Government Operations Committee on June 21st, 2022

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

I agree.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you.

We'll now go to Mr. Johns for two and a half minutes.

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

Mr. Giroux, if Canada were to invest the $18.2-billion shortfall needed to meet the NATO targets in 2022-23, how would that impact inflationary pressures? Could significant new defence spending exacerbate existing supply and demand and labour market challenges?

[Yves Giroux]

To answer that question, one would need to determine how the spending is allocated—what these amounts would be spent on. For example, if it was to increase the number of Canadian Forces members or even civilian personnel, that would create wage pressures. There would not be tremendous wage pressures, but it would contribute to labour shortages. However, if it was to acquire goods or military equipment produced abroad, it would add very little inflationary pressure.

The magnitude of the inflationary pressures created would depend on the type of spending made with this $18 billion. If it's all on personnel, it will exacerbate or put additional pressure on inflation. It would be the same if it went to purchasing domestically produced goods.

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

Mr. Bains talked about lapsed spending. Back in 2018, Parliament unanimously supported my motion to end all lapsed spending for Veterans Affairs.

Perhaps you can speak about the estimates in terms of the likelihood that some defence spending allocated to the current fiscal year will be lapsed. We know it's been typical, since 2015, for some portion of defence spending to be budgeted but not spent. Is lapsed funding more common for defence versus other areas of federal spending?

I know it's not just the Liberals. The Conservatives left a billion dollars unspent for Veterans Affairs during their term.

[Yves Giroux]

Thank you for the question.

It's not atypical. In fact, it's quite common for departments to lapse money for a variety of reasons: unforeseen events, spending that arrives relatively late in the year, decisions made in less than a timely manner and other factors. There's also an inherent built-in factor that almost forces departments to have a lapse. Departments cannot go above their budgets, so managers tend to be prudent and want to avoid going over their spending authorities.

With respect to defence, I don't think this year will be any different from previous years. We anticipate a lapse of similar magnitude to previous years in this year's Department of National Defence spending.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you, Mr. Johns.

We'll now go to Mr. Perkins for five minutes.

[Rick Perkins, Conservative, South Shore—St. Margarets, NS]

Thank you, Mr. Chair.

At the time of the announcement about surface combatant vessels, Dexter's NDP government gave Irving Shipbuilding an interest-free loan of more than $300 million, of which, I believe, about $260 million was nonrepayable.

Is that included in this calculation?

[Christopher Penney]

In principle, if it accounts for defence spending, it would be included in here. If it's a loan, I don't think that would be included.

[Rick Perkins, Conservative, South Shore—St. Margarets, NS]

The forgivable portion probably would be, though.

[Christopher Penney]

It would be included, yes.

[Rick Perkins, Conservative, South Shore—St. Margarets, NS]

Mr. Chair, as a follow-up, Irving Shipbuilding recently announced that they would require another $300 million to upgrade the facility at the Irving shipyard in Halifax for that program. Is that included in this estimate?

[Yves Giroux]

It's included to the extent that the government uses existing funding—funding that has already been set aside in the fiscal framework. If, however, the government were to use additional funding, new spending, then it would not be included. It would be on top of the amounts that we talked about in our report.

[Rick Perkins, Conservative, South Shore—St. Margarets, NS]

Thank you.

To change the subject, about the polar icebreaker project, on which the Parliamentary Budget Officer did a report in December, is that included in this estimate?

[Yves Giroux]

Yes, it is because it's part of the Coast Guard's capital spending projects.

[Rick Perkins, Conservative, South Shore—St. Margarets, NS]

In reading through this report, the original $1.3 billion for the vessels has now exceeded a total project cost of $7.25 billion, if the project starts cutting steel next year. Is that correct?

[Christopher Penney]

Yes, that's correct.

With respect to our projections, the major parts of that cost estimate come in mostly at the end of this five-year window, so it doesn't have a huge effect.

[Rick Perkins, Conservative, South Shore—St. Margarets, NS]

Okay.

Could you share with us the reasons for why that escalation happened?

[Christopher Penney]

We actually didn't have.... We requested information from Fisheries and Oceans. They didn't provide us with a breakdown of what was in that $1.3 billion estimate at the start. Our exercise was to come up with an independent cost estimate with the project for where it was now, rather than to see how it went from $1.3 billion to $7.25 billion.

[Rick Perkins, Conservative, South Shore—St. Margarets, NS]

Thank you.

I think you said that if the project is delayed by a year, it will cost another $235 million, and two years, $472 million.

In terms of being prudent and the fact that we will probably be about 10 years into this before we do it, with regard to the likelihood of actually getting to that point, have you built that part into your estimate?

[Yves Giroux]

We have not, because there are a few ways that the government could deal with that. They could keep it a fixed envelope and reduce expenditures on other items to keep the overall expenses whole, or they could decide to replenish the capital envelope for these projects, for defence projects or for the Coast Guard. We have assumed that it's all within the existing envelope.

As Chris mentioned, it's beyond the five-year horizon for this report, so it would probably not have been captured had we done it in a different way in this report.

[Rick Perkins, Conservative, South Shore—St. Margarets, NS]

In any of your studies, have you had the opportunity to look at alternative procurement processes that might be more efficient, in comparison to what we've done in terms of buying these vessels the way we have?

[Yves Giroux]

In our reports, notably on the surface combatants, we looked at alternative designs, not necessarily different ways of procuring the ships, but different designs that were not identical but were comparable and were deemed comparable by other navies across the world.

We found that there are other designs that would be cheaper, with smaller ships or ships of slightly different designs, and there are alternatives to the Canadian surface combatant, which we mentioned in our report on that project. Off the top of my head, I don't remember all the details.

[Rick Perkins, Conservative, South Shore—St. Margarets, NS]

In terms of looking at this, I thought your report said that a duplication of the two shipyards was one of the major cost factors.

That obviously was a political decision and not necessarily a procurement decision. Is that correct?

[Yves Giroux]

I won't comment on what prompted the decision, but it is true that having more than one shipyard build the same type of ship increases cost. There are economies of scale and knowledge gains that cannot be accrued if two shipyards build the ships at the same time. However, there are other benefits. Obviously, faster—