Government Operations Committee on March 25th, 2022

[Andy Smith]

Thank you very much, Mr. Chair.

Indeed, the ships may look the same, but they will be fundamentally different. For example, we've taken the armament off the AOPS for the navy. We've put some bridge wings on to facilitate the way we operate in ice. There are some accommodation changes. The ships may look the same, but inside they will be different.

With respect to the earlier reference that they are $750 million per copy—there was an article published earlier this week—I do think that, to use your expression, it's not really a fair apples-to-apples comparison. They will cost more, but in fairness, look at the price of steel in the last two years. It has skyrocketed, and for the supply chain and the long-lead items that were generated for the first six ships, a lot of the procurements were done four or five years ago, so it's not untoward to think that the costs of ships seven and eight would be higher than those for the first six.

[Anthony Housefather, Liberal, Mount Royal, QC]

Right.

I think we're all focused on making sure we get delivery of product as quickly as we can, to make sure the men and women of our armed forces have the best up-to-date equipment. We also want to be cost-efficient and keep costs down, but we have to recognize that not everything is the fault of either procurement or defence. Part of it is worldwide trends; part of it is shipyards and the labour experiences they have had during the COVID-19 pandemic. It's easy to blame. I want to make sure that I'm not blaming and instead am more trying to fact-find and see where we can help.

I'm confident, Mr. Page, that you have been working very closely with the shipyards—all three of them, including Davie—to help them mitigate the challenges they face in the NSS. Can you talk to us, whether with respect to the COVID-19 pandemic or with respect to supply chain issues, about things that Public Services and Procurement Canada does to help the shipyards confront the challenges, for example, in terms of facilitating their access to steel? Talk to us about what you and your team do to help the shipyards be more cost-efficient.

[Simon Page]

Thank you very much, Mr. Chair, for the question.

At the outset, to answer this question, I would say that we have a very rigid governance system with the shipyards. That includes Chantier Davie Canada in Lévis, Quebec. This rigid system of governance enables us to cover an array of topics that are key enablers within the shipbuilding strategy and, eventually, for the execution of the respective work programs in the shipyards.

Under this governance of the shipyards, we review where they are with respect to their labour workforce, their supply chain challenges and their schedules and costs. We have now enabled a specific review of schedules and costs through the earned value management system. Very recently, we have taken the national shipbuilding strategy human resource strategy to a different level. We've engaged them in specific discussions about accessing the right tools and programs in the hopes that they will be able to resolve some of the challenges they have with their workforce.

Holistically, we have very good conversations with the shipyards. We work together. There are some things that government controls and some things that government does not control, but together we're having the right conversations.

[Anthony Housefather, Liberal, Mount Royal, QC]

Thank you.

In addition to helping review—and I understand that we provide them support in that regard, in the form of technology and intelligence—we also, for example, in the event that they're having challenges with respect to certain materials, and the Government of Canada has better access to those materials, do you not make introductions? Do you not also help the shipyards potentially access materials that they might not be able to get otherwise, or help them with logistics that they may need help with?

[Simon Page]

Mr. Chair, we do that. Especially with materials, one real enabler, is to plan the procurement of long-lead items and materials ahead of time. We do that for all of our contracts. We see this as a key enabler, moving forward, to address some of the challenges we see in the supply chain.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Mr. Page.

Thank you, Mr. Housefather.

We will now go to Ms. Vignola for six minutes.

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

Thank you very much, Mr. Chair.

Mr. Crosby, the estimated cost of the 15 Canadian combat ships that have been ordered from Irving is $56 billion to $60 billion. The Parliamentary Budget Officer doesn't quite agree with that cost estimate. He has pegged its maximum at more than $10 billion.

That being said, what I see is that the delivery date for the first ship has not yet been determined.

When will the first Canadian surface combatant ship be delivered?

[Troy Crosby]

Mr. Chair, at this point, we're forecasting the delivery of the first Canadian surface combatant in the early 2030s.

To come back to the question of cost and the situation of where we are right now with the procurement, we aren't actually on contracts for the construction of any of the ships yet. Those are contracts that have yet to be negotiated and put into place, so there remains cost uncertainty there.

As you'd appreciate, when we're talking about the timing scales and various economic factors that are taken into consideration, there remains uncertainty in the overall program cost for the Canadian surface combatant project, which includes not just the 15 ships. It includes all of the program management costs, weapons and infrastructure.

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

Thank you, Mr. Crosby.

Indeed, with regard to costs, the contract for the combat ships was awarded to Irving. However, on February 8, 2019, the Government of Canada confirmed that the Irving shipyard had awarded a subcontract to Lockheed Martin Canada to finalize the design.

Isn't using a subcontractor one of the reasons you are unsure of the final cost?

