Will the Sweden-South Korea Icebreaker Deal Stand?
Davie's appeal has merit, but it may not be enough to overturn the award. With the costs being so close, perhaps political or other considerations will drive a reconsideration.
Who will end up building this icebreaker for Sweden?
Earlier this week, I reported that the Swedish Maritime Administration had awarded the contract to build Sweden’s next icebreaker to Hyundai Heavy Industries (HHI) and that Davie, whose Helsinki Shipyard had come in second, had appealed the award:
Today, we’re going to look at the appeal itself, what it tells us about the contract, and then consider a couple of other items that don’t seem to be addressed. For those of you interested, I’ve included copies of the documents referenced in this post at the end. I don’t believe they are available elsewhere on-line. Warning, there is a fair amount of technical detail in this article. Feel free to ask questions, make comments, or correct me if I got something wrong.
Davie’s Appeal
Tekniikka&Talous published an article in which they describe Davie’s appeal. They also provided me with a copy of it. Let’s look at it in some detail.
Challenging the Reference Vessels
In order to be considered for the contract, shipyards had to submit three different reference vessels. Davie is challenging whether HHIs listed references meet those requirements. In response to my request, the SMA provided me with a copy of HHI’s application form showing these references (among other things). From HHI’s application document:
Reference Project A:
To qualify the shipyard shall have experience in the construction and delivery of an icebreaker vessel in Polar Class 1 to 6 or equivalent. The requirements are that the icebreaker vessel has been delivered in year 2012 or later and has a length overall (LOA) ≥ 80 meters.
HHI’s reference:
Language Change: Icebreaker to Vessel
When I first saw this document, I thought that Davie has an open and shut case on appeal, as the HMNZS Aotearoa is, without a doubt, not an icebreaker. I asked the SMA to tell me the basis under which they accepted this reference. In response, Anders Holmgren told me that “icebreaker” was later changed to “vessel”1:
INFO: When the qualification in the current procurement was conducted, SMA mistakenly used the designation icebreaker for reference ship A, but this was discovered at an early stage, and SMA corrected the designation by sending out a correction notice to all participants that the word icebreaker should be removed and replaced with the word vessel.
This means that the designation vessel has been applicable in both procurements, of which the participating shipyards are aware. See below the text that was communicated:
Public information message
Anders Holmgren/Sjofartsverket
19/09/2024 08:18
A correction needs to be made in section 5.2 of the invitation. The existing first sentence says: To qualify, the shipyard shall have experience in the construction and delivery of an icebreaker in Polar Class 1 to 6 or equivalentThis sentence is changed to: To qualify, the shipyard shall have experience in the construction and delivery of a vessel in Polar Class 1 to 6 or equivalent
Public information message
Anders Holmgren/Sjofartsverket
19/09/2024 16:04
Another correction needs to be made in section 5.2 of the invitation.The existing second sentence says: The requirements are that the icebreaker has been delivered in year 2012 or later and has a length overall (LOA) ≥ 80 meters.
This sentence is changed to: The requirements are that the vessel has been delivered in year 2012 or later and has a length overall (LOA) ≥ 80 meters.
Davie’s challenge:
As regards the vessel that HHI has referred to as reference project A, it has been stated that the vessel is of polar class 6. However, DNY doubts this information as it cannot be read in any ship registers that this vessel is of polar class 6 or equivalent. How the Swedish Maritime Administration has concluded that this vessel meets the requirement for polar class is unclear to DNY. There is no fully verified information that the vessel is actually of polar class 6, which is why it cannot be proven according to the information in the tender form that HHI meets the requirement. HHI therefore does not meet the requirement that reference project A should include a vessel with polar class 6 or similar.
(Machine translated from Swedish using Google Translate)
Comments:
According to multiple internet sources, HMNZS Aotearoa was classified by Lloyd’s Register:
As Davie notes in its appeal, the vessel does not appear in Lloyd’s online register. However, this may be because Aotearoa is a Naval vessel. Military and Coast Guard vessels do not normally appear in these on-line databases. I can attest to the fact that the U.S. Coast Guard’s newest icebreaker, Storis, stopped appearing in searches of the American Bureau of Shipping’s registry (as either Aiviq or Storis) once she was taken into U.S. Coast Guard service from private ownership. There is no need to maintain class of a vessel owned by the government.
In any case, it should be relatively easy for HHI to demonstrate that the ship was built to Polar Class 6 standards.
Note: Requiring only a PC 6 vessel is a very low bar. There are significant differences between a PC 6 logistics vessel and a PC 4 Icebreaker (+), which is what Sweden’s icebreaker will be. More on this, and the overall suitability of the tender requirements, at the end.
