HALIFAX, TUESDAY, APRIL 15, 2003
STANDING COMMITTEE ON ECONOMIC DEVELOPMENT
8:00 A.M.
CHAIRMAN
Mr. Brooke Taylor
MR. CHAIRMAN: I believe members of the Liberal caucus are in transit. I would like to begin by welcoming our guests this morning. We have representatives of Irving Shipbuilding Inc. here this morning. To my right, at the head table, would be Mr. Andrew McArthur, Vice-Chairman, good morning, Mr. McArthur and Mr. Tim Brownlow, Director of Offshore Services, J.D. Irving Limited. Darlene has informed me that we're having a little difficulty with the heat and air conditioning here this morning, so I hope everybody can be patient and bear with us. I would like to thank all the committee members for being flexible and adjusting their schedules a little bit this morning to accommodate our guests. Maybe we could begin with the member for Guysborough-Port Hawkesbury and introduce ourselves.
[The committee members introduced themselves.]
MR. CHAIRMAN: Thank you for those introductions, and perhaps our guests could begin.
MR. ANDREW MCARTHUR: Good morning, ladies and gentlemen. Like the chairman said, we appreciate it very much that you accommodated my schedule and switched it from 9:00 a.m. to 8:00 a.m., it's much appreciated. We were asked to come along and talk about Irving Shipbuilding, but somebody has done a fantastic job here. I was just flicking through your briefing book, and I could say, thank you very much, and leave. You could read the book, and you will know everything about us.
1
First, I thought I would tell you a little bit about Irving. The name is well known in the Maritimes, and most people know the Irving group. Irving is a very large diversified group, of course, and we're into many businesses. We're in construction for industrial consulting, prefabricated housing with Kent Homes, and many other companies under that. Oil, of course, is a very big part of the business. We're in oil importing, refining and distribution. In fact, the refinery in Saint John, at 300,000 barrels a day, is the biggest oil refinery in Canada, the second largest in North America. The only larger one is the Exxon, down in Baton Rouge, Louisiana. The Irving Refinery, however, is more modern. It went through $1.5 billion upgrade, finished about a year and a half ago. Today it can take a barrel of crude down to absolutely, almost nothing.
Transportation - sea: we're in tugs, barges, tankers, there are two VLCCs running to Canaport, 300,000 ton tankers, there's at least one a week that comes into Saint John Road: there's five trucking companies in the group. In fact, the Irving companies are one of the largest private owners of trucks in Canada. We're also in the railway business, as the railway runs from Saint John down through the States, short-line, but we are in that business. Forestry is a very big part of the business. They own a lot of land and also own cutting rights to a lot; very well managed. Just recently, a couple of years ago, they planted the 500 millionth tree, and their practice is that they plant three trees for every one they cut down. K.C. Irving was way ahead in reforestation and forest management. Pulp and paper and paper products, we're into all of these. Pulp mills, paper tissue, very big now in tissue. They have Majesta, they own Royale here, and Scotties in the States. So tissue is now a big part of the business.
The one we're going to talk about, however, is the shipyard. We're in offshore construction, naval construction, commercial, structural, management and engineering. I will tell you a bit about it because, today, when people think about Irving Shipbuilding, they mainly think about the Halifax Shipyard. Irving Shipbuilding is actually more than shipbuilding. We have the Halifax Shipyard, East Isle over in Prince Edward Island, Stenpro down in Liverpool, Nova Scotia, Shelburne, Woodside Industries and Pictou Industries. I will talk a little bit about each of these later on. We also have Fleetway, which is our engineering company, Atlantic Quality Technical Services, BFC Atlantic, and CFM. The top ones in blue are all owned by Irving Shipbuilding, the other ones report to myself but they're affiliates and they're set up as separate companies. The reason is quite clear, a lot of them are into consulting and engineering, and it's much better if they're stand-alone companies.
Let me back up, there's probably two questions that become very obvious. Saint John Shipbuilding and Dartmouth Marine Slips were not on that chart that I showed you. Saint John Shipbuilding is the largest shipyard in Canada, and it was enlarged quite a bit after 1983 when we signed the frigate contract in Saint John. It was enlarged to become the biggest yard in Canada, the most modern, and it's been closed now for almost three years. Part of the navy contract we had for the CPFs, we had to create and maintain a centre of excellence, which we did, and everybody anticipated there would be follow-on programs from the CPFs. It never really occurred and today you need a huge volume of business to make that yard viable.
That volume of business is not available in Canada for a Canadian shipyard. To compete on the world market today, to get enough work to fill Saint John, is exceptionally difficult. The final decision is not taken, we're getting close, but the probability is Saint John will be out of the shipbuilding industry.
Similarly, Dartmouth Marine Slip, it was reported recently we're in negotiation with an agreement to sell it to a local development company. They're currently doing their due diligence, and that should be completed fairly soon. We do not need the Dartmouth Marine Slip, we have enough capability here in the Halifax Shipyard. We have a graving dock and two floating docks, and we also have Shelburne and Stenpro, so it was surplus to our needs. It's been closed about two years, and the decision was taken to sell it.
We also had a great deal of difficulty in Dartmouth. A big part of the small-ship repair business is blasting and painting, and we had a lot of trouble with that blasting and painting. We eventually got an order from the government that we had to cocoon the ships. Now cocooning ships is not practical. The cost is prohibitive, so we just faced up to reality and sold the facility.
The Halifax Shipyard is the largest shipyard that we now have in the group. The main concentration of shipbuilding in the future will be here at the Halifax yard. It's a very good facility. We've got two floating docks and a graving dock and a slipway - a very capable facility. It's now probably the second-largest shipyard in Canada. The Davie Shipyard in Quebec is still the largest; however that's currently in receivership and nobody is quite sure what's going to happen. With an election yesterday, we might see some action fairly soon on Davie, who knows?
In Halifax we generally run around 750 to 800 to 900 people, depending on what we're doing. That's excluding the Eirik Raude, which was a special project, and I will talk about that later. We can run 800, 900, maximum 1,000, a very nice facility, and it gets along quite well. Employee payroll taxes: approximately $12 million federally, and approximately $7 million provincially. Payroll runs roughly $60 million a year, including the Eirik Raude. Without it, of course, it's considerably less. The average salary runs about $55,000 per year. On an average, we buy about $31 million in goods and services. Last year we placed over 2,500 purchase orders here in Nova Scotia.
The future for Halifax - we really see there is a growing market in the repair business. Up until NAFTA came, we couldn't repair ships for the U.S. We still cannot build ships for the U.S. NAFTA is very one-sided for our industry. U.S. shipbuilders can build for Canadian shipowners, import them into Canada duty-free, but we are totally excluded and prohibited by law, the Jones Act, from building for U.S. owners. We feel we got sold down the river on the NAFTA, and we would like to see it changed, but the possibility of that, in my opinion, is very remote.
However, under NAFTA, we can repair Jones Act vessels up to a certain point. We cannot replace more than 10 per cent of the steel in the ships, for example, and there are limitations. Even with these limitations, we really see the repair market, the growth in it, being from the U.S.A. It's quite interesting that since the early 1980s, the repair business here in Halifax has changed quite a bit. The winter used to be an exceptionally busy season and all the ships coming across the Atlantic would stop into Halifax and we got all the voyage repairs, ships hitting ice and that. Then they put all these satellites up in the sky, the captains can now dial up and get a printout of all the icefields - totally ruined the ship repair business. It used to be good business. So the whole concept is changed, and we do see the growth being from the U.S. market.
The Global Sante Fe is a project we are currently completing. Quite interesting, it's getting an upgrade. The rig, actually, was built in Saint John in the early 1980s as the Bow Drill Three, it was built for Bow Valley Husky and it was the only semi-submersible that was built in Saint John. It's changed ownership a few times. It's here for an upgrade and then it's going to drill somewhere off the East Coast here. There were about 250 hourly and full-time salaried people on it. We had 11 subcontractors, 150 subcontracted employees and has a value of about $12 million. The rig is going very well. It's much smaller than Eirik Raude, which is one of the biggest in the world.
Eirik Raude was a great project, a huge project. It's one of the largest in the world. It's fifth generation harsh environment and well-suited for working off Nova Scotia. There's quite a history to the rig. The steel hull up to the green piece there was actually built at the new Dalian Shipyard in China. The hull was then towed to the Friede Goldman yard in Pascagoula, Mississippi, where they had a contract to complete two of them. They ran into a great deal of difficulty and after the first rig was finished and went out to work, the owners towed the second one away and we got the contract to complete it.
A huge project. There were over 2,000 Nova Scotians on the job. It ran at over $2 million/month in wages and the employees from that project alone paid $3 million in employee taxes to the province. We placed 1,900 purchase orders here in Nova Scotia, for a value of $66 million and there were over 400 Nova Scotia vendors involved in the project.
We were absolutely delighted. I mean the word around is, well, Nova Scotia, we are not in the offshore business, the infrastructure doesn't exist. The way the supply industry came together in Nova Scotia to support this project was tremendous. We got great support. There is a good infrastructure here in Nova Scotia.
[8:15 a.m.]
