Government Operations Committee on March 8th, 2021

[Yves Giroux]

Lightship weight is a very important parameter in our models. Apparently some stakeholders are saying that we overrely on this parameter, but we disagree with that, of course. It's important to note that in the costing literature—because we've looked at that—numerous studies identify the relationship between lightship weight and the construction cost of surface combatants as being the single most important factor. The approach we have taken also reflects best practices suggested by NATO and other independent organizations, such as the United States Congressional Budget Office.

[Matthew Green, NDP, Hamilton Centre, ON]

I'm not oversimplifying it. We've heard in previous testimony the discrepancies between the capabilities. I would think that the ambitious project that started out some years ago with these design elements—to try to cram all of this warfare capability onto one ship—would probably have an outstanding impact on the weight, cost and timeline analysis. Would that be accurate or fair to say?

[Yves Giroux]

I think it's a very accurate, very right analogy; it's probably a very good way of describing it.

[Matthew Green, NDP, Hamilton Centre, ON]

From your perspective, when you went down this path, did you receive any information that quantified or verified the need for this type of capability and design, or did you leave it up to the DND to assess the requirements?

[Yves Giroux]

Carleigh can probably clarify that point better than I could.

[Carleigh Malanik, Financial Analyst, Office of the Parliamentary Budget Officer]

We effectively did take the specifications as given and provided by the Department of National Defence. We are not capability experts, but of course, we do need to factor into the account that there are differences in capabilities that could explain the differences in cost.

[Matthew Green, NDP, Hamilton Centre, ON]

I think it begs the question—although this isn't for you to answer—about the need for these particular capabilities in the global theatre of defence or war. For me, I can't unpack this from the national shipbuilding strategy. I can't help but think about the cost overruns as having an effect and an impact on some of our other programs or, if we took a more astute approach to this, what that $16-billion or maybe $20-billion differential might look like if we were to apply it to other aspects of the shipbuilding strategy.

I do recognize that I'm at six minutes, and I'll respect that.

Thank you, Mr. Chair.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Mr. Green; I appreciate that.

Now we'll go to the second round. We have five minutes with Mr. Bezan.

[James Bezan, Conservative, Selkirk—Interlake—Eastman, MB]

Thank you, Mr. Chair.

I want to thank Mr. Giroux and everybody at the PBO for this report.

I guess the one thing that I'm trying to reconcile here is this: You looked at different types of ships, but did you drill down into what it's costing us, as Canadian taxpayers, based upon the way that we have the management and the contracting established and whether or not there's been a competitive process that is in the best interest of taxpayers to get the ships that we need for the Royal Canadian Navy?

[Yves Giroux]

There's a lot to unpack in your question. We approached the costing with a top-down approach using analogue ships, comparing what has been spent in other countries to procure similar ships, and taking that into the Canadian context, adjusting for productivity, the size of ships, and so on.

We didn't look at the differences and capabilities, but that's probably a big factor in the cost increase, compared to what it could cost. We also did not look at procuring these ships abroad and upgrading them to Canadian specificities because procuring them abroad was not within the scope of our study, but there would be savings—

[James Bezan, Conservative, Selkirk—Interlake—Eastman, MB]

I'm not suggesting at all, Mr. Giroux, about procurement.... I'm just saying a better competitive process, a better management system, right here in Canada so we can keep...because every time we turn around the costs of shipbuilding, but specifically the surface combatants, continue to rise exponentially.

[Yves Giroux]

That's a very good point. This project has seen delays and changes in specifications, but I think there's maybe an issue of governance because we have chosen the naval shipyard and the type of ship, and then the costs are almost by-products of these two decisions. Honestly I don't have an answer as to whether the competitive process needs to be improved or the type of specifications. We looked at the cost, but we didn't look at the governance of the project or whether something went wrong.

I think my colleague the Auditor General would probably be in a much better position to determine whether changes or improvements need to be made or should have been made to the process.

[James Bezan, Conservative, Selkirk—Interlake—Eastman, MB]

I appreciate that, and that's a question I'm going to have when we have her before committee.

There are some discrepancies when you're talking about the different values of ships—the 31e versus FREMM versus the surface combatant—and we always have Canadianization. You did talk about the statement or requirements that you got from DND on behalf of the navy.

The question comes down to—because you do have such a low value on the smaller frigate, the type 31e—how much are we giving up on capability and how much is that going to be putting our navy and our sovereignty at risk if we go to a small ship, versus having the surface combatants that can handle both anti-submarine warfare as well as air threats?