Reference Project B:
To qualify the shipyard shall have experience in the construction and delivery of a vessel equipped with AC or DC or a combination of AC/DC diesel-electric propulsion systems. The requirement is that the vessel has been delivered in year 2012 or later.
HHI’s reference:
Davie’s Challenge:
50. The description provided by HHI regarding Reference Project B does not demonstrate that HHI has experience in manufacturing and delivering a vessel according to the requirements set out in Section 5.3 of the Call for Proposals. This is not stated anywhere in HHI’s tender application that it is HHI that has manufactured the vessel ROKS Donghae/ FFG-8222. Furthermore, the vessel that HHI has invoked as reference project B is equipped with a propulsion system that is powered by a combination of diesel and electricity or gas (“CODLOG”). The vessel that HHI has cited as reference project B thus has a different propulsion system than the one that the Swedish Maritime Administration has required reference project B to have, i.e. an AC or DC or a combination of AC/DC diesel-electric propulsion system.
51. The power transmission requirements for open water cruising are different from heavy icebreaking. In icebreaking, there is a constant change in propulsion force and direction, which is why an AC or DC or a combination of AC/DC diesel-electric propulsion system is needed. The reference project with CODLOG system intended for open water cruising specified by HHI is different and not comparable to a propulsion system for an icebreaker. The CODLOG propulsion system is also not compatible, or consistent, with what follows from the requirements for reference project B. HHI therefore does not meet the requirements for reference project B.
Propulsion Systems:
I’ll attempt a quick overview.
CODLOG arrangement:
In this set-up, the diesel engines are coupled with generators which provide electricity to power the ship’s loads and electric propulsion motors. These propulsion motors feed a gear box that turns the shafts. This is suitable and efficient for cruising at a constant low speed. When high-speed or additional power is needed, the gas turbine comes online and powers the shafts through the same gearbox (with the electric motors de-coupled). This is an efficient arrangement for a warship which mainly operates in open waters.
Here is a typical diesel-electric arrangement for a diesel-electric icebreaker:
In this case, the diesels power the ship’s distribution system through the main switchboards. Propulsion motors are powered directly off of the ship’s distribution system through propulsion transformers and frequency converters. Batteries can be incorporated into the distribution system through a DC component.
Electrical distribution:
Here I would like to note the very different demands on the electric system made in these two cases. The ROKS Donghae has two permanent magnet propulsion motors powered off of the ship’s electrical distribution system. These propulsion motors are relatively small, 1.7 MW each, for a total of 3.4 MW. They are typically used for low-speed cruising, as they are more efficient than the gas turbine at low speed. So here we have a 440 V electrical system designed to provide up to 3.4 MW of power to two propulsion motors at generally steady-state conditions.
Let’s compare this to the Finnish icebreaker Polaris. Her main electrical distribution system operates at 3300 V (6600 V and 10,500 V are also common voltages used) and must be able to supply up to 19 MW of power to her three Azipods. As part of a study, ABB tracked Polaris’ electrical load during a period of typical icebreaking operations:
The study looked at the demands on the system during different operations and noted large load fluctuations during icebreaking operations and a high-power requirement while assisting other vessels. As a reminder, the total propulsion power required on Donghae is 3.4 MW, and its total electrical generation capacity of about 6.6 MW3. As you can see, the power required by Polaris is significantly greater and is not steady state.
Comments:
The CODLOG system in the reference is not comparable with modern icebreakers. Therefore, it is not a good and suitable reference for the new icebreaker which will have four multi-fuel engines powering a diesel-electric set with an energy storage system (ESS).
The electrical distribution system on the ROKS Donghae is entirely different from that required in a modern assistance icebreaker, as it is not designed for the voltages, power levels, and power fluctuations required by a modern icebreaker.
As with the requirements for Reference Vessel A, I find that the SMA’s requirements for Reference Vessel B set a very low bar. The requirements should specify the type and capability of the diesel-electric system, not just say, essentially, any propulsion system that involves a diesel engine and electricity. Technically, a sailboat with a battery, electric propulsion motor, and a small diesel engine (to charge the battery) would qualify.
Reference Project C:
To qualify the shipyard shall have experience regarding the construction and delivery of a vessel equipped with an energy storage system (ESS) of at least one (1) MWh based on novel battery technology and used for propulsion.
The ESS shall have been used in combination with the vessels ordinary diesel eclectic propulsion system, so called hybrid-electric system.
HHI’s reference:
This reference is likely the ROKS Shin Dol-seok, commissioned in January 2020.
Shin Dol-seok is a Type 214 submarine, designed by HDW (Howaldtswerke-Deutsche Werft GmbH, today ThyssenKrupp Marine Systems) as an export variant of Germany’s Type 212 submarine. South Korea built nine of these submarines as part of a deal with HDW that included the transfer of submarine building technology.
