July 23, 2002

Offshore Shipyards and Government Purchasing

Under the guise of a refit to extend the life of the Queen of Coquitlam, Transportation Minister Judith Reid has invited bids from any international shipyard. While we won't know for sure until the bids are in, some news reports have put the value of the six month refit in the vicinity of $26 million. The real issue goes beyond the Queen of Coquitlam to the BC Ferries Capital plan for the next fifteen years. At stake is over $1 billion in ship building that consultant Fred Wright has recommended be done offshore.

Gordon Campbell promised to "Appoint an independent public inquiry into the fast ferry fiasco and the mismanagement of BC Ferries." (NED page 4) On the government's website, at public expense, a 12 month New Era Review (pdf) repeats that promise on page 2 and then says "The review was completed December 2001." That claim is an outright lie. No independent public inquiry was ever appointed by Premier Campbell. In its place, a dependent consultant, Mr. Fred R. Wright, was appointed to report to BC Ferries. His report was released a week before Christmas, with that timing it was soon forgotten.

Mr. Wright's report makes frequent reference to a report that was done by Kvaerner Masa Marine (KMM) for BC Ferries. The full KMM report is not available on the Internet but page 22 of Mr. Wright's report said:

In other words, BC Ferries has been advised not to do refits like the one currently advertised for the Queen of Coquitlam.

Mr. Wright's report went on to say:

What is at stake for BC shipbuilders is not the loss of a refit job but the loss of over $1 billion in work over the next fifteen years. That work could provide the stable basis to maintain a BC industry which has been greatly diminished but continues to successfully bid on repair work for ships visiting BC waters.

Vancouver Sun columnist, Paul Willcocks entered the debate on July 22, arguing that average British Columbians shouldn't pay higher fares so as to subsidize folks who own BC shipyards or their highly paid workers. Saying that "industries come and industries go" Willcocks concluded that domestic shipbuilding had its chance and didn't succeed because other countries are subsidizing their shipbuilding industries and in emerging nations people "will work more cheaply and under more difficult conditions than we will." According to Willcocks public money used to buy BC Ferries should go to workers in those emerging nations. In his words, "Surely we should encourage their efforts and focus on our own competitive advantages, instead of trying to crush them with taxpayers' money."

At least Willcocks stated the case more bluntly than Transportation Minister Judith Reid. There is a point where the numbers are so overwhelmingly large, where costs are great and benefits few, that Willcocks' argument must be accepted. After all, we do not set up green houses to grown bananas so as to stimulate a banana industry. We do, however, engage in trade wars - subsidy wars - to maintain much of Canada's agricultural capacity. Why don't we simply shut down the farms and buy from those countries that are foolish enough to pay their farmers to produce? There are many components to the answer ranging from the political power of the industry to the long run importance of maintaining domestic food production. Do any arguments like that apply to shipbuilding?

BC shipbuilders clearly have no political power - at least not now. Over the past twenty years, Ottawa has aided Quebec and Maritime shipyards and allowed BC yards to go under. The wrecking balls are working today at what was once the Burrard Shipyard. There is a point to be made that there is a strategic benefit to maintaining an industry that is needed to support a busy port and cruise ship industry, but that argument might also mean the repair business should stand alone.

The answer for BC shipbuilders lies with the criteria that ought to be used to select the successful bidders on new ferry construction. When government issued a request for proposals for an advertising agency to help it improve its image in handling health care, the bidding documents laid out very detailed selection criteria. Price was not a factor. Whether the bidder worked for a health union was a negative factor.

It is very expensive for a shipyard to prepare a bid for a refit, let alone prepare a bid for a new ship. If BC Ferries is going to be credible with any shipyard, including yards in "emerging nations", then it ought to disclose the precise selection criteria both to the BC public and to the potential bidders. As the line says in the bottom of the invitation to tender for the Queen of Coquitlam conversion, "Not necessarily the lowest or any bid will be accepted." That is not good enough. Precisely how will a successful bid be selected?

This is where it gets tricky. Government is not like a private business - certainly not like a small private business. When government pays a BC worker to do a job it also turns around and collects taxes from that worker. The worker in turn spends money that provides work for others. The same money used to purchase a ship offshore produces no such multiplier effects for British Columbia. A proper evaluation of competing bids should take different multipliers into account because, unlike a small business, government has a direct interest in and benefits from the multiplier effects. Economists may argue about the magnitude of the various multiplier effects. Remember the dispute between David Bond and Gary Collins over whether tax cuts would pay for themselves. Collins was much more optimistic than Bond. A complete evaluation would also consider offsetting benefits of buying ships at a lower price and who would benefit from the subsequent savings in British Columbia.

It is not an easy problem, but this is the kind of problem that government faces with each purchase and investment decision from the Olympic Bid to the capital plan for the Ferries, from outsourcing of information technology to the capital plan for BC Hydro. Government should not apply a different economic model with different assumptions to each of these decisions. If future costs and benefits are to be discounted to present value at a rate of 7%, then that rate should apply to the evaluation of all purchasing decisions. If provincial tax recovery is estimated to be 22% for each dollar spent on a BC worker, then that assumption should remain consistent between projects. Foreign bidders should be told that proven competency to do the job as well as both cost and net benefits to the province will be taken into account in making the final decision. That kind of bidding is standard procedure in the awarding of many multimillion dollar military procurement contracts.

Rather than floating simplistic trial balloons, Judith Reid should engage the public in a discussion of how government procurement can be used to maximize benefits for British Columbia. She should say how much of a price advantage foreign shipyards must have in order to offset the economic benefits of employing BC workers.