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.
2:05 p.m.
Conservative
The Chair Conservative Robert Gordon Kitchen
Thank you.
We will now go to Mr. Bains.
Mr. Bains, welcome to what I think may be your first committee. Welcome aboard.
You have five minutes.
2:05 p.m.
Liberal
Parm Bains Liberal Steveston—Richmond East, BC
Thank you, Mr. Chair.
Thank you to Mr. Penney and Mr. Giroux for joining us today. I'm quite fascinated by this file. I'm a British Columbian from the coastal city of Richmond. I was working as a communications officer for the provincial government when I first learned of this announcement around Seaspan and the shipbuilding coming. It was many years ago, so I'm extremely interested in how this moves forward.
Mr. Giroux, my question is geared toward the Canadian Coast Guard. In May 2021 they explained that, according to early estimates, the construction of these ships would generate approximately 300 jobs per vessel at the shipyards and 2,500 jobs across the marine supply chain. Seaspan and the Vancouver shipyard indicated that the new ship construction program would sustain approximately 1,400 jobs at Seaspan on the Vancouver shipyard and 1,400 additional jobs across the country.
What are your views on the Canadian Coast Guard's estimates, Mr. Giroux?
2:05 p.m.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
I don't have views, per se, because we looked at the cost of procuring these ships. We didn't look at the economic spinoffs, the economic impacts and the benefits, or the number of jobs created. For that reason, it's very difficult for me to have an opinion as to whether these numbers are accurate or not, given that it was not within the scope of our report.
2:05 p.m.
Liberal
Parm Bains Liberal Steveston—Richmond East, BC
Okay. Thank you for that.
On page 10, you mention a “sensitivity analysis” to determine the impact of delays. How were those delays calculated, and what's your confidence in that number?
2:05 p.m.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
I would probably ask Eskandar if he can jump in here and explain how we calculated the delays.
February 4th, 2022 / 2:05 p.m.
Eskandar Elmarzougui Senior Analyst, Office of the Parliamentary Budget Officer
It is easy to calculate the cost of these delays. The production process is delayed, which increases project management costs. In addition, production costs will increase due to inflation. We calculate the costs by year and convert all these years to our base year, 2021.
If we delay the production process, there will definitely be higher project management costs. Production costs will be a bit higher because they will be spread over more years. Inflation will increase production costs.
The production process takes four to five years. Then we do the conversion and generate our cost for our base year. For an additional year, we will pay more management fees. Also, delaying production will cost a bit more.
This is how the calculation is done. We calculated that a one-year delay would cost us $200 million more, and a two-year delay would cost us a little over $400 million more. That's how we did the math.
2:10 p.m.
Liberal
Parm Bains Liberal Steveston—Richmond East, BC
Okay. Thank you.
I don't have any more questions, Mr. Chair. Thank you.
2:10 p.m.
Conservative
The Chair Conservative Robert Gordon Kitchen
Well done, so we'll now go to Ms. Vignola.
You have two and a half minutes.
2:10 p.m.
Bloc
Julie Vignola Bloc Beauport—Limoilou, QC
Thank you, Mr. Chair.
Mr. Giroux, the pandemic has created supply problems in all sectors. The polar icebreakers are high-tech ships. If you have had the pleasure of trying to buy an electric or hybrid car, you know the current problems with technology supply.
Can breakdowns in technology supply chains impact on the cost and time taken to produce and build the ship? To mitigate this, shouldn't there be manufacturers in Canada for this type of technology, which we need?
2:10 p.m.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
Thank you, Ms. Vignola.
It is clear that breakdowns or interruptions in the supply chain can impact the delivery schedule of vessels of this magnitude and can also lead to cost increases.
We can already see that supply chain disruptions have had some impact on inflation. This has led us to change our assumptions about inflation in this project. This is one of the reasons why we estimated the potential costs of a one-year and two-year delay. It's also why we have a range of estimates, a range of possible costs, to account for possible disruptions in the supply chain.
Whether this is a reason to incentivize Canadian manufacturers to provide materials that could help build ships is more of a political question. Do we want to pay higher costs to have an entirely local production line, or do we want to source around the world from suppliers who can offer a better price? These questions are more about industrial policy and economic policy than my area of expertise.
2:10 p.m.
Bloc
Julie Vignola Bloc Beauport—Limoilou, QC
Earlier, you were saying that if the ships were built by the same yard, we would save $600 million to $800 million for both ships. That's huge.
At the end of the day, what could possibly explain the fact that we are missing out on these significant savings?
2:10 p.m.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
There are two main factors.
First of all, there is the simplification of project management, because the government would be dealing with one shipyard, rather than dealing with two partners that you have to monitor.
Then, the aspect that is probably the most important is the economies of scale generated. There is always a learning curve when doing something for the first time, and this applies to the first ship that is built. These economies of scale are realized by a shipyard and can allow the second ship to be built more efficiently, and therefore at lower cost. This is not the case when two yards both build a first ship.
2:10 p.m.
Conservative
The Chair Conservative Robert Gordon Kitchen
Thank you very much.
Ms. Vignola, you should thank Mr. Bains that he went 30 seconds short and I added a couple of seconds there for you.
We'll now go to Mr. Johns, for two and half minutes.
2:15 p.m.
NDP
Gord Johns NDP Courtenay—Alberni, BC
Thank you, Mr. Chair.
I have a question around labour market shortages. You cited the average cost of a worker at $51.62 an hour.
Did you account for the labour market shortages we're facing right now? This is clearly an unprecedented time right across all industry.
2:15 p.m.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
That's an interesting question and I'm sorry I didn't address it the first time around.
We did not address it explicitly, but we did address it implicitly by revising our inflation projections. Labour shortages are one factor that can lead to higher inflation and we have revised our inflation projections upwards for that cost estimate.
Even though we didn't factor in labour shortages per se, higher inflation projections are taking that into consideration to a certain extent.
2:15 p.m.
NDP
Gord Johns NDP Courtenay—Alberni, BC
In terms of the future years, clearly we're going to need to develop workers and ensure that we have workers trained, develop capacity and labour market strategy that's going to ensure that we have workers to build these vessels in years to come.
In your research, did you feel that the government is developing capacity and doing the important work of attraction and recruitment of workers to ensure that we can build these vessels, but also finish them, and in the long term?
2:15 p.m.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
We looked at the cost, and the potential cost, for completing these two polar icebreakers, but we didn't look at the broader issue of availability of qualified labour and whether government policies are currently sufficient to address labour shortages that we see in the country. That was beyond the scope of our report, which was to estimate the cost of these polar icebreakers.
2:15 p.m.
NDP
Gord Johns NDP Courtenay—Alberni, BC
Given the impact of COVID and seeing the labour market shortage, seeing the skyrocketing costs of labour, especially the cost for our workers, with housing, child care and whatnot, do you foresee that potentially it could be much greater cost to develop these vessels in the long run?
2:15 p.m.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
In our cost estimate, we assume that the Bank of Canada monetary policy will ensure that inflation returns to its target range of 2% in the medium term by successively increasing interest rates, but if that were to not be the case, the cost would quite clearly be higher if inflation was not brought under control.
We assume that the monetary policy of the bank will be sufficiently robust to return to inflation of around 2%, but if that were to not be the case, again, costs would go up.
2:15 p.m.
Conservative
The Chair Conservative Robert Gordon Kitchen
Thank you, Mr. Giroux.
We'll now go to Mr. Paul-Hus for five minutes.
2:15 p.m.
Conservative
Pierre Paul-Hus Conservative Charlesbourg—Haute-Saint-Charles, QC
Thank you, Mr. Chair.
Mr. Giroux, since the meeting began, the questions have all been more or less the same. They have focused on the staggering costs. In this case, as in others, there seems to be a systemic problem. I'm referring to the delays in major procurement projects and the resulting cost overruns.
Do you think the Government of Canada has a systemic problem when it comes to large procurement programs?
2:15 p.m.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
The word systemic has a certain connotation in Quebec, so I won't go down that road.
However, I do see a clear pattern happening: whenever a major procurement project is involved, the initial cost estimates are significantly lower than the subsequent cost revisions.
Is it a recurring problem? Definitely.
What is causing the problem? Is it intentional, or is it due to a lack of foresight or failure to plan ahead? Is it a negotiating strategy some public servants use to obtain lower cost estimates in the hope that they will lead to lower bids? Unfortunately, I don't have those answers, but if I did, I'd be happy to share them with the committee.
2:15 p.m.
Conservative
Pierre Paul-Hus Conservative Charlesbourg—Haute-Saint-Charles, QC
Right now, all we see are cost increases.
The project management costs really get me. Eventually, I'd like you to give us more details on that. The project management costs are estimated at $346 million and could go as high as $405 million. Project delays result in higher costs. These increases are exponential, and I've pointed that out before. You and I have talked about the fact that we are discussing billions of dollars today the same way we used to discuss millions of dollars a decade ago. In today's terms, $400 million is peanuts.
What accounts for the staggering project management costs?
2:20 p.m.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
I'm as shocked as you are about the project management costs, not to mention the design costs. Unfortunately, I'm not an expert in the field.
In the course of the many reports I've submitted, I've learned that the design and project management costs are based on historical data and comparable projects, specifically those related to support ships and other types of icebreakers. The numbers are based on cases in the past, but I, too, am taken aback every time.