Part of the difficulty in such a project was there is no question the owners in the previous shipyard lost total control of that project. There are reports in the media - quite erroneously, I might say - that we were late. There is no question the date went back but there
are many reasons for it. For example, when we took it over, one of the most glaring examples is the owner said you have 82,000 feet of cable to install. So the time was based on installing 82,000 feet of cable and so it was the cost and everything else. We installed 82,000 feet of cable and we purchased 320,000 feet of cable. So you go from 80,000 feet of cable to 400,000 feet of cable, you do not, no matter who you are, do that in the same time and at the same cost.
The other point is, the first rig went to work for Exxon off the west coast of Africa, brand new design and many recommended engineering changes came from the rig operators through to the owners. The owners quite rightly, in my estimation, took the decision, we will incorporate these changes now rather than later for it's much cheaper doing it at a shipyard alongside than trying to do changes out there on the ocean. So there were many engineering design changes and it was an onerous decision to do them but, like I said, it's one that we truly endorsed.
The rig does incorporate a lot of new features and it's out there and both rigs are working well. So it was a great project for us and one we would like to continue.
The new building program is going very well. We have three ships out working. The fourth one, the Atlantic Osprey, will be launched Thursday morning about 9:30 a.m. and anybody who wants to come in and witness the launching, they are more than welcome. It's a program that's gone very well. The second two are a bit bigger than the first two. They are all a Norwegian design. It's called UT722. The second two are UT722Ls. They are five metres longer, more horsepower and huge winches, 500-ton winch. The winch is a massive affair. It's the biggest winch you will ever see. The first two had 300-ton winches.
It's a program that the government has supported us in. We have a loan guarantee from the province which we have delivered three, there's never been a penny of the loan guarantee called and I can assure you, the loan guarantee will not be called on the fourth one either. So it's been a good program. In fact, the government has made money. We've paid probably $2.4 million to the province in loan guarantee fees without anything being called so it's a good deal for the province. They are very good ships. They are all working. The Kingfisher, which was the third one in a series, is over in the North Sea right now operating and it depends on the market whether it will stay there. These ships do have the capability to operate in rough seas worldwide, whether it's the North Sea, the west coast of Africa or Brazil.
Offshore. South Venture, we got the contract from ExxonMobil for the South Venture topsides. We want very much to get into the offshore business. We purchased the Woodside facility a year past December and the only reason we purchased that facility is it is downstream of the bridges. The Halifax Shipyard, you have to go under the bridge to get to it and many of the large floating cranes, in fact all of them, cannot get under the bridge so at the Halifax Shipyard we were restricted if we wanted to really get into the offshore
business. So we purchased the Woodside facility. The province still owns the dock in front of the Woodside facility but we have a long-term lease on it and we were fortunate enough to get the South Venture topsides. We lost out on the Alma project a year ago and we decided if we are going to get into business, we just have to bite our tongues and look at the cost and say, okay, there are times you may have to buy some business.
There's a learning curve in everything you do and you look at the frigates that were built in Saint John, the MCDVs were built here, the tugs in East Isle. There's a learning curve and the first one costs a lot more than the fifth, sixth or anything after that.
Our situation was that we were competing against shipyards mainly down in the Gulf, where were built many of these topside units. They know exactly their costs and they've got good recorded costs and a good history. We have none in topside units, but we looked at it and said, the oil industry always says, we're different, you have to do this, you have to do that. One of the things they do demand is they're very demanding on quality control and paper work and traceability to track various items, all items in fact. We are very good at that for we did it on the CPF, we did it on MCDVs, so we looked at our topside module and said, it's steel, it's all flat, it's straight up and down, that should be easy. We're accustomed to curvature and three dimensional control so we said that shouldn't be too difficult. You put modules in and you pipe them up and install electrical cable and instrumentation so we looked to that and said, we've been doing that for years, there's nothing magic about it so let's go for it. They quoted a price that we won and now we have to deliver and deliver it on time and we've every intention of delivering it to cost, for we do see the offshore as a big part of the future. So far it's going well.
Woodside Industries, I mentioned. There's currently about 100 employees there. We're doing selective catalytic reduction equipment, mainly for power plants in the States. We're doing it through Babcock Borsig Power and getting ready to do the South Venture. The industrial work we're doing at Woodside will phase out within the next few weeks as we start South Venture. It's been very good industrial work and if there is nothing coming behind South Venture for the offshore we'll transition Woodside back into industrial work so that we keep going.
There was a huge demand for the catalytic reduction equipment, but the American Government decided to delay some regulations where power stations had to implement this equipment which cuts down the noxious fumes going into the air. The American Government gave the power stations quite a bit longer - I'm not sure of the date, but what it meant was there was a slowdown in that where we expected it would continue for quite a few years. But it will come back, for at some point all the power stations will have to comply with the regulations.
Pictou Industries - we have a lease which expires at the end of this year. That is doing the same type of a fabrication that we're doing in Woodside and the stuff we are taking from Woodside right now we're transferring up to Pictou and it will certainly run through the end of the year. There's about 100 people, I think, working in Pictou right now. Not in shipbuilding, it's totally in industrial fabrication and it is a site that we only have a lease on.
Shelburne Ship Repair, a nice little facility, well managed, just ticks along year after year. A funny thing to say, but, we don't pay much attention to it. The management run it down there, they do a great job, they turn a profit and we keep out of their hair and let them get on with life. If every facility was as good as that, we'd be fine. They're doing a great job down in Shelburne. It runs 80 people generally. It fluctuates a bit, but that's about the average.
Stenpro down in Liverpool, much the same. It runs 85 to 100 people. It's in ship repair and industrial. It has one marine railway that you can see down in the left hand corner. We've debated whether or not to take it out of ship repair, but there seems to be a demand around that area, not a high demand, but it's worthwhile keeping the marine railway. It does service a little segment of the market, but the big push for Stenpro is definitely going to be in industrial work. We decided two years ago that we'd too much repair capability and didn't see a big future for them all and decided to transition a lot of them from a shipbuilding/ship repair into industrial work. Stenpro has done quite well. We're doing our vent knockout drum for Sable, which Sable placed the order directly. It is one of the pieces of equipment that will go in the topside vent for South Venture that we're building. FMC for the BP Thunder Horse project down in the States, we're doing quite a lot of subsea work for FMC and we currently have some work for them that will run for the next three years, not a huge volume, but FMC is a huge company. It has about 40 per cent oil right of all subsea work, so we've been courting FMC for quite a bit, as we see them as a very good source of future work for Stenpro. The Thunder Horse project is a huge project down in the Gulf and BP have another one coming behind it. We'll look for that to be a good ongoing business.
We also did quite a lot of work for General Electric. We built hydrogen carbs for the 7E and 7F gas turbines that GE build and we really thought we were on a winner there, things were going well and then we had the Enron fiasco - Enron was a huge customer of GE for gas turbines and, of course, when that happened a huge amount of the gas turbines were cancelled. The hydrogen carbs we had on order were cancelled, so that work quickly came to a halt and so far it hasn't been replaced by anything with GE. We continue ongoing discussions with GE. They're a huge company worldwide and they outsource a lot of material.
The only trouble with GE is they are a tough, tough customer and a lot of the bidding, except for the major projects, is online. GE have what they call a reverse auction. You go online, and they say okay, the opening bid price is $1 million and you don't bid it up, you bid it down. The guy who bids the lowest then gets it. It's a tough, tough way of doing business
and you are told the lowest three bids - you don't know who it is, but you look at them and say, this guy's bid 950, he bid 920, 910. We want the work, we'll try 890, so you go in at 890 and five minutes later it comes up at 870, 880, 860. It really is a tough way of doing business, and more and more companies are starting to go to online reverse auctions, so the future is quite tough.
East Isle Shipyard, over on the Island, mainly in the tug business and has done well. We've built 15 tugs in a series; we can't compete now, and it's the same reason again. The first tugs were built for an associate company of ours, they were quite expensive but we're down the learning curve and we are very close to signing a contract for three more tugs, and it will be signed, I would say sometime next week. There's been about a six-month gap there, but it's going to pick up again. We built the big white building about four or five years ago and we can now build a complete tug inside and then we take it out and put it on our marine railway that you see at the top right-hand corner there - a nice facility, only for ships of that size.
Long term, will we keep East Isle and tug? We're not sure, it's a tough market. The biggest market in the world for tugs is, again, the U.S.; it's closed to us. You can only sell into Europe under special circumstances. There are still limitations and there are still subsidies existing in Europe. The Europeans will deny this, but there are definitely subsidies in Europe. The U.K. have what they call - they don't call it a subsidy - it's an intervention fund and if you go to the government and say, we'd like this contract, but we're $1 million high, they will intervene and you get $1 million. It's just a straight subsidy.
It's very difficult to sell into Europe, we have done it, but the only way we've done it is an owner desired a tug and he wanted it very, very quick. We were building one for our associates, who agreed they could delay it. We sold the current one to Europe and replaced it with another one. The fact that we do have an associate company in the business is a big benefit to us.
[8:30 a.m.]
Long term, we might take it out and put it into some other business, but right now it's going to remain in the tug business. We built four for the Panama Canal Authority. The Authority, just last month, got their budget approved, and they're going to build four more, probably a contract for August, September this year. So we continually talk to the Panamanians. There will be an announcement very shortly about three more tugs for another South American country that we will build for.
