Government Operations Committee on Feb. 4th, 2022

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

Canada's national shipbuilding strategy was meant to foster stability in shipbuilding. This project is about icebreakers. Seaspan was awarded a contract in 2011, but it was taken away in 2019. Nothing happened for eight years. At the time, the contract was valued at $700 million or $1 billion. Now, the government has announced that it will once again award the contract to Seaspan—this time valued at $3.5 billion—and that it will award a contract to Davie. Nothing was done for eight years, but all of a sudden, things are going to be better, and it's going to cost triple.

Isn't there something illogical about all this? Aren't we stuck in a vicious circle when it comes to shipbuilding?

[Yves Giroux]

Certainly, the lack of decision-making and the little progress that's been made over the years has contributed to the increase in management costs. People do still have to keep an eye on things and manage the project, and that may also contribute to the increase in design costs. Obviously, as time goes by, design improvements are needed.

Other than those few observations, I unfortunately don't have an explanation for the cost differences.

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

In Canada, it's often necessary to involve a number of departments in a project. Fisheries and Oceans Canada wants icebreakers, but Public Services and Procurement Canada is in charge of procurement. Somewhere along the line, things get lost.

For the sake of comparison, let's look at the Australian model. In the case of defence procurement, for example, Australia ensures continuity in the process and, above all, keeps politics out of the equation. The idea is to avoid changes being made to the project whenever a new government comes to power.

Should Canada do the same thing? That was more or less the idea behind the shipbuilding strategy. Should there be another step, one that is more serious so the process wouldn't have to start over every time? At the end of the day, taxpayers are the ones footing the bill, after all.

[Yves Giroux]

That comes down to the governance of major procurement projects.

Public Services and Procurement Canada is in charge of those major projects. Unfortunately, my office didn't examine that. It's possible that my fellow officer of Parliament, the Auditor General, has already looked into that, so she may have some insight into better governance mechanisms for major procurement projects.

It's clear from the cost estimates I've provided to parliamentarians since becoming the Parliamentary Budget Officer that the mechanisms are in need of improvement.

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

Very good.

[The Chair, Conservative, Robert Gordon Kitchen]

Thank you.

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

[Majid Jowhari, Liberal, Richmond Hill, ON]

Thank you, Mr. Chair.

Welcome, Mr. Giroux, to our committee again.

Not only at the outset, but also through this last hour or so, it's become quite clear that we can't use the $1.3 billion as a base of comparison, at least because we have very little data for it. Therefore, the only number that we could use, based on the methodology that you used, is the $7.25 billion. If you bring it down to the same level, one ship would be $3.5 billion or $3.6 billion. Since we don't have a comparison, we can't compare the bases.

Let me start by asking you why you picked these three ships. You talked about one being American. You also talked about two being Canadian. You commented on their size and their purpose.

Can you expand on that?

[Yves Giroux]

There are not that many ships that are comparable in both size and mission to what the government needs or plans on purchasing for polar icebreakers of that size. I think the only country that has ships that fit these two criteria is Russia and we didn't find there was sufficiently reliable data to use that as a basis for an estimate in the Canadian context.

Failing a perfectly comparable ship, we decided to go for another method of estimation, widely recognized as reliable, which is looking at both ships of comparable size even though they are not built for the same mission, and ships with a similar mission, but a different size, so polar icebreakers that are smaller.

By combining these two estimates, we arrive at an estimate for this type of ship and that size that is fairly reliable.

We also looked at the Canadian context to estimate costs in the Canadian context so historical data for ships that have been built, or are in the process of being built, in Canada, to take into consideration the Canadian costs, and design, acquisition and productivity differences for Canadian shipyards.

[Majid Jowhari, Liberal, Richmond Hill, ON]

Thank you.

Much has been discussed about project management, and the design and the costs of that. Also, we have to acknowledge that the acquisition costs, which I believe are the construction costs, are to the tune of $6.1 billion.

There seems to be sufficient breakdown of the project management and the design, but when I go to page 13 when you're talking about modelling, you seem to have made an attempt to break down the costs of the construction, which I assume is also called acquisition. You're talking about initial studies, analysis, engineering support, initial spares, system tests, trials and evaluation.

Is there a breakdown of the $6.1 billion by those categories that we might be in a position to be able to look at?

[Yves Giroux]

I will ask Chris and Eskandar if they have that breakdown.

[Christopher Penney]

The way it works in our model is that the historical data we used had those cost categories all included in one bucket, if you will, and so we were using that as our base data to do the projection. You're projecting for all those categories simultaneously.

