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.

6.7 Conclusions

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.

Table 6-1: SFF Projects (as of September 21, 2004)

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

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Table 6-2: Primary Economic Benefits as Reported by Participating Shipyards

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Table 6-3: Secondary Economic Benefits as Reported by Participating Shipyards

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
				3.4	3.9	3.1	3.3	2.9

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¹⁵ We note that Industries Ocean went bankrupt during the build of a tug. (Return to reference 15)

¹⁶ Marine and Ocean Industry Technology Roadmap Special Report, March 2003, p. 24. (Return to reference 16)

¹⁸ Marine and Ocean Industry Technology Roadmap Special Report, March 2003, p. 20. (Return to reference 18)

¹⁹ The Rationale and Benefits of Enhancing the Structured Financing Facility, SIMAC Presentation to the Department of Finance, June 17, 2004 (Return to reference 19)

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)