Fleetway is quite an interesting company. Fleetway actually started as St. John Marine Consultants, when we had the frigate program. We bought a small company in Ottawa called Fleetway, and we've now transitioned that into - in fact, there's about 160 people today in Fleetway. We have an office here, that's our office in Bayers Lake, where there's 80-some
workers, and we have an office in Ottawa and it's roughly the same, 80 and 80. We do have the general services contract for ExxonMobil for the Sable Project. General services means anything ExxonMobil wants to buy or do for the rigs, Fleetway does it for them. We have the in-service support contract from the Canadian Navy for the Halifax-class frigates and the Iroquois-class destroyers.
The Victoria-class submarines, the ones we bought from the U.K., we have a group called the Canadian Submarine Group that we put together with the General Dynamics Canada and CE in Montreal and Fleetway, and together we won the contract to move all the trainers and facilities from the U.K. and set them up here in the base in Halifax. That's going very well, the trainers have now been relocated. They're in the process of being put together, and then we will start training the submariners. We have an ongoing support contract for that, which runs for five years. It won't be a big employer, but it's good work for us.
The ISAC contract, in-service support contract is a very good contract. It employs quite a lot of people. We're currently doing work for what is called FELEX, Frigate Life Extension, which will be the next program coming along. We're really up there, right at the front with the government.
We also do a fair amount of work here. We can sell engineering into the States, we can't build ships for them but we can sell engineering. We're actually doing quite a bit of work in Fleetway for shipyards down in the Gulf of Mexico and some of the other yards. We see the future for Fleetway as quite encouraging.
I should mention, too, with Fleetway and with Irving Shipbuilding, we have an agreement with BAE, which is the designer and the builder of the Victoria-class submarine. Somewhere along the line the government is going to want a lot of work on the submarines, and we want to be in a position to do that work for them.
Atlantic Quality and Technical Services, AQTS we call it, we have 25 full-time staff. They're in inspection. They do a lot of x-rays, gamma rays, tank measurements, tank inspections, a very well equipped company. For example, we have little machines you can put in an oil tank and it will run all around the bottom, the sides and do photographs, measurements, nobody ever has to go inside. We did, at one time, get up to about 60 full-time people, too difficult to maintain on an ongoing viable basis. So we decided to cut back, and if we get big contracts we bring in subcontractors. We much prefer the philosophy that we would like to run long term, level load as much as possible with all the companies, so they get away from all the humps and hollows. You can't do that all the time, and it's especially difficult in the ship repair business, but that's the aim anyway.
BFC Atlantic, quite an interesting company. It's only been in business for a couple of years. The building you see there, that's a warehouse in Saint John Shipyard. We looked at the warehouse, it was sitting empty, it's a nice building, 100 feet wide, 300 feet long, very
modern, and we were kicking our own ideas for what we could do with it. We thought, pipe fabrication, so we set it up, brand new equipment. We set it up as a pipe fabricator, and it employs about 100 people. We do a lot of work in the high-quality, copper, nickel, iron, chrome alloy, superduplex, as well as carbon steel pipe. We currently have a couple of big contracts for the White Rose Project over in Newfoundland. In fact, we have a meeting going on there tomorrow, and we think we will get quite a bit more work for that.
We did a lot of work, again, with GE. We were actually doing the pipe work for the 7E and 7F gas turbines, then we did have a downturn with the same end run and the cancellation of a lot of projects. It's coming back again, and there's a project, the Amethyst rigs, they're being completed down in Maine. Again, it was the same company, Friede Goldman were building two of the Amethyst-designed rigs. When they went bankrupt, these two rigs were towed away.
Unfortunately, they were built with MARAD Title XI money in the U.S., so the rigs had to stay in the U.S., couldn't come to Canada. But we did compete, and we're doing most of the pipework for the company that's completing them. So we did get some of the work. They do all the pipework now for the shipyard, of course. It's a very modern facility and very capable. So it does show there are opportunities, you can take a facility that's just a warehouse and turn it into an ongoing viable company.
CFM is a company in Saint John with a facility, it's in the same type of work, the selective catalytic reactors, when we saw that big boom coming. It's an industrial fabricator. We're going to downsize that now to something under 100, because the future we see as being quite different, if that business ever comes back, we will ramp it up again. It's based in Saint John and we are going to downsize it slightly. We just have too much capacity there.
Presently, in Nova Scotia, we have 1,600-plus employees, probably a significant contribution to the local economy, and one that we are seeing being maintained. Whether it will grow really depends a lot on the offshore. We certainly hope it's going to grow. Upcoming work, Sable Tier II, we do have the South Venture deck, where there's a bridge for the compression deck. We are currently bidding some companies, and then behind that we have Glen Elg. Then there's Deep Panuke, and you all know what's happening with Deep Panuke, kind of decided to take a time out to the end of the year to decide what they're going to do and if, in fact, the project is going ahead.
White Rose, the project off Newfoundland, we are currently bidding. We put one bid in to them, unfortunately we didn't get the first one. The first one was quite difficult for us, the time frame was exactly the same as South Venture for ExxonMobil. Trying to do two at the same time, we did incur quite a bit of extra cost. So it's not surprising we didn't win it. We have another bid in to them right now for another topside unit. It will be awarded, I would think, probably within the next two months. We have to wait and see if we get that one or not.
Then, new builds, PSVs, anchor handlers, we have to wait and see what the market is. Our associate currently has four of them. If they're out and operating and the offshore worldwide goes well, we would like to build and they would like to operate more PSVs. Rig work, it depends where we go. If you look at the world market, all the jackups in the world are becoming quite old, there's going to have to be a replacement program started reasonably soon for jackups. Jackups are quite difficult for us to build, just due to the facilities. But we're doing various studies right now to see if we could possibly build jackups. It's a market we may or may not get into. I think it is going to be quite a big market.
Ship repair will continue, I mentioned that. It will continue as is. The big push will be in the States. Naval work, we are well positioned. We are fortunate with geography, we have a common boundary with our neighbour next door, so it's quite convenient for us.
The Coast Guard has a replacement coming up. It's not yet funded. We've been talking about it for I think six years now so it can't be too far away from being funded. My feeling is you will see a movement on that next year and they will probably place orders for about eight ships. If it's not next year, it won't be too far away, so it's certainly coming.
Then there are the submarines I mentioned. We do have the agreement with BAE and we are looking at what we can do to support FMF on the submarine program.
What we do hope for the offshore is that the oil companies all have great results this year and everybody sees lots of oil and gas out there and that will make a huge difference. Right now we don't really have an industry. We have projects and the projects, until we get quite a few, do not form an industry. So we've got a few projects right now. We'd like to see a real industry here and all the infrastructure and backup equipment needed to support it.
EFTA, European Free Trade Association. The public at large, I've talked to individuals and they've never heard of EFTA. Most people think of EEU, the European Economic Union. EFTA is totally separate. EFTA is made up of four countries: Norway, Switzerland, Liechtenstein and Iceland. What brings these four countries together - I mean Switzerland doesn't even have an ocean - is quite remarkable. The only thing we can think is maybe if they join and they form EFTA, they might get into the European Union. I don't know if that's behind it but the driver behind EFTA is Norway.
The Canadian Government has been negotiating with EFTA, which you read Norway, for Norway is leading the negotiations and what they want to do is if you build a ship in Norway right now and bring it into Canada, there's a 25 per cent import duty on it. There isn't from North America or Chile because of NAFTA but there is from most of the other countries.
Norway has had a huge downturn in the supply vessel business because they brought in new regulations and supply vessels and instead of supporting one rig, now within a certain mileage can support more than one rig. Norway owns more than 40 per cent of the world's supply of offshore supply vessels. They have nothing for these vessels to do. The Norwegian shipyard is in a downturn and they look at an emerging market to look at Canada here and they think, great, let's get rid of the 25 per cent import duty and we can do two things. The owners of the vessels can come in here. A lot of these vessels were built under the Norwegian subsidy. They've been depreciated so they can come in and quote a daily charter rate that people like Secunda and Atlantic Towing just couldn't match and you'd find ships coming in to displace Canadian-owned and Canadian-operated ships.
On the shipbuilding side, anybody, if they wanted to come to Canada or go to Norway, right now there are still subsidies obtainable in Norway. They will deny this and they say, should be fair, you should get rid of your import duty, we've got rid of our subsidy. Well, that's all very well but they have developed a tremendous industry during the time it was subsidized. We buy the UT722 design from Norway. We pay over $1 million to the Norwegian company for every one we build. We buy packages, the main engines come from Norway, the shafting and propellers come from Norway, the nozzles come from Norway, the generators come from Norway and it's a huge part of our cost which is already Norwegians'. So we tell them, be reasonable. You don't want the whole thing but they are not being reasonable.
In fact, we had a meeting last summer with the Norwegian Ambassador to Canada and the Shipbuilding Association and attended by quite a lot of local people, government people were there, myself, Secunda and we had said we didn't want it. We felt that the Canadian Government should say no, we are going to maintain the 25 per cent import duty. We are having a tough time with the Canadian Government. We have been well supported by the province. The Premier has written saying it should be maintained but the feds are not giving up.
