Is Irving Shipyard double-dipping from public funds for the construction of new warships?

Last month, the federal government announced it will give $463 million to Irving Shipbuilding Inc. (ISI) to prepare to build 15 warships known as Canadian Surface Combatants (CSCs) for the Navy.  

Construction on these ships — to replace frigates built in the 1980s — is expected to begin in 2025, five years later than planned when the contract was awarded in 2011.  

According to the Department of National Defence’s most recent estimate, the cost for these ships has grown from $25 billion 12 years ago to an estimated $60 billion. This is still below the number released last December, when a review by the Parliamentary Budget Officer (an independent entity) estimated the cost of the 15 CSCs at $84.5 billion. 

Despite these mind-boggling numbers, the focus of this article concerns the $463 million grant to Irving Shipbuilding, owned by one of the wealthiest families in the country. The question is, “Why should it receive this public funding?”

The official answer

Public Services and Procurement Canada described the purpose of the $463 million in this news release from Aug 8:

This investment will enhance the efficiency of ship construction while improving project costs and delivering best value for Canadians. The enhancements to the shipyard’s infrastructure at ISI will expand and modify their site and facilities at the Halifax Shipyard and supporting facilities at Woodside Industries and Marine Fabricators in Dartmouth. These enhancements were identified during the design phase and from lessons learned during the construction of ships in the United Kingdom and Australia, which are also based on the same Type 26 model as the Canadian Surface Combatants.

The phrase “expand and modify their site and facilities” raised a red flag for investigative journalist David Pugliese at the Ottawa Citizen. 

When the National Shipbuilding Strategy was announced in 2010, one of the conditions for shipyards competing for the lucrative 35-year prize contract was that the company — not the public — would pay for upgrades to infrastructure needed to build the CSCs. 

Pugliese noted the federal government got around that requirement by making an amendment to its “definition contract” with Irving Shipbuilding. 

“The Liberals could have used Irving’s lack of capability to build the CSC as a way out of project that has been described by critics as endless money pit with little accountability or oversight,” wrote Pugliese. Instead, “the government’s decision to provide $463 million extra for CSC is a signal the Liberals are fully committed to the program, no matter what it costs.”

Neither Pugliese’s analysis nor the federal news release made any reference to the previous public funding Irving received from the province of Nova Scotia in 2012, “to expand and modernize” the Halifax shipyard. That arrived by way of a $260 million forgivable loan, meaning if the shipyard meets prescribed job creation targets, Irving will not need to repay it. 

Then-Premier Darrell Dexter promised that money to Irving in 2011, when Halifax was competing for the 35-year contract to build the CSCs. 

The shipyard was awarded the work in October 2011, but the public didn’t learn about the loan to Irving until March 2012. 

Irving Shipbuilding president Jim Irving said the shipyard would not have won the contract without the support from the province. Dexter called the win “Nova Scotia’s greatest opportunity since Confederation.” 

The proof of that statement remains a work-in-progress, partly because the construction of the warships has yet to start. 

Meanwhile, Nova Scotia has benefitted from 10 years of work on the “starter ships” known as Arctic Offshore Patrol vessels. 

In 2012, a news release from the provincial Department of Economic Development used Conference Board of Canada data to predict “the shipbuilding work is estimated to result in $2.8 billion revenue to Nova Scotia over the next 20 years.”  

In 2017, a glossy mailout from Irving Shipbuilding to residents of HRM used Conference Board of Canada modelling to suggest the work to modernize the shipyard and start construction on the Arctic patrol vessels would “generate $1.57 billion of economic activity in Nova Scotia between 2013-2022.”  

Since then, the goal posts have shifted repeatedly due to delays with both the small ships and the big ships. 

Earlier Conference Board forecasts calculating direct and indirect jobs and billions of dollars worth of economic spinoffs are nearly impossible to track or verify. 

The task is complicated by the fact the only source of data about how and where the money gets spent always circles back to Irving Shipbuilding. 

“Data on the National Shipbuilding Strategy spending were provided by Halifax Shipyard,” says the Conference Board in its May 2023 update on economic impacts associated with the shipbuilding program. “From 2013 to the end of 2022, over $5.2 billion was spent on the National Shipbuilding Strategy across Canada.”

Acknowledgments on page 11 of the same May 2023 Conference Board update read: “This data briefing was completed by the Conference Board of Canada’s Economic Research Division with funding and support from Halifax Shipyard.” 

So Irving Shipbuilding was not only the  source of information used in the Conference Board’s modelling to forecast direct, indirect, and induced benefits linked to shipbuilding projects; Irving Shipbuilding was also the client that paid for the study. 

In other words, when it comes to measuring  and projecting actual economic benefits of the shipbuilding program, this does not appear to be an arm’s-length relationship between Irving and the Conference Board of Canada.

