Government Operations Committee on March 8th, 2021

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

Whether it's mismanagement by the Liberal government or whether it's ongoing delays and moving targets creating these increased costs, you can't say how much each type of indecision has created increased cost because of the delays or changes of design. There's a whole question about the life-cycle cost, which you didn't even look at. You weren't asked to, I know that, but when we start looking at life-cycle costs, they're going to be exponential when the taxpayer gets hit with the bill.

[Yves Giroux]

I can't say mismanagement at all. What I can say is misalignment of incentives. You ask people who will not be in charge of paying what they want. Of course, they will want the best for themselves and for the generations to follow, but the people who have to make the decisions are not experts in that specific area, and they don't have as clear an idea as to the costs of this or the alternatives.

The incentive alignments are not perfect, to say the least.

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

As we go forward, I am a fan of making sure that we get the navy what they need—not necessarily what they want, but what they need. Because of the size and scope of our navy, we aren't going to have the same economies of scale the Americans have, for example. How many Arleigh Burkes did they build? It was in the fifties or higher, I believe. They have economies of scale with all their ships, and they're gearing up to have a 330-plus ship navy.

Then we also have to look at our adversaries. We know that the Russians have really increased capabilities in their navy in recent years, especially in their submarine fleet. Then you look at what's happening with mainland China and the People's Liberation Army Navy. The threat environment has increased, and we need to have capability to match it on both the east and west coasts, never mind the Arctic. At least we're getting the AOPs up there.

What are the things you would recommend? I know you gave three options.

I look at the one option, which is that you build the first three surface combatants and then you move to the FREMM design. The difference there is not even $7 billion. That could easily be blown through just in the Canadianization of the FREMM and trying to match up capabilities on the surface combatants to the FREMMs.

Did you do that type of analysis, or how do we make the surface combatant more comparable to the FREMM with the capabilities onboard?

[Yves Giroux]

Unfortunately, I don't have the mandate to look into the difference in capabilities and I don't have the expertise. Even though Carleigh and Chris are very smart, we don't have that capacity. I'd say, however, that at $77 billion for 15 Canadian surface combatants, I am worried that the navy may get these 15 ships, but that the cost might be having to forego other types of ships that would be beneficial for Canada's defence at the same price tag.

For example, for $77 billion we get 15 ships under the current procurement program. Maybe there is a way to get smaller ships or different ships, but for the same price having submarines or other types of ships that would be beneficial for the navy and for Canada's sovereignty.

However, I cannot pronounce on this and the mix of these different ships, because I don't have the expertise in military needs and military doctrine. Those, though, are the types of question that I think are worth asking.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Mr. Giroux, and thank you, Mr. Bezan.

We'll go to Mr. Weiler for five minutes.

[Patrick Weiler, Liberal, West Vancouver—Sunshine Coast—Sea to Sky Country, BC]

Thank you, Mr. Chair.

I'd also like to thank Mr. Giroux and the other esteemed witnesses we have taking part in our committee meeting today.

I want to touch on some things that were raised in the Naval Association of Canada response report that was submitted as part of the study.

They mention that:

In their 2017 study on the subject, PricewaterhouseCoopers...concluded that the local economic and tax benefits would allow Canada to build the CSC for 13% less than had they been ordered from a European yard. The reason for this is clear. While the need to retool the Canadian shipbuilding industry may create inefficiencies and drive up costs in the short and medium term, the overall economic and tax benefits compensate the government for that premium. Irving Shipbuilding, for instance, calculates that one-third of its labour costs comes back to the federal and provincial governments in taxes on wages alone.

I think you spoke a little bit to these efficiencies when you mentioned that after the fourth ship is built, we would start to see some of those.

They also say that:

...there is a great deal more complexity behind the economics and strategic value of shipbuilding than such simple cost comparisons tend to yield.

They add that:

The...rationale for the NSS was to ensure that the defence dollars spent would be sunk back into the Canadian economy.

I mention this because Seaspan's operations are just outside of my riding. I have many constituents who work there, and while they're not part of delivering or producing the CSC, Seaspan is a key beneficiary in the NSS and is delivering several ships as part of that strategy.

In your report, you note that there are several costs that you can't or chose not to take into account. Given that the CSC program was designed in part to develop a made-in-Canada industry for future domestic shipbuilding, did you consider the losses to local economies and future procurement if the development of a made-in-Canada shipbuilding sector were not expanded?

