How was Ottawa to choose who would build its ships?

The situation could hardly be more packed with political danger. The federal government decides to award $33 billion of shipbuilding work to two shipyards, but there are three bidders. They hail from Nova Scotia, Quebec and British Columbia. Which of the three provinces, each with its own tradition of feeling grievously slighted by Ottawa, will be the big loser? Even when the stakes have been lower and the optics less harsh, the history of granting major federal contracts teaches a dismal lesson. “It’s always horrendous,” says André Juneau, director of Queen’s University’s Institute of Intergovernmental Relations, and a former senior federal bureaucrat who worked on many sensitive federal-provincial files.

But this time, improbably, not nearly so horrendous as usual. Last week’s anxiously awaited announcement was great for Halifax, which won the $25-billion deal to build warships, and very good for Vancouver, which scored $8 billion worth of work on coast guard and other non-combat vessels. Inevitably, that left some in Quebec complaining bitterly. The outcry, though, was oddly muted. “That’s competition for you,” said Yves-Thomas Dorval of the Conseil du patronat, Quebec’s main business lobby group. Elaborate measures taken by the federal Conservatives to make sure they couldn’t be plausibly accused of politically manipulating the outcome seemed to have succeeded in insulating them from the typical fallout.

That tactical victory came at a testing moment in federal-provincial relations. Looming questions about how the money is divided up in the federation threaten, as they have so often in Canadian history, to sour Ottawa’s relations with the provinces and heighten tensions between regions. The key issues involve renegotiating transfer-payment deals for health and equalization. Other touchy matters in play are Ottawa’s plans to redistribute seats in the House of Commons and create a national stock market regulator. The shipbuilding procurement is, in many respects, unique. But one lesson that could apply broadly is that taking elaborate steps to show that decisions aren’t tainted by favouritism pays valuable political dividends.

In fact, most observers naturally concluded that the National Shipbuilding Procurement Strategy must have been designed precisely to minimize outrage in whatever province lost out. Senior government officials, however, told Maclean’s the evolution of the plan started with quite different worries. Recent major military procurements have been plagued by controversy. In particular, Ottawa was sued by the loser in a $5-billion program to buy a fleet of maritime helicopters, a messy dispute finally settled out of court in 2007. Burned by that experience, federal officials set out in 2009 to find a way to avoid repeating it as they devised a strategy for buying 28 large ships.

After consulting with companies, they worked out a plan to sign umbrella agreements with two shipyards that would last for decades, rather than awarding each contract on a project-by-project basis. That makes the initial selection of shipyards hugely consequential—the government estimates 15,000 jobs over the next 30 years will be created at the two successful bidders. At the outset, Defence was the lead department on the program, but in early 2010, Public Works took over, with a new minister, Rona Ambrose, specifically tasked by Prime Minister Stephen Harper to push the shipbuilding file.

Ambrose was shuffled to the Public Works portfolio on Jan. 19, 2010, after a stint as Harper’s intergovernmental affairs minister, an apprenticeship on the sensitivity of federal-provincial relations. Senior government sources said Harper liked the overall approach of the shipbuilding strategy she took to cabinet in the spring of that year, but insisted on guarantees that whatever shipyards won, the government would be bulletproof against charges that politicians had skewed the process against the loser. The result: an elaborate system to assess the bids that shut out politicians and was scrutinized by outside “fairness monitor” firms, who last week declared the process “free from personal favouritism or political influence.” Cabinet ministers were informed of the winners—and loser—only minutes before the public announcement.

The bad news for Quebec landed in the middle of a series of contentious federal moves affecting the province. Late last month, Harper and Premier Jean Charest signed a deal that will see Ottawa pay Quebec $2.2 billion for harmonizing its sales tax with the federal goods and services tax. Also in a bid to calm Quebec, the Harper government is about to revise a long-planned seat redistribution in the House, likely giving Quebec two more MPs. And the Supreme Court of Canada is expected to issue a ruling soon on the constitutionality of a single Canadian securities regulator, a proposal Quebec bitterly opposes in favour of continued provincial oversight of stock exchanges.

All these thorny issues, however, pale in comparison to the big transfer-payment questions now confronting Harper’s government. In 2014, the deal for federal payments to provinces for health care expires, and so does the equalization formula that sets out how much “have-not” provinces receive. Back in 2007, Harper injected $39 billion over seven years into a range of provincial transfers. But in the new era of fiscal austerity, buying another stretch of peace with the provinces no longer looks affordable.

Beyond the multi-billion-dollar amounts involved, Harper must consider fundamental questions about the balance of interests in the federation. Arguably, the biggest new factor is a historic shift in Ontario’s place compared to the other provinces. Ontario’s relative wealth has declined—especially compared to oil-rich provinces—to the point where this year it will collect $2.2 billion out of the $14.7 billion in equalization Ottawa distributes to the have-not provinces. That means less for Manitoba, Quebec and the Maritimes. “Having the largest province becoming a growing recipient of equalization isn’t tenable,” says University of British Columbia political science professor Gerald Baier. Yet Ontario Premier Dalton McGuinty has served notice he will fight any bid to revise the rules at his province’s expense.

Connecting the shipbuilding case study too closely to the coming hard bargaining on transfers and other issues might feel like a stretch. Still, the underlying political challenges aren’t so different. With many billions on the table and intense provincial rivalries in play, shifting the decision-making burden, as much as possible, into the hands of neutral bureaucrats advised by outside experts could be the smart political move. Ultimately, though, cutting a federal-provincial deal is the same as arriving at a commercial arrangement. Dangerous as the shipbuilding decision once appeared, the potential for truly horrendous outcomes for the Harper government’s relations with the provinces still lies ahead.