We had a meeting just over a week ago with the feds and they still want to go ahead and sign the free trade agreement. The only thing that's holding it up is the shipbuilding and we said, well, carve it out. They said we never carve anything out, it's either across the board or nothing. We said that's absolute rubbish, what happened to the shipbuilding industry under NAFTA? Well, that was different. We said we were carved out, carved the Norwegians out. They have not given up. In fact, I had a call from the ambassador last week asking if I would talk to the head of the Norwegian shipbuilding association which we did and they're still on the same tack. His story is we need the work, we've got 42 shipyards in Norway, we employ over 80,000 people, we don't have enough work. I said, well, join the club, and the trouble is that you have never downsized.
[8:45 a.m.]
Our industry has been downsized dramatically. If we had 42 shipyards and 80,000 people, we might downsize. So you should go back and think what you're going to do about it for we are not giving up our opposition to maintaining the 25 per cent. Where it will end up, I'm not sure. So we get through NAFTA and then we get a call from the government saying, by the way, we're negotiating a free trade agreement with Singapore and the only thing holding it up is shipbuilding. Here we go again, and we had an agreement under a committee called CMAC with the government that we would be advised of any upcoming trade negotiations so we could be right, front and centre at the very beginning and, we are way at the end again, it's almost done. Mr. Chretien would like to sign both these agreements before he retires and the outcome, I'm not sure. If both these agreements go ahead, that's going to be very bad for the industry, not only for the shipbuilding but for shipowners as well. That's going to open the market up to Singapore, still a low cost country and very good; Norway, tremendous infrastructure built up and Norway very capable. So it's a tough market.
The shipbuilding policy, the government did bring a shipbuilding policy in and under the shipbuilding policy you can go to the government and as a help in selling ships you can get money to subsidize the interest rate. For selling ships today, the finances are a huge part of what you do to sell the ship. If you get the Title XI money from MARAD and the States, for example, you get an American Government back guarantee for 25 years. I mean you could walk into any bank in the world, if you've got an American Government guarantee for repayment good over 25 years, you will get a hell of a good interest rate and you get very good terms and that's tough to compete with.
The Canadian Government brought in a program where you can get up to 10 per cent of the cost of the ship which doesn't go to the shipyard, it goes to the owner or the bank and you may buy depending on the deal. Let's say you were going to pay 7 per cent for 10 years, you can put that money to the bank and buy an interest rate down to 4 per cent, or however it works out. That's the theory and that 10 per cent is probably going up to 15 per cent. We've been arguing it's not enough still to compete with the Title XI and some others, but the government in all their wisdom brought in a ringer as well, if a Canadian owner builds a ship, you do get accelerated depreciation. So you can actually depreciate that ship over four years which is very good from a cash flow point of view for an owner, but when they brought in a new shipbuilding policy, they said, well, by the way, if a Canadian owner takes advantage of the shipbuilding structured finance facility we call it, if the Canadian owner takes advantage of that, we're not going to let him depreciate his ship over four years. It's then 20 years straight life. So you give it with one hand and you take it away and the effect is about the same. So I mean it doesn't make any difference.
So what we've done is brought in a policy that does help in the international market, but does nothing for us in the domestic market. So the policy is really penalizing Canadian owners and traditionally a big part of the market is for Canadian owners and if you look at
the Great Lakes fleet, they're all getting quite old. The Great Lakes fleet has to be replaced very soon and if the government hadn't done that, I'm quite sure you would see business going right now. We have a situation right now, a company up in Ontario was going to place an order for two ships and if that accelerated depreciation had been maintained, they would have built them here in Canada. The ships are currently under construction in China. So there are two Canadian owners.
There's another well-known Canadian owner who builds in China and that could have been done here. So I mean we've got a tough market and things are not getting any easier, but we're going to survive. We will always find some things to do and, hopefully, you know the market keeps changing and we always keep looking at other opportunities and something will come up. Thank you very much, ladies and gentlemen. If you have any questions, we would be happy to try to answer them.
MR. CHAIRMAN: Thank you very much, Mr. McArthur. We have been joined by the MLA for Cape Breton West, Russell MacKinnon. Good morning, Russell. I understand there are a number of questions, so we will begin with Mr. Chipman.
MR. FRANK CHIPMAN: Mr. Chairman, I'm interested in the Alma topside contract. ExxonMobil awarded that contract to a U.S. company. I understand your company bid on it, but they specified that you had to include Canadian content. You were advised to specify a Canadian content and yet the contract was awarded to a U.S. company, I believe, that had no commitments to include - apparently that's very vague, can you explain?
MR. MCARTHUR: Yes. There actually was no requirement for Canadian content. There was a requirement - you had to quote technology transfer what you were doing and what your Canadian content was, but the regulations under the Canada-Nova Scotia Offshore Petroleum Board said Canadian content will be used if everything is equal, so really there is no requirement for the oil companies to use Canadian content as a driver in awarding contracts.
MR. CHIPMAN: So it would be an unfair bidding process, wouldn't it, if you were obliged to, and of course you are a Canadian company, you are going to try to include as much Canadian content as possible, yet a company in the U.S. can be awarded that contract. It almost seems like a protectionist system.
MR. MCARTHUR: Yes, it's good for the American companies because it's really the learning curve; they're well down the learning curve and have done a lot before, and once we catch up and get down the learning curve we will compete with them. I mean there is no requirement for Canadian content, so we just have to say that's the regulation and let's get on with it. The price is going to be the driver and we looked at the price very, very carefully, quoted a very comparative price and were fortunate enough to get the contract. But to be quite clear, there is no requirement under existing regulations for Canadian content.
MR. CHIPMAN: What do you feel the loss to this province - that contract I believe was around $40 million - what would you estimate the taxes generated for the province would have been?
MR. MCARTHUR: I'm not sure, $2 million or $3 million in taxes, but the big benefit we think, you know if we win the contract you look at other people here, you look at Guildfords, MacKinnon & Olding, who do insulation, who do painting and the other people, Land & Sea do instrumentation, Black & McDonald, we employ these people as subcontractors. None of these people will get work if it's done down in the Gulf. So it's not only the shipyard, it's the spinoff effect of the whole local economy. Not only that, if you talk to taxi drivers, limousine drivers, when Eirik Raude was going had a great time. I mean there were people in and out here all the time and the taxi drivers have remarked to me that they've seen a downturn when that rig left. So there's a huge spinoff effect from all these.
MR. CHIPMAN: When Brian Tobin was Industry Minister he was pushing for a shipbuilding policy for Eastern Canada. Have you seen much support from the federal government in that direction?
MR. MCARTHUR: That's the structured financing. That was the outcome of the Tobin initiative, it started some time ago and that's what came out of it. Not quite what we had hoped for, but you know if they did that one correction and allowed the Canadian owners to get the accelerated depreciation, as well as the financing, like I say, it would make a big difference here.
MR. CHAIRMAN: I'm going to, in the spirit of fairness and co-operation, allocate approximately five minutes if we can and then we may go back to members if there's time permitting. Mr. MacKinnon.
MR. RUSSELL MACKINNON: Thank you, Mr. Chairman. Mr. McArthur, does your company do work for non-Canadian entities?
MR. MCARTHUR: Oh, absolutely. In the ship repair business, a lot of our business right now is for American companies and that's a growing part of the business. We're doing Babcock Borsig Power, industrial work, we do work for GE, we do work for Carlton Estates, and I forgot to mention that the Stenpro building, basically is for Rolls Royce, for the White Rose Project. We do quite a bit in the States and in fact, we have an office in Houston and we have a vice-president of business development marketing, it's just a one-man office, but he's located in Houston. He gets around to all the oil companies and all the companies down there, FMC, we're doing quite a bit of work for them. Houston is a place we go a few times a year and we tie in with him and get around to see people so, yes, we do quite a bit in the States. We can't build ships for them.
MR. MACKINNON: Pardon?
MR. MCARTHUR: We cannot build ships for them, it's prohibited by law.
MR. MACKINNON: Do you build ships for any non-Canadian entities?
MR. MCARTHUR: Yes, not as many as we would like. The latest ones we did were the tugs over in Prince Edward Island, we built four for the Panama Canal Authority. Within the next couple of weeks we will sign a contract for three more for a South American country.
MR. MACKINNON: So you are competitive internationally?
MR. MCARTHUR: Depending on what it is. The tugs, for example, were . . .
MR. MACKINNON: You win some, you lose some, that's the nature of the business.
MR. MCARTHUR: Yes.
MR. MACKINNON: And you have 1,600 employees here in Nova Scotia, approximately.
MR. MCARTHUR: Approximately.
MR. MACKINNON: This might be an unfair question but I feel I have to ask it, does your company make a profit or are you losing money?
MR. MCARTHUR: We like to make money.
MR. MACKINNON: But that wasn't my question.
MR. MCARTHUR: Last year we were profitable.
MR. MACKINNON: You made reference to the offshore as being a series of projects and not an industry. I think I have a sense of what you are saying, we haven't built ourselves up to the point of being integrated with one sector feeding off the other, value added and that sort of thing. That's essentially what you're saying, correct?