[Yves Giroux]

That's an interesting aspect. In all the scenarios in our report, all the ships would indeed be built in Canada. The loss of Canadian expertise or strategic aspects would not be significantly different because the ships would all be built domestically. What we looked at was the difference in cost of the different designs that could have been chosen or that could be chosen if we were, for example, to go with a hybrid model.

With respect to the strategic objective of having domestic shipbuilding capacity, that's outside of the scope of the report, and these are aspects that are difficult to put a price tag on, but that are important considerations for decision makers like yourselves, members of the committee. Again, we didn't touch that in the report. It's important to keep in mind that, regardless of the type of ships that would be chosen, the assumption in our report is that they would all be built in Canada. We did not consider outsourcing to other countries or buying ships that would be built abroad.

[Patrick Weiler, Liberal, West Vancouver—Sunshine Coast—Sea to Sky Country, BC]

Thanks for that answer.

Does your report take into account the economic losses that the further delays you outline would have on the Canadian economy?

[Yves Giroux]

No, the scope of the report was not to determine or quantify the economic benefits to the broader economy or the losses of a delay. There would be costs incurred if we were to cancel type 26 and start all over from the beginning of the competitive process, but we did not factor the cost to the Canadian economy at large of a four-year delay or of switching between different types of designs.

[Patrick Weiler, Liberal, West Vancouver—Sunshine Coast—Sea to Sky Country, BC]

In the AG report, it states that the government took steps to minimize the expected reduction activities at Irving, amongst other actions, by building two additional Arctic and offshore patrol ships. These actions were taken to avoid delays in the CSC that could arise from the shipyard having to rebuild its workforce and were estimated to save $890 million.

With this in mind, would it be fair to say that there would be economic impacts under scenario one and two due to possible interruptions in production?

[Yves Giroux]

It's clear that under scenario one, where we would stop all activities on type 26 and start the procurement process from the start, there would certainly be losses. That's why we went for a hybrid fleet, where we would continue the production of type 26, and in the meantime, while the ships are being built, then the government could launch another process and choose a different type of ship to minimize the losses to the shipyard and to the economy. That's why we went with a model where there would be a hybrid fleet.

[Patrick Weiler, Liberal, West Vancouver—Sunshine Coast—Sea to Sky Country, BC]

Thank you, Mr. Giroux.

[The Chair, Conservative, Robert Gordon Kitchen]

Ms. Vignola, you have two and a half minutes.

[Julie Vignola, Bloc, Beauport—Limoilou, QC]

Thank you very much, Mr. Chair.

Mr. Giroux, just now you said that your focus was on ships built wholly in Canada, as is the case currently.

Did you also focus on a single shipyard?

[Yves Giroux]

That is a good question.

Let me ask Ms. Malanik or Mr. Penney to help me with it.

[Christopher Penney]

Yes, our assumption was that all construction activities would be done at the Irving shipyard in Halifax.

[Julie Vignola, Bloc, Beauport—Limoilou, QC]

In your opinion, would the costs be different if more than one shipyard was used to build the type 26 frigates?

[Yves Giroux]

That is a good question.

Generally, if construction work is divided among several shipyards, there may well be a loss in productivity. However, giving specialized work to the shipyards in question could allow for economies of scale, for example, if each shipyard looked after a specific aspect of the construction.

It would depend on the way in which the work was divided.

[Julie Vignola, Bloc, Beauport—Limoilou, QC]

If the work was divided into specialized areas, as you are suggesting, could it save time too?

[Yves Giroux]

That is very possible. Dividing the work among a number of shipyards could speed up delivery, although the costs may suffer as a result. Everything depends on the way in which the work is divided, as I said.

[Julie Vignola, Bloc, Beauport—Limoilou, QC]

Chantier Davie achieved success in 2015, the year in which it won the prize for the best shipyard in North America.

Does the fact that the shipyard is not currently in the running have any impact on the costs?

[Yves Giroux]

We did not look at scenarios where a shipyard other than Irving, or a number of shipyards, would be involved. So unfortunately, I am not able to answer that question with any certainty.

[Julie Vignola, Bloc, Beauport—Limoilou, QC]

Thank you very much.

Earlier, my colleague was talking about the Shipbuilding Association of Canada—

[The Chair, Conservative, Robert Gordon Kitchen]

Ms. Vignola, please be very quick.

[Julie Vignola, Bloc, Beauport—Limoilou, QC]

Yes, Mr. Chair.

He mentioned that the type 31e ships could not be used for combat activities that are considered essential in Canada.

What kind of combat are we talking about?

Is that a question you looked at?