Irving's proposal included its own estimated profit and the cost associated with its expertise, but since it is using a subcontractor who also wants to secure a profit margin, doesn't that also affect the final cost, in addition to costs related to ammunition acquisition, infrastructure, and so forth?

[Troy Crosby]

Mr. Chair, the contract structure we have right now is, as the question suggested, that Irving Shipbuilding is the prime contractor and they have subcontracted work through Lockheed Martin for the design of the combat system. While the parent design of the Type 26, which originates in the United Kingdom, will be what we call pulled through— made part of the foundation of the CSC design—the mission systems will be unique to meet Canadian requirements.

We work alongside ISI and their major subcontractors, Lockheed Martin and BAE, in order to find the trade-offs that are required to deliver the ships efficiently and effectively to meet the navy's requirements.

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

Given that the design work was subcontracted to Lockheed Martin, I think you can appreciate that this raises questions. This company is seriously being considered to build aircraft, and it is also being subcontracted for ships that are, after all, important to Canada.

Since it is an American company, is it required to comply with the Industrial and Technological Benefits Policy?

Is it required to do so in any other way than the way Irving has managed to do it, that is by investing in potato chip plants in Alberta?

[Simon Page]

Mr. Chair, maybe I can answer this question, as this is a process question.

For all procurements that have been mentioned here, the policy for ITB and value proposition applies fully, so in the case of the aircraft contract it applies, and in case of the shipbuilding it also applies. We will have specific obligations that will be required to be met and monitored for the Canadian surface combatant project. It was part of the contract and it's part of the proposal.

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

Thank you.

I'd like to turn now to the multipurpose vessels that are under contract between the Government of Canada and Vancouver Shipyards of Seaspan. It is stated that there could be as many as 16 multipurpose vessels to be built, but the budget and timing of the delivery of the first vessel is still undetermined.

Having a spouse who works in the private sector and has to submit bids to companies to meet their needs, I wonder how Canada, being the client and knowing its needs, can ask a company to bid but not know how much these 16 ships will cost. It seems to me that when you make a proposal, you include the costs and that includes increases due to inflation and contingencies.

Why do we still not know how much these 16 ships are going to cost us?

When do we expect to receive them?

[Andy Smith]

Thank you for the question.

In terms of the first multi-purpose vessel that will be delivered, we expect it to be in service in 2028‑2029. We are currently in the design stage.

We won't be into a contract for the actual cutting of steel for that ship before probably 2025 or 2026.

With respect to the budget, I would offer you the same answer that we have for some of the other projects we have out there, like the program icebreakers and the polar icebreakers. It's not that we don't or won't make those budgets public, but until such time as we actually get into contract, to put those budgets out in the public domain would remove some of the leverage we have in terms of contract negotiations.

We look forward to making those transparent and public, and we will do so at an appropriate time.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Mr. Smith. If you have anything further to add, by all means please submit it in writing if you can.

We'll now go to Mr. Johns for six minutes.

[Gord Johns, NDP, Courtenay—Alberni, BC]

Thank you, Mr. Chair.

Thank you to all of you for your important work and for being here today.

One thing I keep hearing about, obviously, is the skyrocketing cost due to inflation—cost of materials and labour—and labour shortages. My concern is that I don't think we're thinking outside the box as a nation, in terms of developing on federal lands—federal opportunities.

We have 18 Canadian ports. I live in Port Alberni. We have a port, and the Port Alberni Port Authority has been doing incredible work. It has been asking for the government to develop a dry-dock program, for example.

I was at the Pacific NorthWest Economic Region conference just four years ago. It cited that there is $3 billion of dry-dock work done annually, and it was absolutely short of dry-dock space at the time.

We look to countries like Norway, which has developed dry-dock space in small communities to build economic resiliency. In Port Alberni, there is this great company, Canadian Maritime Engineering, that's doing incredible work. It's working in partnership with the port to try to get a dry dock.

I just want to talk about the cost of living on the west coast. It costs $1.5 million now for the average home in Vancouver, over $1 million in Victoria and about $500,000 in Port Alberni. The wages you have to pay somebody to make their mortgage in Vancouver is absolutely through the roof.

Why are you not working collectively with Transport Canada in opening up opportunities so that we can reduce costs of shipbuilding in this country?

[Simon Page]

Mr. Chair, as I alluded to before, we have a very good and rich system of governance for the national shipbuilding strategy and defence procurement writ large. This governance includes Transport Canada, so we can actually have discussions about such topics. For instance, the salary of employees versus the cost of living in the areas where we build ships is often discussed.

With respect to the specific piece about Port Alberni, I'm not aware of this proposal. I don't think we are tracking this proposal. I'd be happy to have a detailed look at it, if it's tabled.

[Gord Johns, NDP, Courtenay—Alberni, BC]

Well, I'll just say this. We've actually met with department staff at Transport Canada, and they don't even have a program for floating dry docks. That's why Port Alberni can't even apply for it.