This is a long-winded way of telling you, yes, it's possible for us to obtain that breakdown, but it would take some work on our end.

[Majid Jowhari, Liberal, Richmond Hill, ON]

The specific line item I was interested in was the initial spares. I don't know how much that is, but it would have been good because when you do the costing, it's usually costs of the acquisition and build. For the spares I'm not sure what costing models....

I want to go back quickly. It looks like the design started in 2016 and now we're in 2022. Has the design changed, or has it been enhanced and the specification has been improved since then to put you in a position to be able to quickly firm up those estimates and narrow that range?

I know I don't have much time. I want to ask one more question, and, hopefully, you get to answer it.

We have looked at other costing models. Have you looked at outsourcing costing models? I know that might be a controversial question, but we seem to be looking at potentially a $680-million saving. I want to know how much the saving is if these things were outsourced.

Thank you.

[The Chair, Conservative, Robert Gordon Kitchen]

I'm sorry for interrupting you, Mr. Giroux, but, unfortunately, we have run out of time.

If you can provide the answer to the question to the committee in writing, it would be greatly appreciated.

Thank you very much.

We will now go to our fourth and final round.

We will go for five minutes with Mr. Lobb.

[Ben Lobb, Conservative, Huron—Bruce, ON]

In some of these large projects whether they are public or private—in this case it's public—how many of the actual tasks and dollars are done by the company that bid on the project and how many are actually farmed out to other firms? Is it close to 100%, the work that is going to be done? Obviously, there are the people who are right in the shipyard when they are building it, we know that, but I'm saying from now until they actually start cutting steel or making steel.

[Yves Giroux]

I think Chris or Eskandar might be in a better position to answer that question.

I see him smiling, so maybe I'm wrong.

[Christopher Penney]

Unfortunately, I'm not in a much better position than you are, Mr. Giroux.

I can certainly say that subcontractor costs are included in our estimate, but I can't hazard what percentage that would be.

[Ben Lobb, Conservative, Huron—Bruce, ON]

It's something that would be helpful when DFO or whoever finally comes up and offers another costing to open everybody's eyes as to how much actually each one....

[Yves Giroux]

That would be a very good question for the Minister of Fisheries and Oceans. If she cannot provide an answer immediately, I'm sure her officials would be able to provide that in writing to the committee.

[Ben Lobb, Conservative, Huron—Bruce, ON]

In addition to that, how much of the billable hours and work would actually be done on Canadian soil by Canadians? Is a lot of this being outsourced around the world, or is this all being done by Canadians in Toronto, Montreal, Vancouver, and all points in between?

[Yves Giroux]

I would think that most of the work would be done domestically, which is what would explain the cost differential. I cannot rule out that a significant portion—and “significant” remains to be defined—could be outsourced abroad. First and foremost, given that it's Vancouver and Davie, then most of the work would be done domestically. Again, there would be domestic parts, but there could be imported parts as well.

[Ben Lobb, Conservative, Huron—Bruce, ON]

When you were working on this, did they offer any of that information, or was that just a couple of steps down the road?

[Yves Giroux]

Yes, I think it's a few steps down the road. I don't think we have that detailed information on what the two shipyards will do and the extent to which they will outsource as opposed to doing it themselves, or outsource to Canadian or foreign suppliers. I think those are further steps down the road.

[Ben Lobb, Conservative, Huron—Bruce, ON]

I think back to 2008 when the announcement was made. I think it had two components, one was arctic sovereignty and the other was coming out of the economic disaster to create some economic activity for the next 20 years. I think those were the two accomplishments. But, if an unreasonable portion of the work is outside of Canada, then I think that would be unacceptable.

Now that I hear about this project and your presentation today, I think of some of the refurbishments that are taking place in Canada's nuclear industry and the refurbishments of the CANDU reactor, and each one was more efficient....

I have nothing against either shipyard, but I do see issues with cost-effectiveness, repeatability and learning from mistakes when you're basically a continent apart. I know you did mention a little bit of it, but that has to be a huge issue going forward.

[Yves Giroux]

It certainly is a cost driver when you have shipyards that are not building the same ship. When you attribute the contract to two different shipyards it increases the cost.

There are other factors than cost that enter into that decision-making process, which I don't comment on, like regional economic benefits and so on.

[Ben Lobb, Conservative, Huron—Bruce, ON]

Were you able to see any of the contracts or terms to see what the penalties were for going over budget, late production, any of those kinds of terms?