President , Irving Shipbuilding Inc. Implementation of a National Shipbuilding Procurement Strategy Steve Durrell President , Irving Shipbuilding Inc. COEx…The Road Map to A Sustainable Industry

Brief History Due to over capacity in the Mid 80’s Government introduced “Shipyard Rationalization Assistance” Shipyards Closed in British Columbia Ontario Quebec Atlantic Company Confidential 2

Shipyard Rationalization Assistance Source: Industry Canada Website Company Confidential 3

Shipyard Capacity Today our industry is only sustainable if we have a federal program Canada can not afford any further reduction if we are to meet pent-up demand Contracts are required immediately to maintain current capacity Company Confidential 4

Overview Existing Marine procurement for fleet renewal requirements contains high risk elements, it is very complex, time consuming and expensive for both Government and Industry. Stakeholders recognize the need for change given significant government shipbuilding requirements and the need to ensure capable and qualified Canadian shipyards have continuous work in order to maintain a strategic asset. Our proposal was submitted in response to the July 27, 2009 National Shipbuilding Procurement Strategy Consultations. Most Western nations have chosen a model similar to our submission. Company Confidential 5

Future For Canada’s Shipyards Majority of work will be Government Some commercial in booming markets this market is not predictable. Perhaps some niche markets Lake Vessels Provincial ferries and tugs Company Confidential 6

Continuous Procurement (New Builds) Essential to Maintain Ongoing Viable Industry History of the Boom/Bust industry: Canadian Patrol Frigate (CPF) contract signed 1983 Maritime Coastal Defence Vessel (MCDV) contract signed 1992 Next Navy MCP new build contract …? Company Confidential 7

Government New Build Solicitations Cost of bidding is very high and the time from Request for Proposal (RFP) to contract award is exceptionally long CPF – 7 years from expression of interest to contract Bid cost $20Million MCDV – 4 years from expression of interest to contract Bid cost $8Million JSS solicitation suspended – project exceeds budget - $ million spent MSPV bid 3 times before award Arctic Offshore Patrol Ships (AOPS) – Awaiting communication. Company Confidential 8

National Shipbuilding Procurement Strategy (NSPS) Consultations were held with Industry on July 27th & 28th, 2009 Company Confidential 9

Some of the Assumptions (or Objectives) of the NSPS Federal Ships will be built in Canada The Finite Federal demand will be over a 30 year horizon Limited number of yards would be involved Government ship operators will level-load the requirements (No Boom Bust) Company Confidential 10

National Shipbuilding Procurement Strategy (the Road Map) Establish two (2) Centres of Excellence (COEx) for fleet renewal Major Crown Projects (MCP) through a competitive qualification process. One COEx would be qualified for medium, complex combatant vessel capability. One COEx would be qualified for large, complex, non-combatant vessel capability. Company Confidential 11

FAQ’s What is the competitive Process? What is the Contracting Process? What do other western countries do? How is value for money achieved? What are the benefits of a COEx approach? What about the SME’s and small yards? What is the Irving and Davie deal about? Company Confidential 12

Competitive Process Utilize the proven and successful Procurement Strategy, recently used on other Major Marine Procurements prepared in collaboration with Industry Competitive Solicitation of Interest and Qualification Process (SOI-Q) on MERX Compete “Capability” not “Scope of Work” Utilize Appropriate (risk reducing) Qualification Criteria Adequate existing facilities Qualified resources – skilled labour Management strength and experience Financial strength Recent proven experience in ship construction Past performance Company Confidential 13

Contracting Procedures Award a Contract to the 2 Facilities emerging from the SOI-Q process Utilize (Shipbuilding) Supply Arrangements (SSA) as basis for contracts that ensure Best Value. Negotiate contracts by particularized project. Build incentives into the projects, reward performance and share savings with Canada. Company Confidential 14

How do other Western Countries do this? The COEx model of contracting is similar to other countries U.S.A. U.K France Australia Company Confidential 15

Value for Money SSA would use contract cost principles 1031-2 and include contracting templates to ensure fair value utilizing: Annual Rate Negotiations Contract Audits For Profit Limitation Earned Value Performance Measurement Continuous Improvement Incentives Through Shared Risk Integrated Project Management Teams Use contract incentives for continued incremental infrastructure investment Company Confidential 16

Benefits of a COEx approach : Canada can preserve “Sovereign Capability “ and Maintain shipbuilding as a Strategic Asset for Canada Provide a steady work load into the future (30 Years) Retain and develop “high value jobs” with subject matter expertise Provide stable facilities for the cost effective delivery of all MCP’s Allow for incremental investment to keep pace with a world wide industry Reduce industries cost of proposals, more money for facility investment and HR development Company Confidential 17

Benefits of a COEx approach : (continued) Provide the basis for a long term shipbuilding industrial strategy Expedite the government procurement process, while respecting contract policy Provide earlier delivery of vessels Reduce Canada's Project Management Office level of effort: Reduce Canada's costs in the project definition and implementation phases More $ available for the ship and project deliverables Reduce risk to the program, the Contractor, and to Canada Company Confidential 18

SME’s and Small-yard Benefits Facilities designated as a COEx would not be allowed to bid on non-MCP’s Sub-contract work to small shipyards, where geographically feasible; Provide significant contracts to Small and Medium Enterprises (SME’s); and Include shipyards on the West Coast, Ontario and Newfoundland for participation in “In-Service Support” work based on the eventual home port location of the new vessels Company Confidential 19

Other Shipyards (non-COEx) Facilities designated as a COEx would not be allowed to bid on non-MCP’s Utilize National Supply Arrangements Pre-negotiated contracts Work competed on capability and price Lowest priced compliant bid wins Benefits Creates a natural commercial balance Win/win potential for all small shipyards in Canada Minimum bid period, cost and risk Stimulate economy > $100M/year potential Company Confidential 20

Irving Shipbuilding and Davie MOU: Significant Benefits to Canada Technology, IP and Process sharing Project and contract management collaboration IRB coordination and partnership for maximum Canadian benefit Distinct Regional Capabilities in a collaborative teaming agreement Sub-contract where applicable Best Practice teamwork and sharing Value for money structure. Ensure value for money for Canada. Company Confidential 21

Industrial and Regional Benefits (IRB) Company with facilities designated as a Centre of Excellence will: - Create immediate high value jobs Prior to contract signing, commit to direct Industrial Regional Benefits exceeding 60% of the contract value Guarantee to achieve indirect benefits through offsets so that the total industrial benefits to Canada meet or exceed the contract value Company Confidential 22

Industrial and Regional Benefits (IRB) (continued) Spread Industrial Benefits across Canada to the maximum extent possible Include Aboriginal Business as well as Small and Medium Enterprise targets The only thing for sure….if the vessels are not built there will be no benefits to worry about Company Confidential 23

A summary of Benefits form this Procurement Strategy Reduction in solicitation time and cost Projects start earlier and therefore earlier delivery of vessels and earlier IRB’s Significant reduction of up-front expenditure for Government & Industry Significant Project / Program risk reductions This is a win/win situation for Government and Industry Best value for money Company Confidential 24

The Way Ahead Immediate action & steps required Decision by Government on COEx concept Qualify COEx based on overall capability Sign long term agreement Get on with the business of building the Federal Fleet. Company Confidential 25

Thank You!