Government Operations Committee on March 8th, 2021

[The Chair (Mr. Robert Kitchen (Souris—Moose Mountain, CPC)), Conservative, Robert Gordon Kitchen]

Welcome to meeting number 19 of the House of Commons Standing Committee on Government Operations and Estimates.

We will be hearing from the Parliamentary Budget Officer and his officials regarding his report, “The Cost of Canada’s Surface Combatants”.

Today's meeting is taking place in the new webinar format. Webinars are for public committee meetings, and are available only to members, their staff and witnesses. Members may have remarked that the entry to the meeting was much quicker, and that they immediately entered as an active participant. All functionalities for active participants remain the same. Staff will be non-active participants only, and can therefore only view the meeting in gallery view.

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I will now invite the Parliamentary Budget Officer to make his opening statement.

Mr. Giroux, welcome again, and thank you for taking the time to be with us.

[Yves Giroux, Parliamentary Budget Officer, Office of the Parliamentary Budget Officer]

Thank you, Mr. Chair. It's our pleasure.

Good afternoon, Mr. Chair and members of the committee.

Thank you for the invitation to appear before you today.

We are pleased to be here today to present the findings of our report entitled, “The Cost of Canada's Surface Combatants: 2021 Update and Options Analysis,” which we were honoured to prepare at the request of this committee. With me today I have our lead advisor-analysts on the report, Carleigh Malanik and Christopher Penney.

Consistent with the Parliamentary Budget Officer's legislated mandate, at the request of this committee, my office prepared an independent costing analysis of building the Canadian surface combatants with the continuation of the type 26, as well as the cost for two alternate designs, the European multi-purpose frigate, or FREMM, and the type 31e.

We estimate that a fleet of 15 type 26 ships will cost $77.3 billion, rising to $79.7 billion if there's a one-year delay in 2021-22, and $82.1 billion if there is a two-year delay. This estimate represents an increase of $7.5 billion over our previous estimate, which was provided in 2019, due to updates in the ship's specifications and production timelines.

As requested by the committee, our report also presents a cost analysis of two other ship designs: the FREMM European multi-mission frigate and the type 31e, a class of general-purpose frigate planned for the United Kingdom's Royal Navy.

The cost of acquiring 15 FREMM ships is estimated at $71.1 billion, while the cost of a fleet of 15 ships based on the type 31e design is estimated at $27.5 billion. These estimates are inclusive of cancellation costs, running a new competitive design selection process, and an additional four-year delay in the start of construction. It's important to note that these ships have different characteristics and capabilities.

Finally, our report considers a hybrid approach under which three type 26 vessels are procured, and the remaining 12 ships are competed, with either the FREMM or type 31e being selected. Under this scenario, the costs increase to $71.9 billion for the mixed FREMM fleet, and $37.5 billion for the mixed type 31e fleet.

We would be pleased to respond to any questions you may have regarding this report or other PBO work.

Thank you, Mr. Chair.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Mr. Giroux.

We will now go straight into questions, and we will start with Mr. Paul-Hus.

You have six minutes.

[Pierre Paul-Hus, Conservative, Charlesbourg—Haute-Saint-Charles, QC]

Thank you, Mr. Chair.

Thank you for being with us today, Mr. Giroux.

The report clearly identifies issues related to cost monitoring, particularly with respect to the Department of National Defence's and your estimates.

Why is that? What is the Department of National Defence not taking into consideration when making its estimates?

[Yves Giroux]

First, I can say that provincial taxes aren't included in the DND estimates. Beyond that, it's difficult to determine what DND doesn't include in its estimates, because we haven't had access to its costing model.

We've obviously asked for a lot of information to come up with our own cost estimates, and we've received most of that information. However, we didn't ask for details on how they estimated the costs.

Our objective was to provide an independent estimate, not to verify how it was costing. So, it's difficult for us to determine what costs have been omitted by National Defence or why there's such a big difference between the estimates.

[Pierre Paul-Hus, Conservative, Charlesbourg—Haute-Saint-Charles, QC]

In other words, if our committee hadn't asked you for a cost estimate, we wouldn't have those numbers right now.

Could you explain why the department is so lacking in transparency?

[Yves Giroux]

The most recent estimates from National Defence, putting the costs at about $56 billion to $60 billion, are from 2017. You might think that these estimates are a bit out of date, but a few days ago, National Defence reaffirmed that it's certain that the estimated costs of $56 billion to $60 billion from four years ago are still valid today. I don't see why there's such a big gap between our estimates and National Defence's, or why National Defence is coming up with costs that are so much lower than ours.

That said, I have full confidence in the reliability of the cost estimates provided by Ms. Malanik and Mr. Penney, who are with me today.

No information provided by National Defence suggested that the costs could have been lower than what we estimated. If we had had information that would have enabled us to estimate costs closer to those of the department, we would have done so. The information provided led us to the result of $77 billion.

[Pierre Paul-Hus, Conservative, Charlesbourg—Haute-Saint-Charles, QC]

I'm going to read what's written in the 2019-20 Departmental Results Report from Public Services and Procurement Canada, or PSPC:

There is a risk that PSPC may not have sufficient procurement resources to deliver on priorities, objectives, and programs due to a shortage of procurement officers with the appropriate knowledge, which can require several years of experience specific to federal government procurement.

Is there currently a lack of expertise in the public service that often results in miscalculations due to a lack of qualified personnel?