[Yves Giroux]

It depends whom you talk to when you ask that question. If you talk to the Naval Association of Canada they'll say the type 31e, for example, would be a significant loss of capabilities. If you talk to the Danes or the shipyard that's building these types of ships they say it's not the same capabilities, but it's still a fully capable ship. If you talk to the British they'll say it's a very good ship compared to what the alternative could be, especially if it's patrolling alongside bigger ships such as the FREMM or the type 26.

Not being a military expert myself, and not being an expert in military doctrine, I cannot say, but I've heard both arguments, saying it would be a terrible loss of capabilities, and saying that it would be a very capable type of ship, especially if we went for the mixed or the hybrid fleet that would be fully capable of doing what the navy needs to be done.

[James Bezan, Conservative, Selkirk—Interlake—Eastman, MB]

You talked about the FREMM, which both the Italians and the French have built, but you're using the Constellation class estimates coming from the U.S. Congressional Budget Office. I know I asked you this in the past, but why not use the hard numbers that came out of Italy and France that build dozens of these ships and have a lot of experience? You're using estimates coming from the States, which are based on the Arleigh Burke, an air destroyer.

[Yves Giroux]

I'll ask Chris if he can provide an answer to that question.

[Christopher Penney]

Certainly.

[The Chair, Conservative, Robert Gordon Kitchen]

Excuse me for interrupting, Mr. Penney. I'm wondering if you could put your answer in writing to the committee; that would be greatly appreciated. It's a good question, but unfortunately we're out of time.

Mr. Drouin, you have five minutes.

[Francis Drouin, Liberal, Glengarry—Prescott—Russell, ON]

Thank you very much, Mr. Chair.

I will give the witness a few seconds to answer the question from the previous speaker, because it was a very good question.

[Christopher Penney]

There are a couple of reasons for using the Constellation class. The first is that it is the most recent adaptation of the FREMM. As you stated, the analogue approach is based on the Arleigh Burke vessel. This mirrors the approach of the Congressional Budget Office. It is a very good analogue, once proper adjustments are made. It is a general-purpose frigate, which is what the type 26 is intended for.

I should also note that we're not using the CBO estimates for our own estimates. We're not using their estimates as raw data; we are using the Arleigh Burke as an analogue. It is thus a similar approach to what the Congressional Budget Office undertook.

I believe that answers your question.

[Francis Drouin, Liberal, Glengarry—Prescott—Russell, ON]

Thank you very much.

Mr. Giroux, thank you very much for appearing before our committee.

I have a question about the hybrid approach, meaning that we might acquire three type 26 ships and other ships like the FREMM or the type 31e. How do you analyze those costs?

What I am trying to get at is that, for any organization buying 15 ships rather than three, there would be a price difference. How did you go about determining what that difference is?

[Yves Giroux]

That really is a good question.

We estimated the costs that have already been committed to build type 26 ships, at least up to this point. We then estimated the costs for building three type 26 ships.

We also included the costs of restarting a competitive procurement process to choose another type of ship. Those costs would include updating a shipyard in order to retool the equipment and the shipyard in order to build another type of ship.

So we included all the costs we would have to incur to continue building the ship, and also those that we would have to incur if we were to start almost at square one again, in terms of productivity and expertise, in order to build a different type of ship. That's how we were able to produce hybrid cost estimates for the FREMM and the type 31e ships.

[Francis Drouin, Liberal, Glengarry—Prescott—Russell, ON]

But you did not have any discussions with the company to find out whether the cost would be the same for building three ships as opposed to 15. I'm thinking of economies of scale, for example. Building an infrastructure for 15 ships costs much less than doing the same thing for three ships. So I'm sure that there would be quite a significant increase, correct?

[Yves Giroux]

We accounted for that in our cost estimates. We also accounted for the fact that, in general, when building ships, the first is much more expensive because we do not have the expertise and we can't achieve any economies of scale. As the ships are built, we achieve the economies of scale and reach the optimal situation usually around the ninth ship. In our scenario, we were building a new type of ship starting with the fourth ship, so that we are starting almost from square one in terms of productivity.

We also accounted for the fact that retooling would be needed in the shipyard in order to change the production chain.

[Francis Drouin, Liberal, Glengarry—Prescott—Russell, ON]

You also mentioned that you used the TruePlanning software. In your report, you acknowledge that the software produces estimates that can be plus or minus 20% of the actual costs.

What makes you say that?