Air-Independent Propulsion means that the submarine carries fuel cells, which enable to submarine to operate for long distances without surfacing to run the diesel engine. Diesel engines produce exhaust which must be exhausted from the ship, whereas fuel cells produce electricity from hydrogen and oxygen, with water as the only by-product. These submarines also include large amounts of lead-acid batteries, whose stored power can be used while submerged. The Type 214 has two 120 kW fuel cell modules. Specific information on the ROKS Type 214 batteries is not available (at least I couldn’t find it), but the Turkish version has 2x324 lead acid batteries.
Davie’s Challenge
Davie challenges this in three ways. First, it questions whether fuel cells are a novel battery technology:
55. DNY questions whether fuel cells can be considered “new battery technology” as follows from the requirement for reference project C above. Fuel cells have been on the submarine market for over 25 years and cannot be considered “new battery technology”. Although fuel cells can produce energy, they cannot be recharged in the same way as batteries. Fuel cells use a chemical process that needs to be recharged rather than charged, so the resulting electrical support system is fundamentally different from that required in the reference requirement. DNY therefore does not believe that the propulsion system for reference project C is based on “new battery technology” in accordance with the requirement.
Second, Davie questions whether HHI independently delivered the submarine in question, noting that the Type 214 submarines were built with the assistance of HDW and that a later submarine (delivered after the initial tender window) was built in cooperation with Hanwha Ocean:
58. DNY can therefore state that HHI has not independently manufactured any type of submarine with the current fuel cell system. Manufacturing has taken place together with the company Howaldtswerke-Deutsche Werft GmbH or the company Hanwha Ocean. HHI therefore does not have experience in manufacturing these types of submarines itself.
Third, Davie questions the capacity of the fuel cells, expanding the assumption by taking into consideration the later delivered submarine as well4:
59. Assume that reference project C is a KSS-model submarine. Available information on these submarines indicates that the capacity of the fuel cell system installed on board a KSS-III vessel (Batch 1) is around 600 kWh. That system cannot therefore meet the requirement of at least one (1) MWh as stated in the call for applications. For other types of submarines in the world, the maximum fuel cell capacity varies between 300-400 kWh. This lower specification is similar to that for submarines of the KSS-II type, see point 56 above, which therefore also does not meet the requirement of one (1) MWh.
Comments:
It seems to me that Davie may have erred in focusing on fuel cells, as they are not a store of energy. That energy store is the oxygen and hydrogen. The ESS for both of these submarines is really their lead acid batteries. Based on the number of batteries installed, the capacity is well over 1 MWh.
However, lead acid batteries are definitely not a new technology. Lead acid batteries on submarines go back to the early 20th century, before the First World War. The next step in battery technology on submarines is to replace the lead-acid batteries with lithium-ion ones. The newest class of South Korean submarines, the Jang Yeongsil class, will have lithium-ion batteries. But these submarines are being built by Hanwha Ocean, not HHI.
Mandatory Requirement for Social Security Contributions and Taxes
Davie’s challenge:
63. Section 5.8 of the invitation to tender, Annex 2, states that in order to qualify, the tenderer must have fulfilled their obligation to pay social security contributions and taxes. It also states that foreign tenderers must prove that the requirement is met by submitting documents from the relevant authority.
64. HHI is based in South Korea and is thus a foreign tenderer who must prove that the requirement regarding social security contributions and taxes is met by submitting documents from the relevant authority.
65. HHI has submitted a Tax Clearance Certificate in the Procurement, see Appendix 9. The certificate is issued by the Ulsan District Tax Office. However, the certificate only covers tax and does not refer to social security contributions. HHI therefore does not meet the mandatory requirement in section 5.8 of the call for applications regarding social security contributions and taxes
Comments:
I’m far from an expert in taxes and social security contributions, especially South Korean taxes and social security contributions. A quick internet search shows that in South Korea, employers must make four different social security contributions for a national pension, national health insurance, employment insurance, and worker’s compensation insurance. I have not seen HHI’s tax clearance certificate, not the actual requirement from the SMA, so I have nothing to add.
Additional Oddities
These are some items not mentioned in Davie’s appeal that I would like to point out.
Exchange Rates
As I noted in the previous article, HHI submitted its bid in U.S. Dollars, while the other three bidders used Euro. Using today’s SEK/EUR and SEK/USD exchange rates, Davie’s bid would have won by a very small amount (about 370,000 Euro).
However, the call for tender used a calculated exchange rate based on forward exchange rates. Forward rates are designed to reduce exchange rate and interest rate risk for future transactions. I don’t know how the rates below are calculated to achive the exchange rate used by the SMA. One reader noted that the calculation did not take into account the higher volatility in USD/SEK versus EUR/SEK before the deal is signed and the hedge is in place, suggesting that a rate closer to the spot rate is more appropriate.