MR. MCARTHUR: Yes. I'll give you an example. South Venture, for example, to load it out we need heavy roll-out equipment and the company that does a lot of that is, Mammoet, they have no equipment locally so that equipment for the load out is going to come from somewhere else, it's the same for the heavy-lift crane. It's more expensive for us than people say, on the Gulf Coast or the North Sea, where that equipment is local. We have to pay the transportation to get that equipment from Europe, or the Gulf, get it here and take it back, so that's a disadvantage to us. If there was an industry you would get companies like
that who would come up and set up here locally, there would be enough work for them to keep equipment here, but right now, we get hit with quite a bit in transportation costs.
MR. MACKINNON: One final question. I understand what you're saying, Mr. McArthur, is that the offshore gas and oil project - if I can use that for lack of a better phrase - hasn't matured or developed to the point that it should have or could have, to be able to sustain the type of industrial activity that you would envisage?
MR. MCARTHUR: No, but you know, we think it will and we hope it will. You look at a development curve, you can look at the one in the North Sea, it's the same thing, it started quite slow and then picked up. We just have to depend on the oil companies hitting something when they put wells down out there. I have no inside knowledge but my gut feeling tells me that there's something out there or they wouldn't be spending all that money. We're close to the biggest market in the world, so it's going to develop. There might be hiccups along the way but I, personally, feel it is going to develop and we are looking to be a big part of that.
MR. MACKINNON: Thank you.
MR. CHAIRMAN: Mr. McArthur, earlier in your presentation you referenced the shipbuilding tariff, the 25 per cent tariff on foreign-built vessels. You indicated that the Premier and I guess I would submit, Premiers from other potentially-impacted provinces, have been very supportive of the tariff staying in place. Then, I wasn't quite certain as to what the federal government's position is, is it ever-evolving, is it a moving target, is it something that you're concerned with on an ongoing basis?
[9:00 a.m.]
MR. MCARTHUR: Absolutely, we had a meeting with representatives of the federal government just two weeks ago, headed by a lady, and she said it's the only thing holding it up, and the Prime Minister wants to see this thing signed and get on with life and we're fighting it vigorously every week.
MR. CHAIRMAN: So the federal government's position is that it should be eliminated?
MR. MCARTHUR: That would appear to be the case.
MR. CHAIRMAN: So that's a grave concern then?
MR. MCARTHUR: That's a grave concern and then you talk about Singapore coming behind it - I mean it gets worse.
MR. CHAIRMAN: Did the feds not form a committee to study that particular issue and come back with some recommendations? I thought they came back with some that were rather positive.
MR. MCARTHUR: There's what's called SIMAC, Shipbuilding Industrial Marine Advisory Committee. I'm chairman of the trade and investment portion of that committee and there was a commitment from the government that before any other negotiations started, we would be advised. That's why I was quite surprised when Singapore came up. The committee has only met once, and will meet again in June, and there's no question that that committee is totally against the 25 per cent import duty.
Negotiations are stalled right now, but according to this lady they would like to see it concluded. We keep opposing it at every level and as much as we can, and what the outcome will be, I honestly don't know but the shipbuilding association is very vigorously protesting that.
MR. CHAIRMAN: I had a document that indicated the federal government was reiterating this Buy Canada First and vigorously portraying themselves as in support of procuring and repairing and refitting vessels in Canada. It seems rather ironic that they would want to remove that tariff, but admittedly I only have a limited knowledge of the whole issue, but I think it would be quite detrimental.
MR. MCARTHUR: We find it ironic as well. One of the arguments we have put up is if we build a ship we must comply with the latest regulations for health and safety under the Coast Guard regulations, which is as it should be. We said if you're going to do that, one of the things you must do is any ships that are imported into Canada, they would have to comply with the latest health and safety regulations of the Coast Guard. The government's answer is we always do that - and the government doesn't do that. In fact the federal government just imported a ferry which doesn't meet the latest health and safety regulations of Coast Guard. If there is a requirement for health and safety regulations here in Canada to protect the employees, which is what it should do, it should apply to a new ship or an old ship. You can't say let the guys on the old ship, we're not too worried if they get hurt, we'll just put Canadians on the other one. So, there are a lot of abnormalities in the system.
MR. CHAIRMAN: Mr. Carey.
MR. JON CAREY: Thank you, Mr. Chairman. Do you have an adequate supply of local tradespeople?
MR. MCARTHUR: The short answer is yes. Are we worried about the future? The answer is yes. The workforce is getting elderly . . .
MR. CAREY: Do you have a relationship of training or anything with community colleges or any of our Nova Scotia educational facilities?
MR. MCARTHUR: A first-class relationship. The community college is very supportive, do a good job and yes, we talk to them quite regularly and have ongoing discussions with them. We have talked to them about this for example, and we find them very responsive. I'll give you an example. With the Eirik Raude we were very short of electricians because of the problem I mentioned - all of that extra work, we had to find a whole raft of electricians. We went outside the province and, in some cases, even outside the country for a few specialized ones. We talked to the Nova Scotia Community College and we put a program together and they very quickly trained 80 young Nova Scotians, trained them to the extent that we put them to work on the rig - they weren't doing the real high-tech stuff and all the final hookups, but these young fellows did a tremendous job and so did the community college.
The sad fact is though, then Eirik Raude goes down and we have no ongoing work for these young fellows and then I don't know what happened to them. Hopefully they found jobs somewhere else within Nova Scotia or Canada. The community college is a big asset for us.
MR. CAREY: That's excellent. However, for people to think that they would have a career for the long term, are there too many factors, such as the tariffs and so on, that would discourage them? Does anyone really train with the idea in mind that they are going to be working in this industry and, as you said, there were layoffs and so on. What's the long-term view for people who want a career in shipbuilding?
MR. MCARTHUR: The unfortunate fact is if they come to work for us, there's a good possibility they are going to be laid off. We do have a lot of humps and hollows. I've said for many years, and it's common across Canada, my opinion, if you want to train the young people, you put up what I call a proper apprenticeship program. If you look at apprenticeship programs in the U.K., you hire an apprentice and he makes a commitment to you and you make a commitment to him, he's got work for four years. We don't do that in this country. Most of the shipyards are unionized and it's a "last in is first out" and it applies to apprentices, young people as well. So there's a downturn, the first out the door are the young fellows. You will never ever really get a good training program until some point in time that is changed and you say, we're going to take 20 apprentices and they are going to be with us for four years, they are not subject to layoff, and you train them. In the long term, that's the solution.
MR. CAREY: I guess my question would be, would your company be willing to participate in that type of program?
MR. MCARTHUR: Absolutely.
MR. CAREY: Financially?
MR. MCARTHUR: Yes.
MR. CAREY: Thank you.
MR. CHAIRMAN: Frank Corbett.
MR. FRANK CORBETT: I was amazed at the miscalculation on the cable replacement on the Eirik Raude. I know you weren't there at the front end but what do you think would have caused such a miscalculation? We're not talking about 10 feet versus 15 feet here.
MR. MCARTHUR: We honestly have no idea. We are just as amazed as you are. You cannot be that wrong, or you shouldn't be that wrong. We have no idea how that could have come about but there were other instances. That's just the most glaring one.
MR. CORBETT: I am just wondering, because it puts the whole idea of people's capabilities into question.
MR. MCARTHUR: Absolutely.
MR. CORBETT: I was one of those people who saw a lot of my friends from Cape Breton work on that, because a lot of them were laid-off electricians from the coal mines. A lot of them had worked and were quite happy to get that work. I guess that's one of the parts I want to go to. It's almost something about the apprenticeship program. Your labour costs, it's an international business, how do you compete with labour costs here? Are they applicable here?
MR. MCARTHUR: It depends. We are competitive with western Europe, not so with eastern Europe, but western Europe we are competitive. Some countries - Germany is probably higher than we are. Scandinavia is about much the same, so we are competitive with western Europe, very competitive if you split the U.S. with the northeastern and southwestern U.S.; we are very competitive there. The Gulf Coast is very competitive. Labour down there is very competitive. With South America, obviously, we are competitive. Japan, yes; China, Korea, no. The big force that's going to be in the shipbuilding is going to be China. China is coming on very fast. We are paying about $22 an hour and China is something less than $2. You can't compete with that.
MR. CORBETT: You talk about your apprenticeship programming and the effects collective agreements may have on getting into the type of reciprocal agreement with an apprentice - say I'll give you four years of work, you give me four more learning years. Has there been resistence from the people who hold collective agreements with you to sit down
and negotiate around this? Have you brought that up? What's the sticking point, appreciating the fact of where we're at with most collective agreements, last in, first out? I mean, is there any kind of idea of negotiating super seniority or anything like that? Has either party been receptive to that type of stuff?
MR. MCARTHUR: We haven't brought that up in the past few years, our collective agreement is up at the end of this year. We will really have to wait and see which way we go. We would very much like one for the long term, I think it's good for everybody. Seniority is the cornerstone of a union membership and so there has to be acceptance of the fact that there's going to be a number of employees there that basically are not going to be subject to layoff. So, we'll have to wait and see on that issue.
MR. CORBETT: I asked that knowing that the agreement isn't open right at this moment. Usually I find that if you get into those types of discussions, pre-collective bargaining, that it's done under a much better atmosphere because then you're looking around and you've got people who think I'm going to be displaced. So, you haven't pursued that outside the collective bargaining window?