I think the federal government, especially when it comes to procurement and seeing skyrocketing costs, needs to examine all opportunities, especially in markets where there's a.... The only deep-sea port on the west coat of Vancouver Island is in Port Alberni, but there are rural communities that have huge strengths, in that there are lower labour costs and, as well, skilled labour from other sectors that could be transferable.

Now, I look at government policies, and there's that 25% tariff, for example, to build ferries outside of Canada that was in place so that we would deter companies and governments from building boats in Turkey, Poland and other places. The Conservative government of the day removed it in 2010, and that actually helped to deplete the capacity of shipyards right across Canada.

Is the government looking at policies like that and at reinstating those policies? That 25% tariff generated $118 million annually. That could be reinvested in building capacity. The more the capacity, the lower the ship costs come down. That's what the PBO stated when he testified here at this committee.

Do you support new types of policies that are going to support the domestic shipbuilding sector so that when bids come up we're more competitive?

[Simon Page]

Mr. Chair, we definitely discuss and support different policies and adjustments to current policies with the view to optimize the output of the national shipbuilding strategy across three pillars. The one specific policy piece that has been mentioned is not, however, at this time being tracked.

[Gord Johns, NDP, Courtenay—Alberni, BC]

I hope the government takes another look at this.

Also, in terms of funding, B.C. shipyards are at an unfair playing advantage. The Atlantic Canada Opportunities Agency got money. They're investing there. B.C. is lacking that. Is that something you're looking at? Are you looking at creating a funding mechanism in British Columbia to expand shipbuilding capacity?

[Simon Page]

Mr. Chair, we are not specifically looking at a funding mechanism in this regard at this time. We have multiple conversations and multiple ways to access these conversations. We are always open to looking at proposals. Right now, we're very focused on what the programs of work are in the national shipbuilding strategy and the variables associated with this.

[Gord Johns, NDP, Courtenay—Alberni, BC]

Okay. I just think that with the state of the crisis we're seeing right now and the skyrocketing costs, we need to expand capacity. I'm hoping that all the departments will come together and start looking at opportunities like this, because for me, this is just glaring in terms of the failure of government to expand and invest.

This question is for you, Mr. Smith.

We know that the Coast Guard currently is very short on engineers and crew in general. We need to commit to employees like other marine sectors do. What are you doing? Have you been going to Treasury Board to make sure that the employees of the Coast Guard, who we're all grateful for in terms of their sacrifices and the risks they take, are getting compensated properly?

Attraction an retention is a huge issue. Now we're looking at building more vessels, we're going to need to meet those needs when they're built out. Can you speak to that?

[Andy Smith]

Mr. Chair, it's an insightful question as we go about the fleet renewal.

Fleet renewal really speaks to the building of the ships, but that needs to necessarily be accompanied by the maintenance funding to support them in the long term, the additional operating expenses and the personnel costs as we grow the fleet. That's very much front and centre on the Coast Guard as we look to ensure that in the long term, once we take delivery of these ships, we'll be able to operate them and maintain them for decades to come.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Mr. Smith.

Thank you, Mr. Johns.

In looking at the time we have and in trying to make certain that we stay on track, we're going to go now into our second round and change to four minutes for the first two, two minutes for the next two and then four minutes for the next two. That will work.

We're going to Mr. McCauley for four minutes.

[Kelly McCauley, Conservative, Edmonton West, AB]

Thanks, Mr. Chair.

Gentlemen, thanks for joining us.

We're very, very short of time, so I'm going to ask you to provide some information to the committee and email it back to us.

To start with, I'd like to hear from all of you regarding our design costs—basic design, function design, production design—for these projects, especially for the icebreakers, compared to benchmarking to international standards. I'd also like to get information from you on our productivity at the two main shipyards versus international benchmarking, please.

Please provide that to the committee, especially on the productivity.

Mr. Smith stated that costs will come down on long series ships.

I want to follow up on Mr. Paul-Hus' comments. We know that as we build more and more of a specific type of ship, the productivity is supposed to increase quite dramatically, exponentially, as the crew learns more. We've seen that with the AOPS. Despite the fact that they added a sixth ship, the cost has gone up. Now, with the Coast Guard ships going up massively, instead of being perhaps around the $200-million mark, it's going up to $750 million.

Mr. Smith commented that it's a different design. Heavy, heavy costs are being taken off of the AOPS, which is the weapon system.

I'd like a straightforward answer as to why the cost is probably tripling, not just doubling but tripling, because the productivity and knowledge on building those ships will be so high by the time you get to the seventh and eighth ships. Why is the cost basically tripling?

I think it was South Africa or Spain that built a similar ship this year for just $170 million.

Are we just sticking with...? As Mr. Smith said, it's basically just the hull that's the same. Have we made a mistake in picking a bad design and then building around it that is costing us so much money?