The fact that a small change in the exchange rate used can change this deal shows just how close the actual cost is- it’s practically even. Given this consideration, perhaps there are non-monetary factors that should be in play.
The Use of European Union Funding
In another article Tekniikka&Talous notes:
Finnish shipbuilding expert Mikko Niini points out that Sweden has received investment support from the EU for the purchase of icebreakers. The amount of support is in the region of 30 million euros.
The principle of EU programmes is to support Europe’s competitiveness.
“However, now we would be supporting the worst competitors of the Europeans,” says Niini. He also serves as chairman of the Finnish Maritime Association.
He believes that Sweden is supporting Korea’s rise to the icebreaker market with its order.
“Building icebreakers has been considered a European expertise. Sweden’s decision is intolerable from an industrial policy perspective.”
He believes that the matter should be brought to political consideration, and that it should also interest Finnish politicians.
Some have questioned whether it is even legal for Sweden to use EU funds to purchase a ship built in South Korea. The article adds:
The Finnish Ministry of Transport has not responded to the question of what the conditions of the EU support are. The ministry states that it is hoped that Sweden has checked the matter with the EU Commission in advance.
This 30 million euro comes as part of the European Union’s Winter Navigation Motorways of the Sea III (WINMOS III) project. Work package two provides up to 30 million Euro to Sweden to build a new A-type icebreaker for use in the Baltic Sea.
As I noted in my earlier article, the EU just allocated 56 million SEK (about 5.1 million Euro) to help Sweden maintain its icebreakers.
Thoughts and Comments
I acknowledge that I do not have the complete picture. Not all of the documents are public, and I’ve heard that there are 100s of pages more regarding Davie’s appeal that further refine and expand on the arguments presented in the public appeal document.
As for Davie’s challenge, their claims about the A reference and HHI’s tax payments are related to matters of fact that should be easily resolvable. From a technical standpoint, Davie makes a good argument against the acceptance of HHI’s B and C reference vessels, with the argument against the C reference being quite strong (lead-acid batteries are not a novel battery technology). However, the wording of the reference requirements might just be broad enough for Sweden’s Administrative Court to uphold the contract award.
The requirements themselves are another matter. As I stated earlier, they set a very low bar. The purpose of requiring reference projects is to gain confidence that the selected shipyard can build the vessel under contract in the time and cost allocated. HHI has delivered one Polar Class vessel- a PC 6 vessel, not an icebreaker, since 2012. In that time, Helsinki Shipyard has delivered nine icebreakers of Polar Class 4 or higher, three Polar Class cruise ships (2 PC 5, 1 PC 6), and an Arc 7 (PC 3 equivalent) condensate tanker capable of independent operation on the Northern Sea Route. They are all diesel electric, and the cruise ships have a modern battery storage system.
Yet in the end, this counts as much as one PC 6 logistics vessel, an irrelevant diesel-electric reference, and a submarine that uses lead-acid batteries.
And we have yet to discuss delivery times. I’ve heard several different numbers (nothing official), but they were all consistent with one fact: Helsinki Shipyard would deliver first.
With the cost difference being so little and entirely dependent upon a forward exchange rate calculation, it seems logical to me that other factors might tip the balance. But logic doesn’t always carry the day.
I’ll be watching this closely and providing updates as I get them.
Until next time-
All the Best,
PGR
Related original documents:
This change also made in consistent with the procurement documents from 2022, which used ‘vessel’ and not ‘icebreaker.’ Had it been icebreaker— and required a reference vessel classed as an icebreaker— this reference requirement would have been much more restrictive (and relevant).
This is an oddity of the mechanical translation. I checked with a native speaker of Swedish, and the original text calls into question whether HHI built this vessel alone, as the frigates were also built by Daewoo (now Hanwha Ocean).
The Donghae is powered by four MTU 12V 4000 M53B diesel generator sets, rated at 1650 kW each, for a total of 6,600 kW or 6.6 MW.
Davie’s appeal also referenced the South Korean Submarine Shin Chae-ho. This is the third batch one submarine in the KSS-III project. It was delivered in 2024, which differs from the dates listed by HHI. Considering this submarine would not change much from considering the Shin Dol-seok, except that it is larger and contains more lead-acid batteries.
As always, fantastic work and great article. Always enjoy your opinion and research on these matters. BZ
Peter, this is the best article I've read in a long while. BZ. Very well organized and easy to follow analytical piece. Seems like the reference projects are grasping a bit on the meeting the different criteria. The Fins are making a good point as well regarding the big picture in Europe. I feel this one will/should remain in Finland at the end of the day, and like yourself, watching closely.