Interim Evaluation of the Structured Financing Facility
6. Progress and Success
This chapter examines the progress and success of the SFF program in meeting its expected outcomes. A number of issues are addressed including the question of whether the government has delivered on its commitment as stated in its June 2001 policy, barriers or issues impeding progress, effectiveness of the program in meeting its objectives, primary and secondary economic benefits, and the impact of the SFF components on the Canadian shipbuilding industry.
6.1 Has the government delivered on its commitment stated in its June 2001 policy?
Most respondents indicated that the Canadian government is fulfilling the commitment made in the policies described in its June 2001 Shipbuilding Policy Framework as they relate to SFF. The SFF and the necessary support within Industry Canada to run it were created; furthermore, ship owners, and particularly offshore owners, indicated that SFF was a key factor in their decision to source from a Canadian yard.
However, to effectively compete against foreign yards, SFF alone is insufficient. SFF needs to be combined with other measures and programs, in particular, all five components of the policy framework (capturing domestic opportunities, looking globally, innovation, financing, and stronger partnerships). Specific examples include: most yards and owners felt that SFF and ACCA should be combined; for some owners, having a performance guarantee was more important than SFF; and for some owners, obtaining EDC support was more important than SFF. Some yards believe that the only effective way to compete against the heavily subsidized Asian yards is through a direct subsidy, i.e., to fight fire with fire.
Some smaller yards, as noted in the Marine and Ocean Industry Technology Roadmap, "have proven their capability to compete in both cost and quality on the international stage. Witness the recent sales of world-class tugs by the Irving Shipbuilding Group (East Isle Shipyard, P.E.I.) and Industries Ocean Inc. (Ile aux Coudres, Que.) 15 to a variety of owners in Europe, Panama, and the Caribbean. These examples prove the potential for Canadian yards to compete in Europe and Central America with even the historically low cost builders of the U.S. Gulf Coast." However, the Roadmap goes on to note that, "the size of the Central American market is not large, and competition into the European market is quite fierce. Any upward fluctuation from present exchange rates will likely impact our market access significantly." 16 The list of fifteen SFF projects (12 completed and 3 in progress) is provided in Table 6-1, at the end of this chapter. As noted in Table 6-1, both the Irving Shipbuilding Group and Industries Ocean Inc. participated in the SFF program.
6.2 Are there any barriers or issues that will impede the progress of the SFF program?
The short timeframe remaining for SFF is seen as a major difficulty as noted in Chapter 5. Other shortcomings with the existing program noted by representatives of the shipbuilding industry included, the inability through the SFF to provide incentives to buyers which pay cash, the need to combine SFF and ACCA to begin to match foreign shipyard subsidies, the competitive advantage of moving to a non-taxable benefit for the ship owner (such as a direct price subsidy) and the incrementality concept where a project is only eligible if it can be proven that the work would not go to a Canadian yard without SFF support.
The ineligibility of yachts was also cited as a shortcoming. Some noted that the Dutch decided to support their yacht builders, and today they are seen as the world's best. Thirty years ago, the Dutch yacht industry did not exist.
Some yards noted that under the Jones Act, the Americans restrict their procurement to American yards, and even some states restrict procurement to their state. This is not the case in Canada. The press 17 and many shipyards have commented that BC Ferries intends to procure from a European yard; there is no Canadian yard on the short list of bidders. BC Ferries was a crown corporation, but even as a "privatized" entity, the Province of BC is the sole shareholder. Some believe that the reason Canadian yards were excluded by BC Ferries is because of the short timeframe remaining for SFF (e.g., delivery would be after the SFF program ends), and/or no Canadian yard could meet the quality and technical specifications (e.g., we note in Section 6.5 that due to the lack of business Canadian yards have been unable to keep up with the quality of foreign yards). The point being made by Canadian yards is that government, or a governmentsupported organization, should be trying to increase, not decrease, Canadian content. However, as we note below, the lack of business has hurt the ability of Canadian yards to compete, and to maintain quality and innovativeness.
Unlike their American counterparts, Canadian yards have not been able to rely on renewal of navy vessels to sustain them. As noted in the Technology Roadmap, "it is very expensive to design and build Canadian warships. There no longer exists the people or the infrastructure to do this work. It may be necessary for these ships to be common with and fully integrated with the United States fleet, or at the very least with other NATO vessels. In spite of past successes, there has never been a continuing demand to sustain a military shipbuilding industry in Canada. And there appears to be no expectation that there will be in the future." 18
A further issue is the leverage on further business being generated through SFF support. The yards benefiting from SFF that we examined in our case studies have not been able to use SFF to create additional orders; reasons include poor performance in the SFF–supported project, ongoing financial instability of the yards and lack of demand from their customers.
