Evidence of meeting #19 for Government Operations and Estimates in the 43rd Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was costs.
A recording is available from Parliament.
Financial Analyst, Office of the Parliamentary Budget Officer
We don't have those explicit numbers split out, unfortunately. It's potentially something we could go back and do. I would equate it roughly to what the one-year and two-year delay costs would be, because that's roughly what the delays were.
As for the lightship weight increase, it did increase the cost, but again, I do not have that exact number available.
Conservative
Kelly McCauley Conservative Edmonton West, AB
Is your pricing based on the ships being in water, or is that based on delivery before becoming operational, which of course takes a run-up of another year or two years?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
That's based on delivery to the Royal Canadian Navy, and also being usable, to the best of my knowledge.
Conservative
Kelly McCauley Conservative Edmonton West, AB
I would like to follow up on what Mr. Green was saying about the difference of your pricing, their pricing and taxes. There was a comment about weight. DND says its costing is still valid, but there's still the weight issue.
Is there disagreement with the 7800 lightship weight that you're using? Is there a different weight being used, or is the projected weight the same as yours, but your costing is out?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
We're using the lightship weight based on information provided to us by DND. We did not just make this up. That's a lightship weight that's based on—
Conservative
Kelly McCauley Conservative Edmonton West, AB
You work off the same lightship weight, but DND is saying your interpretation of the added cost in lightship weight is different from DND's.
Conservative
Kelly McCauley Conservative Edmonton West, AB
This is interesting because DND told me years ago they had already factored in higher costs from a higher weight. Now they're saying that the higher weight will not be a higher cost.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
That's a mystery to me. As a taxpayer, I hope that their cost estimate ends up being the right one, but I'm very confident that our cost estimate, the $77 billion, is the right one, the accurate one.
Conservative
Kelly McCauley Conservative Edmonton West, AB
Okay. The life-cycle cost, the O & S, is going to be perhaps $250 billion to $300 billion. How do those costs match up to “Strong, Secure, Engaged” numbers or compared to what we currently have set aside for O & S for the whole of our armed forces?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
I haven't looked at the operations and maintenance costs for these surface combatants, but it's true that they add up to a significant portion. They're very likely to be way more than the acquisition costs. I don't have the numbers as to what proportion of the overall defence budget they would be, unfortunately.
Conservative
The Chair Conservative Robert Gordon Kitchen
Thank you, Mr. Giroux, and thank you, Mr. McCauley.
We'll now go to Mr. Jowhari for five minutes.
Liberal
Majid Jowhari Liberal Richmond Hill, ON
Thank you, Mr. Chair.
Welcome back, Mr. Giroux, to you and your colleagues.
I'd really like to bring the focus into the hybrid model and really probe into three areas: the alignment of that model with the overall strategy; the factor of economies of scale, as well as the total cost of the ownership over the longer term; and, finally, capacity building.
Let me start with the alignment. Do you think the hybrid model that's being proposed or was studied is actually aligned with the strategy that DND has and has presented in its NSS?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
That's a question, really, that DND would probably be much better to answer, although I can probably guess what their answer would be. I would say that the U.K. Royal Navy is envisaging something along the lines of a hybrid model where they will have some type 26, and also some smaller frigates, type 31e, primarily because, my understanding is, of cost concerns.
Liberal
Majid Jowhari Liberal Richmond Hill, ON
Thank you.
Let's touch on the economies of scale. Do you believe that, as we build more of the type 26 model, the actual cost of the ship goes down and just by building three and then going to that hybrid model, the overall costs would be more? Did you take the economies of scale into account when you were building your cost model for the type 26?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
That's a good point. We did fully take into account the economies of scale and the increase in productivity as the shipyard gains more experience, and the navy gains more experience, with these ships.
If we were to go with the full fleet of 15 type 26, the cost that we have in our report takes into account the economies of scale. Going with 15 FREMM or 15 type 31e takes into account the economies of scale, and the same with the hybrid fleet, where it's three type 26, and either 12 FREMM or type 31e. It all takes into consideration the fact that we have small economies of scale for type 26, and we have to start from scratch in the alternate design, and we have economies of scale as the shipyard becomes more adept at building these types of ships. That's all taken into consideration.
Liberal
Majid Jowhari Liberal Richmond Hill, ON
Thank you.
I know you just said in your comments that you haven't taken a look at the long term and the total operating costs, but having a little bit of a program management background, when I look at any type of project I look at the long term. What are your thoughts around the cost of the ownership of a hybrid type of fleet, as opposed to one type of fleet?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
It's certain that having two sets of spares to maintain and, as somebody pointed out to me a couple of days ago, on both coasts, it adds to the costs. That being said, if you have a lower-cost type of ship, usually operation and maintenance costs are also proportionately lower, which could offset the additional cost of having two types of ships in the same fleet. It could or could not. That's something that would need to be looked at in more detail if there was one option that was favoured over the others.
Liberal
Majid Jowhari Liberal Richmond Hill, ON
Having learned from COVID-19, the manufacturing of vaccines and what happened over the last 10 years, would you suggest for us to look into another aspect of this project with the fact that we are building in-home capacity from a longer strategic point of view, so we are not caught in the same position as we were with the manufacturing of a COVID-19 vaccine?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
That's a very good question. I think that's a central point of the national shipbuilding strategy. That's a decision, as I said before on other aspects, for brighter minds than mine to make. It's for people like you elected by Canadians to make these trade-offs, but I agree with you. It's a very important point to take into consideration.
Liberal
Majid Jowhari Liberal Richmond Hill, ON
Let me close by asking you the following question.
What are the economic job impacts if we look at the hybrid model and outsource some of these ships to other countries?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
In all of our scenarios in our report, the ships would be built in Canada, so there is no scenario under which ships would be built abroad. All the ships would be built in Canada even under a hybrid scenario.
Conservative
Conservative
James Bezan Conservative Selkirk—Interlake—Eastman, MB
Thank you, Mr. Chair.
We talked about the management of the contract on surface combatants, and we have alluded to the governance structure. We've seen many delays in the construction of the surface combatant. Now we're saying that it's going to be potentially seven years to get the first ship in the water. I think everybody's concerned about that.
We saw the surface combatant from what the original thought process and capabilities were. It was supposed to be a 5,400-tonne ship, and now we're up to 7,800 tonnes.
How much has the governance and the moving target in that statement of requirements changed over time contributed to this escalating cost, and how do we fix it so we can get a handle on it so we don't see these continuing to escalate going forward?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
The short answer is that I don't know the extent to which governance has contributed to this; however, choosing a ship that has not yet been built anywhere increases the risk. That's probably one important aspect. Choosing a design on paper as opposed to choosing another type of ship that had already been built and for which costs to a certain extent were known would probably have reduced the risks somewhat, but not entirely. It all depends on the specifications that the Royal Canadian Navy has and the tailoring of that other ship that would have been made.
With respect to governance, that will be a very good question for specialists in that area to look at, notably the Auditor General. Like you, I'm concerned about the cost increase of this type of procurement, because we're talking dozens of billions of dollars in increase when it comes to cost, and there doesn't seem to be a clear rationale, at least not one that's obvious to me when it comes to explaining these cost increases.