What did the $260 million in provincial money buy?

The expansion of the Halifax shipyard between 2013 and 2015 included the construction of a Main Assembly Hall the length of two football fields along Barrington Street. The hall was built to accommodate the starter ships — the smaller Arctic Offshore Patrol vessels — as well as the twice as heavy CSCs (warships). 

A building was also erected in Dartmouth to cut and fabricate steel used in the ships’ hulls. 

At the Halifax yard, two new piers were constructed with an interface to enable the modules of the Arctic patrol ships to be lowered into the harbour. 

A 500-vehicle parking garage was built and upgrades were made to water, electrical, and gas systems required by both the piping and welding trades. 

According to former Irving Shipbuilding president Kevin Mooney, the total bill for that first modernization was approximately $360 million.  

A check-in with the province confirms that Irving Shipbuilding drew down the entire $260 million loan for the expansion and has received forgiveness for $86,816,087 million in principal and interest. 

The forgivable amount is expected to grow. 

The term of the loan runs until 2041 and it’s still early innings, with the full-time workforce in Halifax expanding as the final four Arctic patrol vessels are being completed. 

“The FTE (Full Time Equivalent) number for Irving Shipbuilding in 2022 was 2,051, with the current number standing at 2,365 as of today,” said Mel Schori, the communications director for Irving Shipbuilding. “These numbers include ISI employees and contractors who gain employment directly through the National Shipbuilding Strategy here in Halifax.”

During the eventual construction of the CSCs, the Conference Board of Canada estimated employment at the shipyard would peak and be maintained at 2,400 full-time workers a year.

“Supplying the province with the actual annual employment data (in full-time equivalents) is the primary basis for earned loan forgiveness on a yearly basis,” explains Jess Hawkes, senior communications advisor for Invest Nova Scotia, continuing:

Before the complex, multi-year National Shipbuilding projects began, there were defined FTE targets set out. Since then, there have been COVID-19 disruptions and the federal government has amended the scope and timings for projects — for example increasing the (number of) Arctic Offshore Patrol Vessels from six to eight. These developments have resulted in changes to the company’s projected FTE requirements. The company provided its revised FTE targets to the Province. The entire balance of the loans is conditionally forgivable, subject to the company meeting the conditions of the financing agreement.

Ten years into the program, it sounds as if Irving Shipbuilding is on track to see much of that $260 million loan “forgiven.” Interestingly, the shipyard has not accessed a repayable, $44 million loan for training purposes also made available by the province in 2011. 

What does ‘modernization’ mean?

The Halifax Examiner asked Irving Shipbuilding for specific examples of what changes need to be made to accommodate the CSCs and why the company (which will  profit from the long-term contract) isn’t paying the bill to cover the upgrade to its facilities. 

Here’s the email response received from Irving’s Mel Schori:

ISI, in accordance with its agreement with Canada, built a shipyard in the period 2013 to 2015 capable of delivering the ship contemplated at the time as the Canadian Surface Combatant (CSC) and has delivered four Arctic and Offshore Patrol Vessels and approximately doubled our workforce over that same period. At the same time, the pace at which Canada requires CSC ships to be delivered and the complexity and scope of the CSC has changed significantly from what was contemplated at the start of the NSS. 

ISI is not “the proponent” of changes to the pace of delivery or the scope of the CSC. Canada’s requirements for both have changed from 2011 in a material way. ISI and the rest of the team that supports Canada has worked diligently to adapt, particularly as it relates to hiring and training the workforce necessary to meet those demands.

The response from Schori does not address why Irving Shipbuilding Inc. isn’t paying to modernize its own facilities. 

Clearly the company contends the Navy and the government are responsible for having changed the requirements for the size and type of ship it wants built since the CSC program was envisioned. No examples were provided by Irving for the specific modifications that need to be carried out to deliver all 15 warships by 2050.  

The federal explanation

The Examiner sent the same questions to the Department of Public Service and Procurement Canada. Here’s a condensed version of what senior communications advisor Jeremy Link provided, although the answer to the second question was emailed by Jessica Lamirande, communications advisor with the Department of National Defence. No response was received as to why Irving Shipbuilding isn’t footing the bill for the latest upgrade to build very complex ships with complex radar and weapons systems.

Examiner Question #1. What is the public supposed to think when the federal government announces it has amended the contract to allow the public to contribute $463 million to one of the richest families in Canada to expand and “modernize” the infrastructure of the yard, especially when the Nova Scotia government has already stepped up and the company appears to be on track to having the loan forgiven?

Irving Answer #1. The Government of Canada is committed to ensuring that members of the Royal Canadian Navy (RCN) have the equipment they need to do their jobs and protect Canadians, while maximizing economic benefits for the country…  The Government of Canada is investing in the CSC project’s infrastructure to enhance and accelerate CSC construction, ensuring timely delivery to the RCN. 