MR. MCARTHUR: No, over the years, we've never made much headway so far.
MR. CORBETT: I guess the other side of it is, when I look at loan guarantees, I think first run at it - like most people say - why would a company as well off as Irving need loan guarantees and is it fair to say it's a way, like you have this pool of money over here and if you don't have to hive that money off to guarantee a loan, then you can use that money to leverage something else. Is that . . .
MR. MCARTHUR: That would be a fair assessment. We have to compete for money within the Irving group and it's just as you said, there's a pool of money, it's only so big. If we can get guarantees from a good source like the government, we would do that.
You could go back in time, this government has put up quite a number of guarantees. There was a guarantee on The Louis St. Laurent, there was one on The Preserver, there was one on MCDVs and then there's been naught. Never has one been called on. It doesn't cost the government one penny and if you add it all up, I'm sure the government's made quite a few million dollars on guarantees from the shipyards since the mid-1980s.
MR. CHAIRMAN: Thanks, Frank. We'll move to your colleague there to your right. Howard.
MR. HOWARD EPSTEIN: Thank you, Mr. McArthur, a very interesting presentation. Can I ask you some questions about the offshore supply vessels that you constructed? Indeed, the Atlantic series. Did they all end up in the ownership of Atlantic Towing - is that where they are - which is also one of your companies?
MR. MCARTHUR: Yes, an Irving company.
MR. EPSTEIN: The work that they're doing now, can you just tell me where it is? Some of it is not just in Canada, is that right?
MR. MCARTHUR: No, The Kingfisher is over in the North Sea.
MR. TIM BROWNLOW: The Eagle is off Sable and The Hawk is in Newfoundland - or vice versa.
MR. EPSTEIN: I also had a question about the loan guarantees because that was my first direct look at a request in the shipbuilding industry, for a loan guarantee. I think this was back in 1997-98 that this was in process and the suggestion at the time was that it would make it less expensive for the company to borrow money to construct these vessels. I think I heard you suggest that this morning. In fact, was that the case, that you were able to negotiate with bankers?
MR. MCARTHUR: Yes and you get a preferential rate; if you have a government guarantee backing up your loan, you'll get a better rate. Absolutely.
MR. EPSTEIN: Is it possible for you to quantify that for us at all, either in terms of straight differentials of percentages or savings to you in terms of the construction?
MR. MCARTHUR: I would be guessing so I would rather not guess. The owner sets up the financing. But it was certainly helpful.
MR. EPSTEIN: This was actually a case of borrowing money from a private lender, from outside Irving's own set of companies?
MR. MCARTHUR: Yes, absolutely, they're financed by banks.
[9:15 a.m.]
MR. EPSTEIN: All right. Can I ask you about NAFTA, which is something that's a big puzzle to me. Can you help us a bit in understanding what went on with NAFTA and why it is that the shipbuilding industry was put in this very difficult position vis-à-vis the United States. Was this a feature purely of NAFTA or did it predate that, and was that also part of the FTA?
MR. MCARTHUR: Yes, it predated NAFTA. The Jones Act has been in place . . .
MR. EPSTEIN: Oh, I know the Jones Act has been around for a long time, but we didn't have a free trade agreement until the first one, 1989, and then the NAFTA in 1994.
MR. MCARTHUR: Yes.
MR. EPSTEIN: So I was wondering why it was that the shipbuilding industry was allowed by the government to end up in this odd position.
MR. MCARTHUR: I'd like somebody to answer that too. We can't find it out. We fought it vigorously at the time. I think we got traded away for culture. They wanted an agreement on culture. The Canadian lobby, the industry in this country is quite small. The lobby in the States is huge - very big companies, very powerful lobby in Washington and I think that's what happened.
MR. EPSTEIN: Is there any indication from the Department of Foreign Affairs and International Trade that they're making any attempt to change this at all?
MR. MCARTHUR: They're making no attempt whatsoever, currently.
MR. EPSTEIN: Does the industry talk to DFAIT about the possibility of changing this?
MR. MCARTHUR: Yes, we fight our battles. Right now we have AFTA, Singapore, which is more concern to the industry right now than trying to change NAFTA; the probability of changing NAFTA is quite slim.
MR. CHAIRMAN: Thank you, Howard. Ron Chisholm.
MR. RONALD CHISHOLM: A few of the questions I have are dealing with the Goldboro gas plant and the fractionation. I understand you have a service contract in those areas through Fleetway?
MR. MCARTHUR: That is correct, yes.
MR. RONALD CHISHOLM: Does it take in the offshore platforms as well as the plant in Goldboro and the fractionation?
MR. MCARTHUR: Correct, yes.
MR. RONALD CHISHOLM: How many employees would you have with that contract?
MR. MCARTHUR: On that contract, not a great deal, six, seven or eight maximum. It fluctuates a bit, it depends on what we're doing. It's as low as two or three at times.
MR. RONALD CHISHOLM: When they have a shutdown, that sort of thing, a maintenance project, would you hire some local people at that time, like welders, machinists, whatever, to provide for that, in the local area?
MR. MCARTHUR: Absolutely. We hire locally where we can, if the expertise is there.
MR. RONALD CHISHOLM: That takes in all the janitorial and those types of services as well?
MR. MCARTHUR: The whole thing, yes.
MR. RONALD CHISHOLM: Okay. Thank you.
MR. CHAIRMAN: Thank you, Ron. Mr. MacKinnon.
MR. MACKINNON: Mr. Chairman, I understand that when NAFTA was signed, Halifax became a very critical access point to Europe as part of the North American free trade corridor. Is that correct?
MR. MCARTHUR: You know, I wouldn't really have any knowledge of that.
MR. MACKINNON: Have you not seen a copy of the North American free trade corridor that was laid out by the NAFTA team?
MR. MCARTHUR: No, I must admit I've never read that.
MR. MACKINNON: Really?
MR. MCARTHUR: No.
MR. MACKINNON: I'm surprised.
MR. MCARTHUR: Maybe we better go look for it and see what's in it.
MR. MACKINNON: Yes. I think you'll find that Halifax is now a key point of access to Europe as opposed to in and around the corridor of the New England States, which has essentially become, I don't know if you'd say landlocked, but they're at a log-jam there, capacity. That was one of the reasons the New England governors were lobbying the Province of Nova Scotia to redirect that corridor, so as to bring it up through the New England States and through Saint John and that area. I'm just wondering if maybe that was part of the logic of the Irving empire moving from Saint John to Halifax. It seemed to be just around the same time.
MR. MCARTHUR: Didn't even come into the equation.
MR. MACKINNON: I know with modern technology a lot of improvements have been made and I know that labour costs are always going up, inflation and contracts. Essentially, it takes less people to build a ship today then let's say it did 20 years ago, is that correct?
MR. MCARTHUR: Oh, that's absolutely correct, yes.
MR. MACKINNON: I guess I'm trying to get my head around this 25 per cent tariff duty. It's a free flow from the original free trade agreement that was signed with Prime Minister Brian Mulroney, is that not correct?
MR. MCARTHUR: I'm sorry. I didn't really understand the question.
MR. MACKINNON: Well, the NAFTA agreement came after the free trade agreement . . .
MR. MCARTHUR: Yes.
MR. MACKINNON: . . . and one flowed right into the other.
MR. MCARTHUR: Okay, but the 25 per cent import duty has been in place for many tens of years.
MR. MACKINNON: Under various administrations . . .
MR. MCARTHUR: Yes.
MR. MACKINNON: . . . even Conservative Administrations.
MR. MCARTHUR: Yes.
MR. MACKINNON: I was a little disappointed because you seem to keep focusing on the Prime Minister, but history is clear. The founder of the Irving empire had not a good working relationship with the Trudeau Administration, in fact he eventually left Canada because of tax issues, isn't that correct?
MR. MCARTHUR: I have absolutely no comment whatever on that.
MR. MACKINNON: Okay, well I think that pretty well answers my questions. Thank you.
MR. MCARTHUR: Excuse me, I mentioned the Prime Minister because the federal government keeps telling us it's the Prime Minister who wants to sign the agreement. I'm only quoting what the federal government tell us.
MR. MACKINNON: That's what we elect politicians for, they have to make decisions.
MR. MCARTHUR: Okay.
MR. CHAIRMAN: Thank you, Mr. MacKinnon. Canadian Steamship Lines, Mr. McArthur, speaking of Prime Ministers and Prime Ministers-in-waiting, I was just curious, during your presentation you politely referenced somewhat of a dichotomy where - well I guess I would ask the question: does Irving or has Irving done any amount of work for Canadian Steamship Lines?
MR. MCARTHUR: We repair ships for them.
MR. CHAIRMAN: Repair ships for them?
MR. MCARTHUR: Sure. They have self-unloaders that run into here and we do work for them.
MR. CHAIRMAN: Is it a fairly consistent amount of work that you would get?
MR. MCARTHUR: No, it's spasmodic, comes every now and again.
MR. CHAIRMAN: Now you mentioned the 4 per cent depreciation policy and then the fact that I guess if you had a vessel constructed in another country, i.e. China, that you are not eligible for that depreciation factor. How did that . . .