6.3 Is the program effective in meeting its objectives within budget and without unwanted outcomes?
The low demand for ships, especially those that will ply their trade on the Great Lakes was cited as an unforeseen limitation on the take up of SFF. The high average age of the Great Lakes fleet and relatively high shipping costs were thought, when the SFF program was designed, to be major drivers of shipbuilding demand. The uneven level of demand for Canadian government owned ships was also seen as a problem for the domestic yards maintaining a baseline capacity.
The unanticipated effect of SFF most often cited was the increase in foreign demand for Canadian-built ships. Foreign owners confirmed that SFF is a useful cost reducer for foreign buyers purchasing ships on credit, because they can also continue to take advantage of other financial incentives offered by their own country. The increased foreign demand has reached the point where one respondent expressed concern that SFF may attract unwanted attention from the WTO.
6.4 How many jobs have been directly created due to SFF? What evidence is there that these jobs would not have been created without SFF?
Energy and Marine Branch relies on a post-project questionnaire from the shipyard to quantify the economic benefits, such as sales and jobs. As noted in Table 6-2, actual shipyard sales are very close to projected sales, with the nine completed SFF projects resulting in sales of approximately $131 million. This has apparently resulted in 485 person-years. Representatives of the shipyards that have participated in the SFF program indicated that these 485 person-years were not "created", but rather, the SFF has helped to "maintain" existing jobs. They noted that the economic impact of maintaining jobs is still significant, with the indirect multiplier effect being approximately 1.5 times the direct.
As noted in Chapter 3, total shipments and employment for the Shipbuilding and Repairing industry in Canada have decreased by roughly 50% in the latter half of the 1990s. Total shipments declined from approximately $970 million in 1994 to $546 million in 2001, while the number of workers declined from approximately 7,360 in 1994 to 4,280 in 2001. Shipyard representatives noted that this downward trend has continued over the 2001 to 2004 period. This decline in business makes it difficult to attract and retain promising apprentices. Continuity in business is needed for labour stability, but this will not happen if the economics of the industry are not fixed.
6.5 Has the SFF program had any impact on secondary effects, such as increased worker skill levels, improved innovation or development of new markets?
Table 6-3 provides the secondary impacts of SFF, such as increased skill levels of workers, innovation and improved partnerships, as reported by the post-project questionnaire from the shipyards. As noted in Table 6-3, feedback from the seven yards responding to the secondary economic benefits component of the post-project questionnaire is mixed. On the question of "innovativeness", 57% indicated that this is very high, while 43% indicated that this is very low. There was more uniformity on "skill level", with five reporting a "4" or a "5" (on a scale of 1 to 5, with 1 being very low and 5 being very high). There also appears to be some uniformity with respect to "productivity and cost competitiveness", with five reporting a "4" or a "3". The response was mixed for "expanding markets", with 57% indicating high or very high, and 29% indicating very low. The response was also mixed for "expanding partnerships", with 71% indicating a "4" or a "3", and 29% indicating a "1" (very low).
The feedback from the interviews was similarly mixed. Some noted that innovation, skills, competitiveness, etc. have improved as a result of new business obtained through the SFF program, while others noted that with the current level of activity, skills, productivity and partnerships are only being maintained, not enhanced. The interviews tended to be less positive than the questionnaire responses on the question of innovation resulting from SFF stating that a steady flow of business was a necessary condition for innovation to take place in the yards with respect to design and construction.
The yards benefiting from SFF that we examined in our case studies have not been able to use SFF to create additional orders; reasons are particular to the examples, and include poor performance in the SFF–supported project, ongoing financial instability of the yards and lack of demand from their customers.
6.6 What evidence is there that any of the three SFF components is assisting the Canadian shipbuilding industry? Are the three SFF components adequate?
To date, 12 SFF projects have been completed and three are in progress, as noted in Table 6-1. Evidence suggests that most of these would not have proceeded in Canada without SFF support. Other than the live salmon transport ship built for Persistence Shipping by Groupe Verreault, it appears that no projects began until they had passed the necessary incrementality tests and received Industry Canada approval.
