Government Operations Committee on May 10th, 2022

[Kevin Young]

The work isn't finished. There's an ongoing discussion with the government as we work our way through this. I don't recognize the $800 million number.

[Pierre Paul-Hus, Conservative, Charlesbourg—Haute-Saint-Charles, QC]

Okay.

We know that Irving is the prime contractor. So it is not the federal government, or another company or Lockheed Martin. Is that correct?

[Kevin Young]

Irving is the prime contractor for the vessel and is responsible for all of the industry participants, including Lockheed Martin and BAE and all those others. However, we work closely with the government, and most of the key decisions are collaborative activities. Though the final decision rests with Canada, we bring recommendations and solutions, and decisions are made with Canada.

[Pierre Paul-Hus, Conservative, Charlesbourg—Haute-Saint-Charles, QC]

Okay.

The project encompasses the design, weapons systems, construction and so forth. Being in charge of the project, you could be expected to be aware of all proposals, costs and various partners. Today we want to know how much the project is expected to cost. It seems no one can tell us. We have been asking the government for two or three years. As contractor for this major project, you must know the costs of all your partners. So you should have an idea of the overall cost of the project.

[Kevin Young]

As my colleague Mr. Mooney said earlier, we provide a quarterly update to government through a shared-cost model of our scope, but our scope does not constitute the total scope of the CSC program. CSC is the acquisition of a total defence capability, and not just the provision of ships and the combat systems within them.

[Pierre Paul-Hus, Conservative, Charlesbourg—Haute-Saint-Charles, QC]

Who is responsible for the weapons systems? Is it Lockheed Martin?

[Kevin Young]

Yes. The government provides the ammunition for the vessel, the training, the infrastructure to operate the vessel, so there's a lot more than just—

[Pierre Paul-Hus, Conservative, Charlesbourg—Haute-Saint-Charles, QC]

With respect to construction, weapons systems and Lockheed Martin's specialized communications systems, does the government discuss these costs for the surface warships with Lockheed Martin?

[Kevin Young]

No, that's our side.

[Pierre Paul-Hus, Conservative, Charlesbourg—Haute-Saint-Charles, QC]

Okay.

So you should have an idea of the costs thus far.

[Kevin Young]

We provide regular costs to the government. What they add onto those—what is additional to those to provide the estimates they formally provide—is in the order of $60 billion, which they have provided publicly. Our number is below that number, and the difference is reasonable enough to believe that it is a credible number. I don't know enough of those costs to be able to say that it's the right number.

[Pierre Paul-Hus, Conservative, Charlesbourg—Haute-Saint-Charles, QC]

Okay.

So, you are saying that the government has estimated the costs at $60 billion to give itself some leeway. For your part, you think it is a bit lower than that.

Considering inflation and the cost of steel and materials, is that figure still valid?

[Kevin Young]

Yes, because this is a long-term program with assumptions about inflation and escalation. Material costs will not be just what they are today. We're not buying all those things today. They are projected over time, using data that the government wishes us to use so that they are consistent with their other cost projections.

[Pierre Paul-Hus, Conservative, Charlesbourg—Haute-Saint-Charles, QC]

Thank you. I have one last question for you.

In this major project, there have been issues with labour and related costs, as well as the cost of inflation and materials. In your contract with the federal government, is your profit margin protected, come what may? If there are unexpected costs, do taxpayers have to cover them?

Is there a risk for Irving, considering all the potential consequences?

[Kevin Young]

For the construction of the vessels, we have no contract at the moment. There's an umbrella agreement that describes our role, but we have no contract with a fee or a figure or a cost. That's still in the future. It's to be negotiated. As part of that, obviously there will be a discussion around costs and fees, but we're not at that point yet.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Mr. Young.

We'll now go to Ms. Thompson for five minutes.

[Joanne Thompson, Liberal, St. John's East, NL]

Thank you. I'd like to begin with Ms. Cianfarani.