MR. MCARTHUR: The one owner would not be. If he's a Canadian owner, he cannot get this interest buy-down and the accelerated depreciation, he must make a choice. He gets one or the other, whereas if a foreign owner comes to us he can get the interest buy-down and he goes back and he gets whatever depreciation applies in his own country. So truly it's penalizing Canadian owners somewhat.
MR. CHAIRMAN: Okay. I just wasn't clear on that. Just concluding on the Canadian Steamship Line questions, recently, I guess allegedly, Mr. Martin divested his interest to family members. Have you experienced, from your perspective, any situations over the years where possibly some of the decisions and policies of, yes, the federal government, the existing government which has been in place since 1993, have adversely impacted Canadian shipbuilders?
MR. MCARTHUR: The one I mentioned, which was the interest buy-down, we as an association fought hard to keep the accelerated depreciation and the interest buy-down. That's about the only instance I know that has adversely affected Canadian owners.
MR. CHAIRMAN: Have representatives of Irving been in discussion with the federal Liberal leadership candidates about some of the concerns? Obviously the Prime Minister is interested in a legacy. It may not coincide with some of the thoughts that Atlantic shipbuilding companies have. I'm just wondering, have you had a chance to lobby, discuss or canvass some of the other candidates out there?
MR. MCARTHUR: Gee, I would think we have spoken to the majority of the Cabinet over the past year or so and expressed concern; we have also expressed concern right to the PM.
MR. CHAIRMAN: Mr. Chipman.
MR. FRANK CHIPMAN: Mr. Chairman, mine may relate a little to Canada Steamship Lines, but I'm not trying to cast aspersions to them, it's just something I read in a newspaper article recently, but I've always been intrigued by the number of vessels that are foreign registered, Panamanian, in the Carribean. Canada Steamship Lines apparently, I think maybe it's Canada Steamship Lines International, had 20 vessels registered in Panama, I believe it was Panama. Are there tax advantages for companies that register outside of Canada? I'm referring to tax deferral. I'm not talking about tax avoidance because we talk about tax deferral, but are there certain tax advantages to doing this and I know they're not the only company doing it, I know there are others too.
MR. MCARTHUR: I'm not a tax expert, you would have to direct that question to someone else.
MR. CHIPMAN: That's all I wanted to know.
MR. CHAIRMAN: Mr. Corbett.
MR. FRANK CORBETT: Back to the 25 per cent tariff again, Mr. McArthur, are you saying that in your dealings with the federal government, it seems to me the wishes of the current Prime Minister, that he wants that for some reason as part of his legacy, but as early as last July the federal government still seemed to be hard onside with telling Norway, no way; the 25 per cent is there and it's staying. What has happened in the last nine to ten months that government has taken such a radical turn in wanting that off the table?
MR. MCARTHUR: You know, I can't answer that for we thought the EFTA issue was dead and we were quite surprised when we got a call just about two weeks ago from a representative of the government asking to come and talk on EFTA. So we were quite surprised for we thought it was dead and gone.
MR. CORBETT: We hear quotes from the minister at the time and still is, Minister Rock that, I believe, it would be folly to relinquish the current tariff. It's not a folly any more according to this government then?
MR. MCARTHUR: I'm not sure what has happened. Mr. Rock over the years has been very supportive of maintaining it. So I can't honestly tell you what happened.
MR. CORBETT: I guess just one last question. Where's the current state of play of the shipbuilding and industrial advisory committee? I know it was industry and labour, right?
MR. MCARTHUR: Yes.
MR. CORBETT: What's the current state of play? Are they active and are they representing the interests of the industry around this item or can you enlighten us on that?
MR. MCARTHUR: Yes, that's the one that Mr. Tobin set up, is that the one you're referring to?
MR. CORBETT: Yes.
MR. MCARTHUR: Yes, that was replaced by SIMAG, the Shipbuilding Industrial Marine Advisory Group, that Mr. Rock set up and the first meeting, I think, was February. The next one is some time in June. So that has been replaced by that group. It's a very large group. There are four subcommittees in it and labour, industry and government are all in there. So we have to wait and see really what the outcome of that is. There has only been the one meeting so far.
MR. CHAIRMAN: John Chataway.
MR. JOHN CHATAWAY: Mr. Chairman, I very much appreciated the presentation so far. It's very fascinating in that basically here in Nova Scotia we have as much activity offshore as we used to have. It's not all finalized, but it's very competitive, but it certainly is a great thing what we're doing in Nova Scotia and I certainly appreciate all the questions from the other people at least and this character is learning a lot more. Thanks for coming. I don't mind if we're another hour late, that's fine, or earlier, whatever.
But basically, if you could clarify, there is a law written and now, of course, the Halifax yard is the second biggest yard. The Davie shipyard in Quebec City, or something, and they're presently bankrupt or something like that. Would you say that if they change this law that the 25 per cent foreign tariff is eliminated, that it's going to be very difficult for what you do in Halifax and I presume the same would be in Quebec, too, would it not, or is that a more complicated thing?
MR. MCARTHUR: No, no, it would be quite a bit more difficult for us. If Davie survive it, it will not be as difficult for Davie. I didn't put it in my presentation, but Quebec has a shipbuilding subsidy, a huge subsidy. In fact, the first ship that Davie, the first ship in a series, the fact that the provincial government will pay 50 per cent of the monies to Davie, this second ship, I think, they paid 25 per cent, the third one 15 per cent, I might be wrong, but if the first one is 50 per cent, that's a huge benefit to Davie. Huge benefit.
[9:30 a.m.]
MR. CHATAWAY: All the vessels that run around the Great Lakes, I presume, other provincial governments support these too?
MR. MCARTHUR: No, Quebec is the only province that has a subsidy.
MR. CHATAWAY: So it's very competitive. I think you implied that China and other foreign countries come in here and just want to set up here the next week, sort of thing.
MR. MCARTHUR: No, I don't think they come and set up here, but if you eliminate the tariff, then owners are free to go worldwide, bring them in duty free, and that makes competition that much more difficult, and life would become harder.
MR. CHATAWAY: Naively, I believe that your presentation has emphasized that we have a busy offshore here and the success of Irving here with the operations, et cetera, is because we have natural gas offshore and things like that.
MR. MCARTHUR: That's a big part of it.
MR. CHATAWAY: I know they're still very much exploring for more natural gas et cetera, but at the same time it's becoming more and more established all the time.
MR. MCARTHUR: That's a fair assessment.
MR. CHATAWAY: Well, yes, keep up the good work.
MR. CHAIRMAN: Thanks, John. Jon Carey.
MR. CAREY: I think in the not too distant past you had been quoted as saying you didn't think Nova Scotia was getting its fair share of the offshore work. What would be your position today?
MR. MCARTHUR: Well, we just won the South Venture, it would be quite hard for me to say the same today.
MR. CAREY: Things have improved.
MR. MCARTHUR: Things have improved. I must say, we had a slight disagreement with ExxonMobil a year ago. We currently have the South Venture project, excellent people to deal with. Very professional. Which you would expect.
MR. CAREY: Would you elaborate a little more. You were saying to help in financing the federal government does put some money in, up to 10 per cent of the value of the sale.
MR. MCARTHUR: Yes.
MR. CAREY: To help you buy down financing and so on.
MR. MCARTHUR: Yes.
MR. CAREY: Is this considered a subsidy? Would Norway, for example, see this as . . .
MR. MCARTHUR: Norway would see it as a subsidy. The federal government believes that it's within WTO guidelines, close to the wire, but acceptable.
MR. CAREY: So your company, on a vessel, how much money would - and I know that different size vessels have different value, but normally, what would be the assistance and how important is this to help you make your deals?
MR. MCARTHUR: Let me say that up to this point in time we haven't done any deal under this program. All the ships we built were contracted for before the government brought this in, so up to this point in time we haven't done any contracts under this structured financing. We're negotiating one right now where we hope to sign a contract very shortly. The dealing is not basically between the shipyard and the government, it's between the owner - the money is paid to the owner direct, it bypasses the shipyard completely and goes to the owner, or the owner's bank. It goes to the owner's financing institution. They then assess the interest rate and that's done in discussions between the owner and the banks and the government and we're not really part of that. We just supply the information that's needed when requested, technical information et cetera, so in the actual negotiation we don't participate.
MR. CAREY: Right, but it's fair to say that your company would be factoring this in as a part of their costs and as a benefit to some degree.
MR. MCARTHUR: As a benefit to the owner.
MR. CAREY: Yes.
MR. MCARTHUR: Pick a number. Say the ship is $40 million, we say to the owner, that's $40 million and we want $40 million from the owner. He can then go to his bank and say, my financing is going to cost me $14 million over the next 10 years, whatever it is, well that $14 million he would then get $4 million from the financial institution, would get $4 million from the federal government and buy his interest rate down from X plus 1 to X, however it works out.
MR. CAREY: I assume that you have ongoing negotiations all the time with representatives in the U.S. and the present relationship with the U.S., have you seen any difference in their position as far as negotiating with Canada?
MR. MCARTHUR: Not a bit.
MR. CHAIRMAN: Mr. Epstein.