As noted in Chapter 4, "the Shipbuilding and Industrial Marine Advisory Committee (SIMAC) 19 claims that the SFF at 15% falls short of the benefit received by applicants if exempted from the specified leasing property rules which was the original change requested by industry in its 2001 report. SIMAC states that an SFF of 30 – 35% would be required to give an equivalent after-tax benefit. SIMAC and Canadian yard owners interviewed cited this difference as the major reason the yards have failed to tap into the Canadian market. The fact the financing period was not extended beyond current OECD limits was also noted as a deterrent to the market."
SFF and the three components need to be combined with other measures such as ACCA and programs such as government fleet procurement in order for Canadian yards to effectively compete against heavily subsidized foreign yards. Maintaining current fleet size (RCN 39 ships, CCG/DFO 125, BC Ferries 35, Marine Atlantic 4 plus others) assuming an average useful ship life of 30 years, would cause a demand of six-seven ships/year. Government procurement would allow the yards to spread their overhead over a larger number of ships, thus allowing them to charge less to commercial shipowners. In addition, this steady work would allow the yards to keep existing highly skilled workers and invest in innovation in design, manufacturing processes and materials.
The credit insurance components have not been used. The comments we received were that they had low visibility and, if used, had a low probability of being approved by the government.
The federal government has delivered on its commitment as stated in its June 2001 policy to establish and market the SFF and to facilitate the use of export financing through the EDC. SFF has been a key factor influencing offshore owners to source from Canadian yards, but has had limited success in attracting the Canadian domestic market.
It is clear that no single measure or program, such as SFF, can fix the economics of the industry. Rather, a suite of measures and programs may be needed such as moving ahead on government fleet procurement, combining ACCA and SFF, extending the term of EDC financing, and providing performance guarantees to prospective buyers.
Without these measures, further consolidation in the shipbuilding industry may be necessary to keep the industry viable. Practically, there is enough work on large ships to keep two-three yards usefully open.
There is some evidence to indicate that smaller yards working in niche markets are able to effectively compete internationally. Obtaining access to foreign markets is the main barrier. These "smaller niche yards" can also benefit from SFF and other complementary measures and programs. Inclusion of smaller repair and refit contract work within SFF eligibility would also help smaller Canadian shipyards.
|Date Approved||Date Contracted||Shipyard||Owner||Project||Vessel(s) Value||Approved Contribution|
|SFF Projects – Completed|
|Nov 3 2001||Jan 3 2002||Vancouver Shipyard||Gemini Marine Services Limited||Construction of steel feed barge||$2,322,477||$238,378|
|Jan 8 2002||Apr 30 2002||Victoria Shipyard||Alaska Railbelt Marine Inc.||Conversion of three barges||$5,671,974||$477,085|
|Jan 8 2002||Feb 13 2002||Industries Ocean Inc.||Partrederiet Stevens Multi-Ship||Construction of one ASD ocean-going tug||$10,480,329||$1,088,880|
|July 26 2002||Aug 2 2002||Verreault||Persistence Shipping Limited||Construction of 40.6 m live salmon transport vessel||$5,598,850||$564,000|
|Nov 29 2002||Dec 27 2002||RTMC||Excursions Maritimes Charlevoix||Acquire 2 deck 100 passenger day cruise ship||$962,275||$96,135|
|Feb 3 2003||Feb 25 2003||Vancouver Shipyard||Marine Petrobulk||Double-hulled fuel supply barge||$8,968,937||$1,360,650|
|Feb 4 2003||Feb 10 2003||Point Hope||Nanaimo Harbour Link Corp||High speed passenger ferry refit||$5,625,000||$234,000|
|Jan 30 2003||Mar 31 2003||Secunda-Dartmouth||Secunda Marine Services||Conversion of cable-laying vessel||$8,169,935||$499,500|
|Mar 29 2003||Apr 3 2003||ABD Aluminum Yachts||North Co-Corp Ferry Services||21 meter Aluminum Passenger Vessel||$1,782,200||$173,000|
|Mar 4 2004||Mar 12 2004||Léo Leblanc & Fils||Centre Nautique de l'Istorlet||38 foot semi-rigid excursion vessel for 36 passengers||$400,000||$60,000|
|Feb 27 2003||Apr 24 2003||Industries Davie||Torch Offshore Inc.||Ship conversion for deep water pipe laying||$127,920,000||$8,131,000|
|Apr 16 2003||May 14 2003||Irving – East Isle||Caucedo Marine||Two tugs||$14,937,000||$1,717,755|
|SFF Projects – In Progress|