Examiner Question #2. Please explain — with examples — what modifications are necessary to the physical plant in Halifax or the shipbuilding procedures to ensure the efficient delivery of 15 ships based on the Type 26 design that has been chosen for the Navy?

Answer #2 (from DND).  The shipyard identified infrastructure enhancements that will enable them to deliver on CSC more efficiently. The proposed enhancements to Irving Shipbuilding (ISI) will expand and modify site and facilities at the Halifax Shipyard, and supporting facilities in Dartmouth, including at Woodside Industries and Marine Fabricators. The Halifax Shipyard site expansion will include dredging, marine structures, and rock infill behind the structure creating approximately 13 acres (5.26 hectares) of additional yard space. Within the shipyard, the newly expanded area is not expected to extend farther into the channel than the limits of the floating dry dock that was previously located at Halifax Shipyard.  

So there will be dredging in the harbour and the Halifax shipyard will have a larger footprint there. If you have read this far, you are probably hoping for a few more details or a clearer explanation of the type of work to be undertaken. Given the large amount of public money being spent, it seems a reasonable expectation. Instead, there is only secrecy and bafflegab. 

Timothy Choi is a fellow at the Canadian Global Affairs Institute who has followed and written about the Canadian Surface Combatants which are now in their final design phase. 

A year ago, after Irving had submitted its funding request to the federal government, Choi told Saltwire reporter Aaron Beswick that while the shipyard’s main assembly hall on Barrington Street should be large enough to build the CSCs, “some processes and equipment would likely have to be moved.” 

Choi said the bigger issue for Irving would be how to get the warships out of the assembly hall and on to the water. He said the semi-submersible barge ISI leases to float the modules of the Arctic ships into Halifax Harbour is too small to accommodate the larger series of warships. Choi said Irving had at one point been interested in purchasing some type of permanent lift, or elevator-like dock, which could move the ship, or pieces of the ship, from assembly on land safely into the water. 

So is Irving Shipbuilding “double dipping” when it comes to getting money from two levels of government to assist with upgrades and modernization of its own property? If so — given the benefits projected to flow to the provincial economy — does anyone care? That’s a harder question to answer. 

Consumer spending is strong, according to provincial finance officials during budget briefings last spring. There are cranes in the sky and new homes being built and new vehicles being purchased. 

Irving Shipbuilding spokesperson Mel Schori told the Examiner that in 2022, “Irving Shipbuilding paid out over $190 million in wages and salaries  to people working in the HRM and that value will continue to grow for the next several years.” 

The May 2023 report from the Conference Board of Canada predicts the province will receive $710.5 million in revenue from shipbuilding activity between 2012-2025 — assuming construction on the CSCs begins in 2024.  

That assumption may be optimistic. A spokesperson with the Department of Defence says while some construction “activity” will begin in 2024, full production on the first ship isn’t expected until 2025. 

Even so, the province can anticipate substantial economic growth, given the federal commitment to build a new fleet over the next 25 years and the need to maintain those ships for an even longer period. Just how large a boost to provincial GDP is still a moving target. 

Irving’s tax deal with HRM

Over the past couple of years, the Halifax Regional Municipality has finally seen a bump in the amount of property tax it collects from the shipyard. After a slow start, it was $1.3 million last year. 

HRM’s tax agreement with ISI includes a base amount as well as an additional $1000 for every full-time employee at the shipyard above the threshold of 1,000 people. HRM media advisor Klara Needler provided the chart below.

    Under By-law T-1100, Respecting Taxation Agreements (which applies to two Assessment Account Numbers), below is what Irving Shipbuilding has paid under its tax agreement, which began June 20, 2015:

In addition to paying taxes and fees to three levels of government, the agreement between Ottawa and Irving Shipbuilding requires the company to  make “offset” purchases or donations equal to the amount spent procuring goods and service from companies outside Canada. This resulted in Irving’s $10 million donation to COVE (the Centre for Ocean Ventures and Entrepreneurship in Dartmouth started by John Risley) and $1.25 million to develop and expand trades courses at the Nova Scotia Community College, an ongoing investment of $250,000 each year.  

There are many other examples. Acadia University recently received $650,000 to develop a new program called Maritime Security with a focus on protecting coastlines — not only from drug runners and terrorists, but from environmental disasters.

Bottom line: the shipbuilding projects may be slower than expected to deliver projected economic benefits. Government accountability for how public money is spent appears shrouded in secrecy. Yet despite the lack of transparency from both the shipyard and Ottawa, the ripple effect of the contracts’ impact on the local and provincial economy is palpable, at a time when there are also critical shortages of housing and labour.