Conservatives won’t collect $36M late fine for helicopter supplier; Sikorsky will miss Cyclone delivery date by at least two years
By David Pugliese
The Ottawa Citizen
Dec. 28, 2008
The Conservative government has decided that U.S. aerospace giant Sikorsky won’t have to pay $36 million in penalties even though the maritime helicopter it is building for the Canadian Forces is being delivered two years late.
The late penalties were put in place when the contract was signed in 2004 as a way to ensure the aircraft would arrive on time.
The original contract called for the first Sikorsky Cyclone helicopter to be delivered to Canada last month, but now that won’t happen until November 2010.
Instead, the government has cut a new deal with Sikorsky, resetting the clock on when the firm would be liable for late penalties, if at all. The company has been given another two years of grace before facing any sanctions.
Liberal and Conservative politicians, as well as Sikorsky officials, have, in the past, highlighted the penalties as evidence there were severe consequences if the firm didn’t deliver on time. The contract clause allowed the federal government to charge the company $100,000 a day for every day it was late, up to a maximum penalty of $36 million.
In January, Defence Minister Peter MacKay brought up the penalties after news reports suggested Sikorsky would not deliver the aircraft on time. “There are penalties and clauses that will kick in,” he warned.
In June, a response from Prime Minister Stephen Harper’s office to reports that there were problems with military equipment projects, including the Cyclone deal, cited the penalties.
“All companies are expected to live up to their contracted obligations and our suppliers are expected to provide what was agreed to,” Mr. Harper’s office said.
Duff Conacher, co-ordinator of Democracy Watch, said the decision by the Conservatives not to enforce the contract penalties is “practising politics as usual just like the Liberals would.”
Mr. Conacher said the announcement timing, on the night of Dec. 23, and the fact that the original press release did not mention the Conservatives were setting aside the fines, is another indication the government is trying its best to hide the deal.
“I’m amazed the Conservatives rolled over on this one so easily because they had made such strong statements before about using the financial penalties,” he added.
Severe financial penalties for late delivery of military equipment are common in some other nations, but in Canada, such sanctions are not usually imposed. Some in the defence industry doubted from the beginning that Sikorsky would ever face any kind of penalty, while others stated that a maximum $36-million fine was little deterrent on a project worth $5 billion.
Under the new deal, Canadian taxpayers will now pay Sikorsky $117 million more for improvements to be made to the Cyclone, as well as changes to the long-term in-service support package for the aircraft.
The government is not discussing the exact nature of those improvements. The Defence Department and Mr. MacKay’s office declined comment, referring inquiries to Public Works and Government Services Canada.
An e-mail from Public Works notes the extra money would go for “an alternate design solution to the helicopter communication tactical data exchange and providing additional capabilities for the helicopters.”
The helicopters would be able to carry more cargo or fuel if needed, but the e-mail doesn’t explain further.
Other unspecified improvements in the design of the 28 helicopters would “provide the helicopter with growth potential for the engine, main transmission and drive system.”
When asked to further explain what changes would be made to the Cyclone’s design, Public Works re-sent the same information it provided the first time.
At one point, there was talk about installing more powerful engines than were originally offered by Sikorsky, but the government is not saying whether this will happen.
Sikorsky also declined to detail what changes will be made. But it did release a statement that it was pleased with the new deal.
“We’ve worked hard with the Canadian government to reach an agreement that will provide these highly sophisticated and capable aircraft to the Canadian Forces in the shortest amount of time possible,” said Sikorsky spokesman Paul Jackson. “We are continuing to push ahead at full speed with the program.”
The e-mail from Public Works suggested the government did not hold Sikorsky responsible for the two-year delay, but did not elaborate.
Steve Staples, president of the Rideau Institute in Ottawa, said the Conservatives should hold Sikorsky to the original terms of the contract and hit the firm with the penalties that are allowed for in the deal.
“Why have financial penalties if you’re not going to enforce them?” said Mr. Staples, whose institute has spoken out against defence spending and procurement.
“Instead of making Sikorsky pay for late delivery, the government turns around and gives them more money to do what they should have done in the first place.”
In the press release, Mr. MacKay said the Canadian military will receive a “great aircraft.”
But Mr. Staples questioned that claim. “DND and the government are being pretty secretive about all of this,” he said. “If this was truly providing taxpayers and the Canadian Forces with better value, then why are they refusing to provide details?”
Sikorsky is teamed on the contract with General Dynamics Canada of Ottawa and L-3 Communications MAS Canada Inc. of Mirabel, Que.
Agusta-Westland, Sikorsky’s rival in the original helicopter contest, predicted in 2004 that the firm would not be able to meet its timetable because the Cyclone was a developmental aircraft and not in production at the time.
Sikorsky officials dismissed such claims. In interviews in February and July 2004, they said they would have no problem meeting the deadline as the Cyclone was based on an existing civilian helicopter, the S-92.
“We are well positioned to take this aircraft, which has the latest technologies available in it, and navalize it,” said Bruce McKinney, Sikorsky’s director for the maritime helicopter project.
After a strike at the Sikorsky plant, the Canadian government allowed the firm a slight delay in delivering the aircraft. It modified the delivery date to January 2009 instead of November 2008.
Earlier this year, Mr. MacKay blamed former prime minister Jean Chrétien for the delays in the project. Mr. Chrétien cancelled the maritime helicopter program in 1993 out of concern the country couldn’t afford it at a time of a large deficit. The Liberal government paid a $500-million penalty for the cancellation and the project was restarted years later.
But Liberals have called Mr. MacKay’s claims ridiculous and point out that most of the Cyclone contract has unfolded under the Conservative government’s watch.
For more Canadian Forces and Defence Department news go to David Pugliese’s Defence Watch at: