Evidence of meeting #3 for Government Operations and Estimates in the 44th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was inflation.
A recording is available from Parliament.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
I'll defer to my colleague, Christopher Penny, who is a few blocks away from here.
Conservative
The Chair Conservative Robert Gordon Kitchen
Mr. Penney, if you can do it in 30 seconds, I'd appreciate it.
Conservative
The Chair Conservative Robert Gordon Kitchen
If there's more you can add, then please submit that as well.
February 4th, 2022 / 1:20 p.m.
Advisor-Analyst, Office of the Parliamentary Budget Officer
Absolutely.
The figure of $51.62 comes from Statistics Canada's other transportation equipment aggregate, the NAICS level, which is the North American Industry Classification System. It was the best figure we had from American data. It was what we would use to make such adjustments.
Conservative
The Chair Conservative Robert Gordon Kitchen
Thank you, Mr. Penney, and thank you Mr. Kusmierczyk.
We'll now go to Mrs. Vignola, for six minutes, please.
Bloc
Julie Vignola Bloc Beauport—Limoilou, QC
Thank you very much, Mr. Chair.
Thank you very much, Mr. Giroux, Mr. Penney and Mr. Elmarzougui, for being with us today. We appreciate your presence very much.
I will come back to a question that Mr. Kusmierczyk asked you, because I find it extremely interesting. Currently, in Quebec, the shipyard is used mainly for cleaning and repair. It could be of great help to Canada, given that it represents 50% of the shipbuilding force in Canada. I am, of course, talking about Davie.
You were saying earlier that there would be a financial advantage to having both ships built by the same yard. That's good, because Davie has room, and its schedule would allow it to build them almost simultaneously.
In your opinion, if both ships were built by the same yard, what would be the impact on the cost of the project?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
Thank you for your question, Ms. Vignola.
In fact, I asked this question quite early on, at the beginning of the project, when we started the estimate. We estimated that the costs would go down by $600 million to $800 million if the same shipyard built both ships. These savings would be due to lower project management costs, obviously, but also to the increased efficiency that is inherent in building a second ship. One learns from the mistakes made in building the first ship.
Bloc
Julie Vignola Bloc Beauport—Limoilou, QC
That's quite a large amount.
[Technical difficulty—Editor] of course, splitting the construction of the two ships between two yards would bring more interesting economic benefits, since it would benefit two regions.
That said, knowing that one of those two regions is already benefiting from tens of billions of dollars in contracts, in terms of economic equity, would building a ship there have as large an effect? Or does the fact that the suppliers for both yards are located across Canada diminish the economic benefits associated with splitting the contract, versus the benefit of reducing costs?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
We did not consider that specific point. Certainly, there are benefits to domestic construction in terms of Canadian economic benefits, but we did not consider regional economic benefits. We focused on construction costs rather than economic benefits or other benefits such as maintaining and developing a domestic shipbuilding capacity.
Bloc
Julie Vignola Bloc Beauport—Limoilou, QC
Thank you.
Other than inflation, what accounts for the fact that between 2008 and 2013 the cost estimate almost doubled, and between 2013 and 2021 the cost estimate per vessel almost tripled?
We went from $720 million to $1.3 billion per ship, and then to $3.625 billion per ship.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
This difference would be due, first of all, to the fact that we went from one to two ships, which obviously has an impact on the cost. However, we don't know how the government arrived at the $1.3‑billion estimate.
So it is difficult for me to explain the difference between our cost estimate and the government's. The Minister of Fisheries and Oceans may be tabling a new updated cost estimate soon, which may shed some light on this.
Based on the estimates and data we have been able to use, we are fully confident in our cost estimate. However, unfortunately I cannot comment on the appropriateness of the 2013 government estimate, because I do not know how the government arrived at that figure.
Bloc
Julie Vignola Bloc Beauport—Limoilou, QC
Have you put this question to the Department of Fisheries and Oceans?
Did you ask them what their method of calculation was for arriving at the $1.3‑billion estimate?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
I know that Mr. Elmarzougui and Mr. Penney have had discussions with people in the department.
Did you get that information, gentlemen?
Advisor-Analyst, Office of the Parliamentary Budget Officer
Yes. Certainly early on in the research project we requested data from Fisheries and Oceans Canada. They did provide us with insight into their methods and so forth, but this would be for their internal estimates that exist now and not the $1.3 billion that existed previously.
Bloc
Advisor-Analyst, Office of the Parliamentary Budget Officer
We took a different approach, certainly. We used an analogue approach that looks at historical vessels that we found to be of sufficient “comparability”, if you'll permit the expression. It's basically a model based on historical data that projects, after making adjustments to this historical data and taking into account inflation and so on and so forth, whereas their approach.... Well, I can't speak to it, but it would be more of a bottom-up approach.
Conservative
The Chair Conservative Robert Gordon Kitchen
Thank you, Mr. Penney and Ms. Vignola.
We'll now go to Mr. Johns for six minutes.
NDP
Gord Johns NDP Courtenay—Alberni, BC
Thank you.
Thank you, Mr. Giroux and Mr. Penney, for being here today and for the important work that you do.
I'm going to follow up on where Ms. Vignola was going. Can you again just share what information the Department of Fisheries and Oceans withheld, if any, in terms of information? If so, can you talk about the impact that might have had on this report?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
I wouldn't say that the Department of Fisheries and Oceans withheld any information. What we did not get a good sense of is how they arrived at the $1.3 billion original estimate of 2013. But that was not that important for us, given that what we are concerned about is the cost estimate now, the best cost estimate that we can come up with, with the parameters that we know now for building two polar icebreakers.
By and large, unless Chris and Eskandar have more information that they would have liked to get from the department, I think we got the information we needed from the department to the extent that we were interested in building an estimate at this point in time.
Advisor-Analyst, Office of the Parliamentary Budget Officer
I can confirm that, yes, they did provide everything we asked of them.
NDP
Gord Johns NDP Courtenay—Alberni, BC
Okay. Thanks. I appreciate that.
Just in terms of comparisons with the U.S. with regard to vessel replenishment and their program around the Lewis and Clark class models, the additional adjustments are undertaken to account for the differences in labour productivity, labour costs and exchange rates between the U.S. and Canada. Can you comment on the differences in labour productivity and labour costs between Canada and the U.S.?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
Sure. When we look at shipyards' productivity in Canada and in the U.S., we find that productivity is lower in Canada. This is explained by the fact that we don't build as many ships as the U.S. shipyards do. They run a constant operation. They are building many, many more ships than our shipyards are building.
The lower productivity is also reflected in lower average hourly wages. So the cost of labour is also lower in Canada, but when you factor in the productivity differences, the wage differences and the exchange rate, the costs end up being significantly higher for building these ships domestically.
NDP
Gord Johns NDP Courtenay—Alberni, BC
[Technical difficulty—Editor] speak a bit about the multiplier effect, the greater impact on the economy. We see the cost estimates come out. What is the impact to the greater economy in terms of the multiplier effect? Has that been looked at?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
The scope of the report did not include the economic benefits or the multiplier effect. We looked at the cost of building these ships, the procurement cost. The economic benefit is something we could look at, if the committee desired us to do this, but it would require more data—for example, the components that are imported versus those that are domestic and so on.
So it would require more work. That's why we limited our report to the cost of this project as opposed to the cost and the economic benefits.