|Mar 26 2003||Apr 3 2003||Industries Ocean Inc. 20||Partrederiet Stevns Enterprise||Construction of one ASD oceangoing tug||$11,247,600||$1,687,140|
|Aug 1 2003||Dec 3 2003||Glovertown Marine||A.M.P. Fisheries Limited||Construction of fishing and fish processing vessel||$3,500,000||$490,000|
|Dec 5 2003||Dec 22 2003||Hike Metal||Ocean Research||141 foot research vessel||$13,500,000||$2,025,000|
|Project Identification||Actual (Reported) Economic Benefits (1 = very low; 5 = very high)|
|No.||Owner (Applicant)||Shipyard||Status||Innov.||Skill Level||Productivity & Cost Competitiveness||Expand markets||Expand Partnerships|
|1||Gemini Marine Services Limited||Vancouver Shipyard||Completed||1||3||4||1||1|
|2||Alaska Railbelt Marine Inc.||Victoria Shipyard||Completed||1||4||1||5||4|
|3||Partrederiet Stevens Multi-Ship||Industries Ocean Inc||Completed||5||5||4||4||4|
|4||Persistence Shipping Limited||Verreault||Completed||5||4||4||4||4|
|5||Excursions Maritimes Charlevoix||RTMC||Completed||5||4||3||5||3|
|6||Marine Petrobulk||Vancouver Shipyard||Completed||5||5||4||1||1|
|7||Nanaimo Harbour Link Corp||Point Hope||Completed||na||na||na||na||na|
|8||Secunda Marine Services||Secunda-Dartmouth||Completed||na||na||na||na||na|
|9||North Co-Corp Ferry Services||ABD Aluminum Yachts||Completed||2||2||2||3||3|
|10||Torch Offshore Inc.||Industries Davie||Completed||na||na||na||na||na|
|11||Caucedo Marine||Irving - East Isle||Completed||na||na||na||na||na|
|12||Centre Nautique de l'Istorlet||Léo Leblanc & Fils||Completed||na||na||na||na||na|
|13||A.M.P. Fisheries Limited||Glovertown Marine||In Progress||na||na||na||na||na|
|14||Ocean Research||Hike Metal||In Progress||na||na||na||na||na|
|15||Partrederiet Stevns Enterprise||Industries Ocean Inc||In Progress||na||na||na||na||na|
- 17 See for example:
- B.C. Ferries Defends Decision to Build in Europe, MarineLog.com, July 31, 2004:
- "Against a backdrop of mounting protests from local unions, shipbuilders and some politicians, B.C. Ferries yesterday defended a decision to build three new Super C Class ferries in Europe. The former Crown corporation plans to build up to three of the 370 vehicle, 1,600 passenger vessels in what is widely reported as a C$500 million project… competition has now been narrowed to two European yards, one in Germany and one in Finland… the only Canadian yard to bid was Washington Marine Group, but BC Ferries rejected it because "expert evaluations conclude that [it] did not have the shipbuilding infrastructure, technology or experience required to build large complex vessels";
- Mayors Issue Plea to B.C. Ferries to Reconsider, CBC News British Columbia, August 3, 2004,
- "North Shore mayors are issuing a plea to B.C. Ferries to consider local shipbuilders for construction of three new ferries – a contract worth about $500 million. The mayors of North Vancouver, West Vancouver and the District of North Vancouver want the company to overturn its earlier decision – and not send the lucrative contract overseas… B.C. Ferries maintains local shipbuilders have lost the capacity to take on major projects, but can still qualify to build smaller vessels";
- Open Letter from BC Ferries' President and CEO David Hahn, July 30, 2004,
- "BC Ferries is poised to launch the most aggressive new vessel program in its history. It's a long-term plan to rebuild our fleet and is particularly critical since the average age of our vessels is currently 32 years. We need to replace 22 ships of varying sizes over the next 15 years. And to do this, we will be working with both international and domestic shipbuilders… The three largest Canadian yards, including B.C.'s largest yard, and 11 international shipyards were invited to participate. Two Canadian yards declined to submit bids… The expert evaluations concluded that the Canadian bidder did not have the shipbuilding infrastructure, technology or experience to build large, complex vessels like the Super C class ferries… Over the next 15 years, the majority of our 22 new vessels will be small to medium-sized open car-deck ferries, the sort of work where B.C. shipyards have demonstrated expertise, and projects where our yards should be very competitive."
- B.C. Ferries Defends Decision to Build in Europe, MarineLog.com, July 31, 2004:
20 Industries Ocean went bankrupt in completing the first tug for Denmark. The order for the second tug subsequently went to East Isle. Industries Ocean's facilities now exist only as a repair yard, repairing the vessels that are used by its parent Group Ocean. (Return to reference 20)
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