You referenced COVID in your opening remarks. Could you speak to the repercussions, if indeed you feel there are repercussions, of the pandemic as we move forward?

[Christyn Cianfarani]

Interestingly enough—

[Joanne Thompson, Liberal, St. John's East, NL]

Sorry; that's as it relates to shipbuilding.

[Christyn Cianfarani]

On shipbuilding, there are two very interesting dynamics with respect to the pandemic.

One is that because of the economic stability of continuing to be able to build ships during the pandemic period, hardship or not, we actually saw statistical growth in the defence sector. In 2020 the sector, predominately buoyed by shipbuilding and the ability to continue to build ships, grew by $2.2 billion in GDP and 13,900 jobs. That's a testament to the fact that when you have something that's economically stable in an environment like a pandemic, which is a snap shock, it is quite good for economic stability.

That said, in terms of the NSS itself and its costs, you heard the shipbuilders say there are long-term ramifications in labour shortages and cost escalations that come from supply chain issues. We are seeing those, and not just in the NSS. We are seeing it across the sector in general. I believe that business in general is seeing it. We've heard escalations, for example, of up to 400% in certain supply chain areas, so there are long-term ramifications. As I said, even though these programs are for 10 years, it will be very hard in the short to medium term for these businesses to absorb those losses without some kind of management from a programmatic perspective.

Our worry is that we certainly don't want to see the number of ships get cut, for example, in order to accommodate things like inflation or labour shortages, which increase wages.

[Joanne Thompson, Liberal, St. John's East, NL]

Thank you.

Following along with that thread and going back to a reference earlier on boom and bust, do you see, as Canada moves through this shipbuilding strategy, that there's a capacity for other global government markets, a capacity to maintain momentum by looking outside of just Canadian shipbuilding needs?

[Christyn Cianfarani]

In general, the defence sector exports between 50% and 60% of its goods. In shipbuilding, it's a little bit more challenging. The reality is that this ship is fit for Canadian purposes, and the design of the ship is from Britain, so the Type 26 will be sold around the world. There is no question about it.

In terms of the skilled labour and the ability for it to generate itself within Canada, yes. There are certain parts and components within that ship, for example, being done by Lockheed Martin. That's the combat management system, which I believe will probably become available to the export market and be sold on the export market, just like the previous generation that's in the Halifax-class frigates.

To answer your question, it is twofold. One is internal and the other is external. However, it's not the ship itself—the platform or the hulls—but most likely the guts inside.

[Joanne Thompson, Liberal, St. John's East, NL]

In my remaining time, I want to throw it to you—coming off of some of your opening remarks—to speak about how we can continue to build Canada's resilience in the shipbuilding sector, looking critically at the things that have gone well as well as the challenges in a very open way.

It's your time to continue with your opening comments, because I found them quite interesting.

[Christyn Cianfarani]

I think that in this country, it's almost as if we relish procurements that don't go well. When I look at the NSS, there are many little projects within these very large projects that are going well. When I look at shipbuilding, it truly is nation building.

Forty per cent of the growth we saw in this sector came from shipbuilding. It provides significant employment to individuals on both coasts. Atlantic Canada has greatly benefited from having the shipbuilding resource—

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you.

I apologize, Ms. Cianfarani, but we have time commitments.

With that, we have now come to the end of our first hour.

I want to thank Irving Shipbuilding for being here with us, as well as Ms. Cianfarani.

Ms. Cianfarani, you will be with us in the next hour to answer questions, but because we are bringing in one more witness virtually, we will suspend very briefly and then come back quickly.

I call the meeting back to order.

We're now going to go into our second hour. Due to time commitments, unfortunately—and we want to be respectful of time—we are going to very quickly do an introduction.

Mr. Aubertin has joined us. Ms. Cianfarani is with us as well.

Ms. Cianfarani, you've provided us with a statement in advance. We have distributed that to the members, so they already have that. If you're okay with just taking questions from what you've distributed, that will help us manage our time.