Government Operations Committee on March 8th, 2021

[Yves Giroux]

Yes, we note in our report that the type 31e is the smallest and doesn't have the same kind of capability as other ships. That being said, the FREMM and the type 2 ship aren't identical, but they provide roughly similar capabilities. France and Italy, in particular, will be using them as their main frigates. They aren't identical ships, but they can be compared to the FREMM and the type 26.

[Steven MacKinnon, Liberal, Gatineau, QC]

Right, but the surface combatants are going to replace—

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Mr. MacKinnon. You hit it right at the six minutes. Unfortunately you didn't get that last question, but next time.

We'll go now to Ms. Vignola for six minutes.

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

Thank you very much, Mr. Chair.

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

Are you able to tell us why there's such a delay with the type 26 ships?

[Yves Giroux]

We don't have a specific explanation for this. We used National Defence data. We know that the net weight of the ship has increased, so there are probably changes in the specifications. We also know that the type 26 isn't used anywhere on the planet. So it's a new type of ship, which could explain some of the delays.

In any event, we didn't conduct a thorough investigation to determine the exact nature of the delays. The perspective of our report is forward-looking, so not backward-looking. We want to determine ship costs rather than the causes of past events.

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

Thank you.

What are the main challenges for departments when presenting an initial budget for a project of this nature? We're still talking about an increase of a little over $51 billion.

So that we have an overview, can you tell us what the long-term challenges are for the department?

[Yves Giroux]

That is a good question. The main challenges are in the design of the ships. This applies to any long-term purchase. When you are buying something that has not yet been built, that does not yet exist, the costs come with a number of risks. Essentially, there is no basis for comparison.

The specifications are also unique to each country, particularly those pertaining to warships. The time horizon is also very significant. The ships we are buying do not presently exist. This is not like buying a car. We are buying 15 copies of a ship that will take several decades to build. Inflation is a major factor, especially when we are talking about 25 or 30 years, or even longer. These are the main risk factors that must be considered when costs have to be determined.

If we have more time, I am sure that Ms. Malanik and Mr. Penney could handle that question a lot better and much more clearly than I can.

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

Thank you, Mr. Giroux.

It is possible to measure inflation.

Would it be possible for departments to improve their forecasting methods with such major projects?

[Yves Giroux]

There might certainly be a way to do that, but there are a number of unknowns. It is difficult to assess something that is spread over a period of 25 to 30 years.

Perhaps some risk lies in presenting cost estimates that are higher than the initial ones. If you present the cost of buying frigates at $75 billion from the outset, it may well scare those making the decision, whereas, if the estimated cost is less, the estimate could be accepted and approved more easily.

However, I'm not pointing fingers at anyone. It is difficult for me to talk about specific factors, given that I did not participate in the initial cost estimates. In addition, we did not see the details of the cost estimates that were done in the past.

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

Thank you, Mr. Giroux.

Do you have an idea of what two classes of ships might cost?

At the moment, we have to replace 12 Halifax-class and three Iroquois-class ships.

If we follow basically the same process of having two classes, would the costs be a lot greater in the future than they are at the moment for the 12 frigates and three destroyers?

[Yves Giroux]

We did not estimate operating and maintenance costs. However, we know that, in general, the less expensive the ship, the lower those costs are. Everything would depend on the type of ship chosen to replace the type 26 by a hybrid model.

We are talking about three type 26 ships and 12 type 31e ships. The operating and maintenance costs of the type 31e would probably be significantly less than those for the type 26, but that remains to be seen. A specific analysis would have to be done.

Estimating the operating costs for a hybrid fleet was not part of our mandate. Generally, when ships cost less to buy they also cost less to operate and maintain. That does not automatically mean that the operating and maintenance costs of a hybrid fleet would be higher.

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

Okay.

I am well aware that we are talking about substantial ships, warships in fact, not the little Fisher-Price boats we play with in the bath.

However, is it usual for a development process to last four years, in comparison to what has been done in the past in Canada or internationally?

[Yves Giroux]

I am no expert—

[The Chair, Conservative, Robert Gordon Kitchen]

Mr. Giroux, could you very quickly answer this one? I would appreciate it.

Thank you.

[Yves Giroux]

I am no expert in government procurement, but these data are based on the process that National Defence used for the type 26 ships. Unfortunately, I could not tell you whether it's usual, because we did not focus on that particular aspect.

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

Thank you, Mr. Giroux.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Mr. Giroux and Ms. Vignola.

Now we will go to Mr. Green for six minutes.

[Matthew Green, NDP, Hamilton Centre, ON]

Thank you very much.

Welcome back, Mr. Giroux. It's always a pleasure to have you here.

I'm constantly learning through these reports and these studies. This one for me is significant. There seem to be some significant questions. I know other people who might be tuning in will have questions in terms of the discrepancy.

Maybe I will revisit it, and I will start there about just drawing out the difference. The Department of National Defence will still estimate their costs running at $50 billion to $60 billion.

Do you expect DND to update their estimates based on your report?

[Yves Giroux]

They stated that they still stand by their initial amount, their estimate of 2017. A few days or weeks ago in anticipation or right after our report was tabled, they said that they still stand by that $56 billion to $60 billion for the 15 ships. My bet is that they will probably update it in a couple of months when it's probably less politically charged, but so far they stand by that estimate.

[Matthew Green, NDP, Hamilton Centre, ON]

I'm looking back at some previous documents back in 2015 when we had the five-year review of this program. Are these guys part of the national shipbuilding procurement strategy secretariat? Are they the project operations for this program?

[Yves Giroux]

I don't know about that specific question. Carleigh and Chris may jump in; they probably know more about that.

[Christopher Penney, Financial Analyst, Office of the Parliamentary Budget Officer]

Actually, I don't have an answer either.

Certainly, the Canadian surface combatant is part of the national shipbuilding strategy. As for which secretariat is involved, I'd have to look it up.

[Matthew Green, NDP, Hamilton Centre, ON]

I'm trying to get a sense for.... It's irreconcilable for me that they would do a cost analysis and not include the taxes; that is material and astounding. I'm wondering, just so that we're clear and on the record.... There's no credit system in which these taxes are recouped or not charged, right? There's no plausible scenario in which these provincial taxes are waived or not charged. Is that right?

[Yves Giroux]

That's right—certainly, not to my knowledge. If there is one, it involves billions of dollars over the lifespan of this project. It would be very useful for us to know if such a plan exists because, to my knowledge, there is no such scheme or arrangement.

[Matthew Green, NDP, Hamilton Centre, ON]

That, to me, is unconscionable, that they would just overlook that. When we talk about politically charged..., that feels like a politically charged analysis when you have that material non-disclosure within your bidding processes. That's one aspect in terms of the cost overrun and the dispute between you and the DND—I won't say between you and the DND—between the disputed numbers of the two organizations. The result is from the interpretations of the tax, but there are also some pretty complicated weight-based calculations, if I'm correct. Can you clarify how you played into the weight-based calculations and what the differences were between your calculations and the DND's?