MR. HOWARD EPSTEIN: I don't know if it has actually been mentioned, but I'm sure all members of the committee would certainly appreciate a copy of your presentation from today if that's at all possible. It was very interesting.
Can I ask about the ownership of your - and I don't know if they're your major competitors, but the other major shipbuilding companies in the country, I'm thinking about Port Weller Drydocks in St. Catherines and also the Vancouver and Victoria Shipyards, are they Canadian owned?
MR. MCARTHUR: Good question. I mean Port Weller is owned by Upper Lakes and Canada Steamship Lines, 50-50 as far as I know. I mean I have no inside knowledge, but that's the general belief. Davie, of course, we're not sure who owns it, probably the receiver. The Vancouver Victoria Shipyards are owned by the Washington Marine Group. Now, Mr. Washington, himself, is an American. Whether it's U.S. owned or Canadian, I couldn't honestly answer.
MR. EPSTEIN: It was because of the Washington Marine Group that I was particularly wondering if that was American owned.
MR. MCARTHUR: I believe it's Canadian, I'm not sure. He is an American so I'm not sure, I don't know.
MR. EPSTEIN: It's maybe not clear where the ultimate control is, I suppose, and is it fair to say that you all operate in sort of fairly independent spheres because of your geographic position or is there any degree of competition at all?
MR. MCARTHUR: There's some. There's very little between us and the West Coast. That's a totally different market and we don't compete in each other's market. Port Weller, we do compete. They have a frigate up there right now. They beat us on a refit of a frigate. So we do compete for work with Port Weller.
MR. EPSTEIN: The frigate would have been military work?
MR. MCARTHUR: Yes.
MR. EPSTEIN: And, in fact, I was curious about this because when you spoke about prospects for future work, you did mention DND and so on. I'm wondering what the prospects actually are for future military work. For example, what's going on with the submarines, the problematic submarines?
MR. MCARTHUR: The submarines are currently undergoing a Canadianization in the fleet maintenance facility.
MR. EPSTEIN: Right, but it's not something that has been put out to tender outside of the military's own repair facilities?
MR. MCARTHUR: No, that is correct, but the future is unclear yet. The government has totally decided that it looks like major refits of the submarines may come to industry and that's what we're looking ahead to, to see what's going to be done on that. There's a lot of work and, you know, the submarines have received a lot of bad press, but I will say that's a hell of a good deal for Canada.
MR. EPSTEIN: I wasn't asking about the deal, I was really asking about your own prospects so I was a little surprised when I heard you mention DND because apart from the potential on the submarines, I wasn't aware of any other major potential projects that might be done in private industry.
MR. MCARTHUR: We've got, I mentioned the fleet, we're doing a bit on FELEX, which is the frigate life extension. These frigates are now getting, you know, to their mid-life and have to be upgraded. So that's going to be a big program. So, you know, it depends how far you want to go in the future. They've got another program called ALSC, the replacement of The Protector and The Preserver. These ships were delivered in 1967 and 1969, so they have to be replaced soon. I can keep going, there is CADRE, which is the Tribal-class replacement.
MR. EPSTEIN: So are you thinking you're going to be able to continue the Halifax Shipyards without interruption?
MR. MCARTHUR: I would think so.
MR. EPSTEIN: Can I ask finally what your major sources are for the steel that you use in your construction?
MR. MCARTHUR: Generally Canadian. Now, South Venture, for example, I'm not sure where it comes from, we don't buy it. ExxonMobil buys it and it's free-issue to us. Some of that came from overseas because it's not available in this country. This country doesn't make all the required steel that you need.
MR. EPSTEIN: ExxonMobil bought its own steel?
MR. MCARTHUR: They buy quite a lot of the equipment and then it's free-issue. It's quite normal in the oil industry and they do that I think because, you know, sometimes that special steel is quite long to be delivered, so they've actually got it on order before the contract's placed just waiting to say, send it to A, B or C.
MR. EPSTEIN: When you said that you relied on Canadian suppliers, that would be where? Sault Ste. Marie or where?
MR. MCARTHUR: Algoma, up in the Sault.
MR. EPSTEIN: Thank you.
MR. CHAIRMAN: Mr. McArthur, or Tim there, the Dartmouth Marine Slip, a number of workers were displaced as a consequence of the property being sold and the slip essentially shut down. How many workers were able to find - what was the total workforce and how many workers at the former marine slip in Dartmouth - jobs with the Irving group? Maybe at the Halifax Shipyards.
MR. MCARTHUR: I think when we closed, when it ran out of work - it wasn't closed - going from memory there was something like 104 on the seniority list. Many of them found work through the Halifax Shipyards on the Eirik Raude. I'm not sure of the number, maybe half of them found work there. A lot of them did quite well on that project. Since that's gone there are still some working in the Halifax Shipyards. We have no way of tracking what happened to the rest of them. We've no access to the information to see if they found work or what happened.
MR. CHAIRMAN: I know there's two different unions - the one at the shipyard in Halifax is different from the one in Dartmouth. The union is pressing Irving for some
settlement for the displaced workers and I acknowledge that's between the union and Irving, however, I'm just wondering, has Irving accepted any responsibility relative to that request?
MR. MCARTHUR: It's the same union, two different locals. We are currently in discussion with the union and that's all I can say at this time.
MR. CHAIRMAN: That's fine. Mr. MacKinnon.
MR. MACKINNON: Ever since the bombing of the two towers in the United States and this battle against terrorism, I would imagine that the Halifax Shipyards has seen a change of its policy in terms of access and security checks for its employees and so on like that. Can you give us some insight as to how this whole process has impacted on the Irving group?
MR. MCARTHUR: We haven't really changed anything. We felt we had a fairly good screening of employees and we just continued as we did before. We haven't radically changed anything.
MR. MACKINNON: Do you do any work for the U.S. Navy when they come into Halifax Harbour?
MR. MCARTHUR: No.
MR. MACKINNON: They keep that all to themselves. They have their own separate wharf I believe. Is that not correct?
MR. MCARTHUR: Depends on the ship. Nuclear powered ships cannot come up the harbour, they have to go to Shearwater.
MR. MACKINNON: But they have their own wharf just on the other side of Casino Nova Scotia do they not, through some holding company?
MR. MCARTHUR: It's news to me if they do. I don't know.
MR. MACKINNON: Okay. That was my understanding.
The offshore. Just as an overview, do you feel that the Irving group is getting its fair share of business, all things considered? I know you always like to have more business.
MR. MCARTHUR: I would say yes. We've got the South Venture project, Stenpro is building some for Sable and the vessels are currently in operation. Tim can probably answer better . . .
MR. BROWNLOW: The Hawk and The Eagle, of course, have been on contract ever since they've come out of the dock. The Eagle worked on a two-year contract for Sable and now it is in Newfoundland and The Hawk is here at present, which towed the Galaxy II in last week.
MR. MACKINNON: So you're generally satisfied that you're getting your fair piece of the cake, so to speak.
MR. BROWNLOW: Sure, yes.
MR. MACKINNON: And you also feel that you will be able to get some of this Coast Guard work for the eight new ships that are going to be upgraded and submarines?
MR. MCARTHUR: Oh, yes, we'll get our share.
MR. MACKINNON: You'll get the lion's share of that undoubtedly.
MR. MCARTHUR: We hope so.
MR. MACKINNON: Yes, okay. So, 1,600 employees, from what I can understand from your presentation, would be working pretty much full-time now?
MR. MCARTHUR: Yes, I mean there will be fluctuations and there might be 1,400, there might be 1,800, but there's a good base we see going ahead.
[9:45 a.m.]
MR. MACKINNON: I have to apologize - I don't fully appreciate all the arguments for and against this 25 per cent tariff. It would appear to me as if Canada is trying to protect itself against an influx of foreign products, markets and competition.
MR. MCARTHUR: Absolutely, yes.
MR. MACKINNON: And it's a way to protect Canadian industry. That was the way I was interpreting it.
MR. MCARTHUR: And that's correct. But I mean the Americans . . .
MR. MACKINNON: Whereas with the Irving group, it would be more of an international group that creates some frustrations.
MR. MCARTHUR: There's no question you get conflicts even within the group, but I mean the natural laws of economics do not apply in the shipbuilding industry. I mean it's mixed up with subsidies and assistance all over the world.
MR. MACKINNON: Sure.
MR. MCARTHUR: And what we ask for is a level playing field. If everybody did away with every subsidy and help, fair enough.
MR. MACKINNON: Thank you. I want to put on the record I think you are a very good company for Nova Scotia.
MR. MCARTHUR: Thank you.
MR. MACKINNON: And I think you will understand where I'm coming from.
MR. CHAIRMAN: Thank you, Mr. MacKinnon, and I would like to thank all members and our guests, especially our guests, for coming in this morning. We don't really have too much housekeeping other than to mention that our next meeting will be organizational on May 13th. I would like to thank our guests for coming in and we would certainly like to have you back again. I know you have a very busy schedule, but I think I would speak for everybody in saying that we found it very enlightening this morning. (Interruptions)
That would be at 9:00 a.m., organizational on May 13th. (Interruption) Yes, if we're not on the doorsteps. I don't think we will be, but I don't know.
The meeting is adjourned.
[The committee adjourned at 9:47 a.m.]