Secrecy surrounds fees paid to Irving for Canada’s multi-billion dollar warships

A drama is unfolding about the affordability of the Canadian Surface Combatant (CSC) program. The Trudeau government is refusing to say how many millions Irving Shipbuilding Industries has been paid as the sole prime contractor for the CSC project to build 15 Navy ships. The uncertain, but still escalating costs may well mean paying Irving whatever severance fees are due.

National Defence spokesperson Jessica Lamirande indicated in recent March emails that “Canada is in contract with ISI [Irving Shipbuilding Industries] as our prime for the CSC build… but their “fees” to act as prime…cannot (be) release (d) as that information… is considered third-party privileged info.” She said so far since 2014 $696.32 million has been spent on five still secret contracts worth $1,022,066,176.63.

According to the Department of National Defence (DND), the overall frigate project costs to acquire the CSC before taxes is between $56 billion and $60 billion. The Parliamentary Budget Office puts the costs with taxes at $77.3 billion. Allan Williams, a former DND procurement Assistant Deputy Minister, pegs the costs, with an added 30 year full-life cycle, at $286 billion.

Back in 2011-12, the Harper government selected Irving Shipbuilding in a secret agreement as the sole shipyard place for the building large military combat vessels. Irving’s predominant CSC role began in 2014 with two contracts worth nearly $20 million to help determine the future CSC design competition and preferences.

Irving’s role as overall controlling sole prime contractor for the design, construction and launching of CSC vessels was quietly announced in January 2015 at a private-defence industry gathering. In July 2015, another $136 million contract was given to Irving to help further define the CSC tasks ahead.
In October 2018, the Trudeau government gave its blessing for Irving to proceed with a Canadian version of the untried Type 26 ship pitched by the BAE/Lockheed Martin consortium. That was met with opposition from competing ship consortiums that already had operational ships to offer that they said were cheaper and faster to build. But the government rejected existing ship designs that could have been delivered in less time and with less risk and costs, and that would be less profitable to Irving.

In defending its decision to reject the existing ship designs, the federal government told CBC News, “As the PBO noted, the other design options that they examined would have ‘more limited’ and ‘modest’ capabilities than our selected design.” The DND statement said, “These reductions would impede the [Royal Canadian Navy’s] ability to execute its assigned roles and missions to keep Canadians safe both at home and abroad.”

In February 2019, Irving received a further $865,682,440.68 contract for the Type 26 design phase. Irving then subcontracted Lockheed Martin to lead the design work. Some $542,100,000 of those funds have already been spent.

However, as the DND spokesperson indicated, there could be “extra costs” in the CSC Type 26 design phase. Those costs will be “greatly influenced by the ship design, and will therefore only be available later in the process, given the design (Type 26) is not yet complete.” The design work and costs are under Irving Shipbuilding Industries’ control and not the Canadian government’s responsibility.

The pre-building construction engineering phase that follows the design phase before actual construction starts could include extra challenges and costs that could delay the projected 2024 target date for beginning construction. The earliest estimate for having one of these ships built and operational is 2031.

Recently obtained Public Service and Procurement Canada (PSPC) records from March 2014 attempted to explain the rationale for government officials choosing to go all-out with Irving as the prime CSC contractor. PSPC’s reasons for doing so were that the Canadian government was not up to the job and had none-to-little experience. The job would take some 25 years or more to complete. By using Irving, officials believed the government risk would be less.

But the government’s lack of experience is no excuse for handing over control of the CSC ship program to Irving for 25-plus years. The risks of which doing so are now becoming clearer with the selection of an untried ship model. All the government was concerned about at the time was that their ill-constructed defence procurement guidelines be followed and that some Canadian companies would benefit down the line.

What makes the government reasoning for entering into the secretive Canadian-Irving prime contract arrangement even more suspect is the underlying deal condition put forward: Irving (ISI) would not “profit on top of profit.” Irving would get to take profit from being both the shipbuilder and the prime contractor while being able to select subcontractors and their pricing. How this profit level would be monitored was not stated. The inference was that PSPC would have in place a monitoring system to check and that excessive profit would somehow be “avoided.”

But a recent PSPC response to my access request found no records existed that examined if Irving was not unduly profiteering from being the prime contractor and shipbuilder in the frigate program. So how much in fees has Irving been receiving as the prime contractor? And is this at what extra overall profit margin? It’s a government secret.

This comes about as the government allowed a private-sector party, Irving Shipbuilding Industries, to run a government procurement project in what is its biggest-ever procurement project.

By choosing the Type 26 ship to be built exclusively at Irving’s Halifax shipyard, the government has placed responsibilities with Irving to design an untested ship model, adding costs, while delaying the delivery of those ships by several or more years.

It has become clearer the government has fallen short in exercising extra vigilance and oversight on the CSC project. The government claims it has oversight risk mitigation tools in place, but a 2021 Auditor General report found their risk tools in the shipbuilding program were very weak.

The escalating costs may mean paying Irving whatever severance fees are due and starting the CSC program from scratch. It would also mean the procurement process returning to common sense factors such as transparency, affordability, and accountability.

Ken Rubin is an investigative researcher reachable at kenrubin.ca.

A version of this commentary was published by The Hill Times on April 19, 2021.