Inc., MIL’S Ottawabased engineering subsidiary, to design the frigates. That action led MIL to launch a $20-million suit against Saint John, which replied with a $100million countersuit. -
Bad relations between Saint John and MIL seemed to worsen as the first ships fell further behind schedule. By the end of 1989, MIL’S liabilities exceeded its assets by $295 million— mostly, MIL executives say, because of spiralling costs resulting from thousands of design changes demanded by Saint John. The Irving company responded to the delays in June, 1990, by launching a $1.7-billion suit against MIL and some of its affiliated companies. The suit claimed that MIL’S failure to provide the necessary resources to its shipyards had put the frigate subcontract behind schedule and $260 million over budget. Saint John’s lawyers asked the courts to declare MIL insolvent. MIL, in turn, sued Saint John for unspecified damages, claiming that the New Brunswick company had breached its contract by changing the vessels' designs 40,000 times—and by delivering project equipment and material late.
Meanwhile, as the myriad lawsuits remain in pretrial stages, construction of the ships has fallen increasingly behind. In September, 1990, Saint John announced a further six-week delay in completing the Halifax, then already 10 months late. Under a provision in the original 1983 contract, Ottawa assessed a $2.7-million penalty against Saint John for that setback—later adding $5.4 million in penalties when the Vancouver and Ville de Quebec were not delivered to the navy on time. (Both ships are now scheduled for 1992 launches, while six others are currently under construction.)
At the same time, the conflict between Saint John and MIL reached a climax. In June, Irving officials informed the Quebec yard that its subcontract had been cancelled, claiming that MIL simply did not have the funds to finish construction. That action threatened the jobs of 1,500 MIL employees. But the following week, MIL won a temporary court injunction preventing Saint John from terminating the contract. The injunction has been extended a number of times and now stands until January, 1992. And on July 11, in the same week that the federal government announced a cap on federal spending, Ottawa and the Quebec government announced that they were giving MIL $363 million to cover various cost overruns. Two of the three frigates that MIL is to build are half-finished, while one is just under way.
In the future, Ottawa may have to cover more of MIL’S costs. Last summer, representatives from Saint John launched negotiations with MIL and Ottawa to draft a new arrangement under which the head contractor would not be liable for MIL’S cost overruns. Saint John has proposed an arrangement where MIL would have a contract directly with Ottawa, rather than a subcontract under Saint John.
Hesitant federal officials privately fear that if they do not agree to Saint John’s terms, the federal government may become the target of a legal challenge by that company seeking compensation for any future cost overruns incurred by MIL. Indeed, under a federal access-to-information request, Maclean ’s discovered that even as the major players in the program are negotiating, the federal supply and services department has ordered dozens of bureaucrats to assemble about two million pages of documents to prepare a potential legal defence. “We are compiling a storage system for Canadian Frigate Program documents to help us address any claims from Saint John Shipbuilding,” confirmed Sandra Crossfield, a spokesman for the department.
Now, although James Irving insists that his company will still make money on the project, officials who have worked closely with Saint John privately say that it has only a slim chance of turning a profit. Moreover, the outlook for the shipbuilding industry is not promising. With the global industry severely depressed, Canadian shipyards now suffer from nearly 50-percent excess capacity. Indeed, neither Saint John nor MIL has any big, new contracts to keep their yards busy when the frigate contracts are finally completed. But for now, just achieving that goal—on time and on budget—would be a remarkable achievement.
JOHN DeMONT in Halifax with KEN RUBIN and GLEN ALLEN in Ottawa
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