Final Evaluation of the Structured Financing Facility — Final Report

3.0 Findings

3.1 Relevance

Finding: The SFF continues to be consistent with departmental and federal government priorities concerning the retention of capacity in the shipbuilding industry.

Although the 2010 Throne Speech did not mention the SFF explicitly, it recognized the strategic importance of having a strong domestic shipbuilding industry and noted the government's intention to continue to support the industry through federal procurement.¹⁸ According to the 2007 RMAF/RBAF, the renewed SFF is intended to maintain shipbuilding capacity in Canada until there is sufficient government procurement to provide the activity base to make the industry self-sustaining.¹⁹ This suggests that the SFF remains a government priority until the implementation of the NSPS. It is anticipated that this will occur within the next few years.

Within Industry Canada's 2010–11 Program Activity Architecture, the SFF program falls under the strategic outcome "Competitive Businesses are Drivers of Sustainable Wealth Creation." It is a sub-activity of the "Global Reach and Agility in Targeted Canadian Industries" activity area. The SFF supports competitiveness and is expected to lead to sustainable economic development.

Finding: The issues addressed by the SFF program fall under the responsibility of the federal domain.

The issues addressed by the SFF program fall under the overall responsibility of the federal domain, including areas of national security, economic development, and international competitiveness.

There is no overlap of the SFF with provincial jurisdiction and programming. Individual provinces offer broad programs in support of manufacturing, innovation, and research and development. Shipyards that have benefited from the SFF have taken advantage of these general programs. In particular, provincial apprenticeship programs have proven beneficial for the Canadian shipbuilding industry. However, the SFF is the only program in Canada that is aimed specifically at supporting the shipbuilding industry.

From a taxation perspective, Canadian ship owners can choose to take advantage of the Accelerated Capital Cost Allowance (ACCA) or the SFF, but not both. Canadian income tax regulations remove the right to the ACCA for vessels whose construction or modification was supported by the SFF. The 15% maximum contribution provided under the program is the estimated amount of support needed to equal the value of the ACCA.

Finding: There is a continued need for this program to help maintain industry capacity until the NSPS is implemented. Canadian shipyards have had limited success in penetrating international markets and rely heavily on the SFF to be price competitive on both domestic and foreign bids.

Various lines of evidence indicate that there is a need for the SFF to help support the Canadian shipbuilding industry until the NSPS is implemented. Statistics Canada figures indicate that the Canadian shipbuilding industry faces fierce competition from abroad. Canadian demand for shipbuilding and repair averages more than $500 million per year. Canadian shipbuilding demand from 2005–2008 was satisfied through imports, at 37.4%. Over the last ten years, imports have exceeded exports on average by a factor of 4 to 1.²⁰

Stakeholder interviews and case study findings also support the need for the program. Several Canadian shipyards have closed over the last 20 years. Some ship buyers are concerned that Canadian shipyards no longer have the necessary know-how to build large ships. For example, the decision by BC Ferries in 2004 to award a contract to a German shipyard to build three new ferries was perceived by some as indicative of a lack of expertise in the BC shipyard industry. The President of BC Ferries argued that "the provincial industry no longer has the infrastructure or the competitive edge to build BC's big ferries."²¹ BC has one of the largest ferry fleets in the world, representing a potential source of business for Canadian yards.

The United States market (the most natural and largest potential market for Canadian shipbuilders) is essentially inaccessible due to the Jones Act. This Act prevents US buyers from purchasing foreign-built ships for commercial shipping within the US. Stakeholders also noted that the large ship market in Canada has recently become more competitive with the elimination of the 25% import duty on ships over 129m in length.

Analysis of program files reveals that Canadian suppliers face a price disadvantage versus foreign competitors. Based on the four SFF projects for which foreign shipyard bid information was available, Canadian bids were on average 20% higher than comparable foreign bids (see Exhibit 3.1). The SFF effectively reduced the overall price of a ship by 11-14%, and closed the competitive disadvantage to between 4.3% and 13.5%.

Exhibit 3.1: Price Disadvantage of Canadian Bids versus Best Foreign Bids on SFF Projects since 2007

Project	Canadian Bid ($M)	Best Foreign Bid ($M)	Initial Price Disadvantage	SFF Contribution ($M)	Remaining Difference
Source: SFF Program Files
#1	$44.500	$37.825	15.0%	$4.984	4.3%
#2	$47.800	$37.600	21.3%	$7.170	7.5%
#3	$10.000	$7.353	26.5%	$1.500	13.5%
#4	$22.936	$18.666	18.6%	$3.440	4.3%
Average			20.4%		7.4%

Stakeholders maintained that without the financial assistance of the SFF, Canadian bids would not have been price competitive with foreign shipyards. They also believed that the relatively high Canadian dollar in recent years has not led to a reduction in costs.

It is anticipated that the launch of the NSPS will necessitate a review of the continued need for the SFF. As federal procurement efforts are initiated and the industry revitalizes core shipbuilding capabilities, the need for "bridge" mechanisms like the SFF is expected to decline.

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Footnotes

¹⁸ "It [the Government of Canada] will take further steps to support the competitiveness of Canadian manufacturers. And recognizing the strategic importance of a strong domestic shipbuilding industry, it will continue to support the industry's sustainable development through a long-term approach to federal procurement." 2010 Speech from the Throne (www.discours.gc.ca/eng/media.asp?id=1388). Return to reference 18

¹⁹ Integrated Results-based Management and Accountability Framework (RMAF) and Risk-Based Audit Framework (RBAF) for the Structured Financing Facility (SFF) Program, 2007, p. 3. Return to reference 19

²⁰ Statistics Canada, Canadian Industry Statistics, NAICS 336611, 2000–2009. Return to reference 20

²¹ Douglas, "Only the Strong Survive", Nov/Dec 2008, p. 37. Return to reference 21