[Yves Giroux]

A program of the magnitude that the Royal Canadian Navy wants to undertake—the construction of surface combatants—certainly requires a great deal of expertise. However, if it's a priority for National Defence, Public Services and Procurement Canada, and the government, there is a way to allocate sufficient resources to ensure the success of this project. I don't believe lack of resources is the only explanation, but it may be one of the factors.

When you're talking about a $77 billion project, I honestly think it's worth putting a lot of resources into it, like a few dozen or even hundreds more employees. And the returns could be really interesting, given the amounts involved.

[Pierre Paul-Hus, Conservative, Charlesbourg—Haute-Saint-Charles, QC]

In your calculations, you didn't take into account the infrastructure needed for the ships, such as docks. Have you done an estimate for the infrastructure costs for this particular fleet?

[Yves Giroux]

We estimated the costs required to build the shipyards so that the ships could have the necessary infrastructure. However, the costs of operating the surface combatant fleet haven't been considered. If, for example, the Royal Canadian Navy needs to build additional, deeper or larger docks in Halifax or Esquimalt, that hasn't been taken into account, to my knowledge.

The report focuses only on development and acquisition costs and spare parts costs for two years. Those are the only costs included in the report.

[Pierre Paul-Hus, Conservative, Charlesbourg—Haute-Saint-Charles, QC]

According to your report, you expect the acquisition of the fleet to be delayed by two years, but it could also be three, four or five years.

I know you touched on this a little bit, but could you talk more about your assessment of the additional costs associated with a three-, four- or five-year delay?

[Yves Giroux]

We did what's called a sensitivity analysis to see how different scenarios would affect the cost estimates. We came to the conclusion that one year of delay would cost $2.3 billion. If there were a two-year delay, it would cost an additional $4.8 billion. This is due to the fact that costs are being pushed over a total horizon of about 20 years.

[Pierre Paul-Hus, Conservative, Charlesbourg—Haute-Saint-Charles, QC]

So there would be additional costs of $2.3 billion a year, is that right?

[Yves Giroux]

It would be the total costs. It's due to inflation, because it's a program that's going to take 25 or 30 years. If there's a one-year delay, then overall spending is deferred and inflation has a compounding effect on the duration of the program. As a result, total costs would be $2.3 billion more for a single year of delay.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Mr. Giroux and Mr. Paul-Hus.

We will now go to Mr. MacKinnon for six minutes.

[Steven MacKinnon, Liberal, Gatineau, QC]

Thank you very much, Mr. Chair.

Mr. Giroux, I'd like to thank you and your team, not just for this work, but also for the ongoing work you do for us, members of Parliament.

As the parliamentary secretary, I've seen this program evolve significantly over the past few years. The first thing I'm sure you'll agree with is that the cost estimates for the projects that were contemplated by the previous government have had to be substantially increased. I think under the previous government, the cost estimates for the same ships were $20 billion to $22 billion.

Can you confirm that?

[Yves Giroux]

If I remember correctly, Mr. MacKinnon, the initial cost estimates were about $26 billion for the 15 ships.

[Steven MacKinnon, Liberal, Gatineau, QC]

That's it. I think you can see a fairly systematic failure in cost estimates, whether it's the DND today or yours.

I'm trying to understand the discrepancy between your estimates and those of DND. I notice that one of the reasons for that, as you pointed out, is that sales taxes aren't included.

With regard to this first discrepancy, why does your methodology include these taxes, while DND's doesn't?

[Yves Giroux]

That's a good question. It's probably just a matter of choice. The Department of National Defence may not see fit to include provincial taxes in the calculation, but we think it's relevant because it's a cost that the department will have to absorb.

As for federal sales taxes, they represent a zero cost, of course, because what DND would pay GST, for example, would be entirely returned to the government. But provincial taxes don't come back to the federal government. So that's a cost that we chose to include so that there would be more transparency. I honestly believe that DND should also include taxes for the same reason.

[Steven MacKinnon, Liberal, Gatineau, QC]

As for the other category of costs, I'm sure you would agree that we have to start building these ships to avoid other costs. But your report talks about the acquisition of other ships. So there would have to be a process of design, architecture, procurement of combat stores and systems, and so on.

How do you see the possibility of further delays, and therefore further costs, in building the surface combatants that our navy needs, when we could have ships immediately, as is currently being contemplated by the government?

[Yves Giroux]

That's an important question.

Starting from scratch would obviously mean stopping the current process and going through a new call for proposals following a competitive process. This would likely add four years to the overall timeline.

That's why we looked at another scenario in our report. Under this scenario, the construction of up to three Canadian type 26 surface combatants would be maintained to reduce the negative impact on the Royal Canadian Navy's fleet and prevent it from suffering from a significant capability gap.

[Steven MacKinnon, Liberal, Gatineau, QC]

As you mentioned, and as we can assume, DND has looked at many options to achieve the necessary ship capabilities, such as the one we're evaluating today, which is referred to as a hybrid. According to the department, this would provide our navy with the necessary capabilities for generations to come. That's already been considered, in a way. Isn't that right?

[Yves Giroux]

The committee asked me to estimate the costs associated with different models, such as the European multi-mission frigate, or FREMM, and the type 31e ship. We created a hybrid scenario to avoid a four-year “hole” and spare the Royal Canadian Navy an undue shortfall in capability. If National Defence has done this exercise, so much the better, but I thought it would be useful to provide these estimates to the committee.

[Steven MacKinnon, Liberal, Gatineau, QC]

They are very different ships. That's basically the point I wanted to make. Between the type 26, the FREMM and the type 31e, there are significant differences in the capabilities and opportunities they provide to the Royal Canadian Navy. Isn't that right?