Evidence of meeting #37 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 ships.
A recording is available from Parliament.
Conservative
The Chair Conservative Kelly McCauley
Thanks, Mr. Johns. You're right on time.
Mrs. Block, you have five minutes, please.
Conservative
Kelly Block Conservative Carlton Trail—Eagle Creek, SK
Thank you very much, Mr. Chair.
I echo my colleagues' comments in welcoming you here today. It's an important study, one that I understand—certainly on this project—has been ongoing. I do appreciate the report that you presented last week.
There is a lot of information here, a lot to try to wrap your head around when it comes to understanding the life-cycle costs of our Canadian surface combatants. You've given us a life-cycle cost that is stretched over 65 years. It's my understanding that, back in 2013, the Auditor General provided a life-cycle cost that was around the $90-billion-plus range. Now, we're looking at that having tripled.
The development and acquisition phase has gone from $26 billion to $84.5 billion. That's my understanding from what I've read.
Of the 65 years, could you describe for me what the actual development and acquisition phase is? I see what you've estimated for time for the disposal phase. We know what the operational phase is, so what exactly should a standard development and acquisition phase be, if there is one? What should that be? What's the industry standard around the world?
Advisor-Analyst, Office of the Parliamentary Budget Officer
It's very country-dependent, based on my experience.
If we look at the United States, usually the development phase would last between five and seven years for a surface combatant. Then, of course, there is acquisition. It depends on how long the production run is.
Conservative
Kelly Block Conservative Carlton Trail—Eagle Creek, SK
Okay, thank you.
I want to talk about some costs that were not included in your report. That would have to do with the taxes and the HST.
Can you explain the issue with the taxes and why the Department of National Defence refused to include or did not include that?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
When looking at typical Government of Canada contracts, HST or sales taxes, provincial sales taxes, are always included in contracts. The Government of Canada will pay the applicable provincial sales tax, HST and GST. There's no reason to believe it will be different this time, but DND made that an important point of disagreement between their estimates and ours. For that reason, and to ensure comparability between the numbers DND has put out and hopefully will put out in the future, and ours, we decided not to include provincial sales taxes or HST to ensure comparability for parliamentarians.
I see no obvious reasons why DND will be exempted from sales taxes, but maybe they will enter into agreements with provinces to exempt them from sales taxes. For that reason, and to avoid making that an issue as opposed to the real and central point of the life-cycle costs of $306 billion, we decided to exclude sales taxes to ensure comparability and to avoid a side discussion that is not central to the point of the surface combatant.
Conservative
Kelly Block Conservative Carlton Trail—Eagle Creek, SK
Thank you very much.
I want to go back and give you the opportunity to answer the question that my colleague asked in regard to where the increases in costs are coming from. Are they coming more from changes made by the government or from necessary changes that have been made by the contractors?
Advisor-Analyst, Office of the Parliamentary Budget Officer
We can only speculate. We certainly had discussions with officials from National Defence, but I wouldn't say that we're at liberty to discuss what they told us. I think probably National Defence is best suited to give you that answer.
Thank you.
Conservative
Conservative
The Chair Conservative Kelly McCauley
Thank you, Mrs. Block.
Mr. Bains, I believe you're up for five minutes.
Liberal
Parm Bains Liberal Steveston—Richmond East, BC
Thank you, Mr. Chair.
Thank you to our witnesses for joining us again here today.
The Canadian surface combatant project is the main component of the national shipbuilding strategy. Of course, it's a very important part of our marine sector here in British Columbia. Could you elaborate on the benefits to the Canadian economy of building our ships domestically?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
Sure. We talk about the costs a lot and the costs of building the ships, but the focus of the report was indeed on the costs. We have not quantified the benefits for the Canadian economy or specific shipyards of the Canadian surface combatant, because that was not the scope of the report. However, it's clear that there are, and will be, benefits for the Canadian economy, notably economic benefits through jobs and expertise.
We often hear that there is an imperative to have a Canadian domestic capacity to build these ships for national security reasons. That is also hard to quantify. Because the scope of the report was to focus on the costs and the life-cycle costs, we indeed focused on that and not directly on the economic benefits or the intangible national security benefits.
Liberal
Parm Bains Liberal Steveston—Richmond East, BC
Thank you.
I think you touched on this slightly, but I note that this report does not go into international comparisons. Previous reports have made some comparisons with international examples. Some commentators have noted how difficult it can be to make accurate international costs, because we just don't have the same level of insight into the costing by foreign governments.
Can you speak to this challenge and to what the limitations are to making accurate cost comparisons?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
That's a good point. In fact, when trying to have cost comparisons, usually navies around the world and national defence or defence ministries don't tend to be very open and transparent about all the costs they incur when they acquire and operate surface combatants or warships.
However, there is information that's available from a variety of shipyards and also from other navies, notably the U.S., the United Kingdom and Australia. For example, we have costing for the United States Constellation-class frigates. The Congressional Budget Office, our counterpart in the U.S., has estimated a cost of about $12.3 billion for 10 ships, in 2020 dollars.
In current-year Canadian dollars, that would be about $16 billion to $17 billion for 10 ships. They're not identical to the surface combatants, and it's only the acquisition cost. It does not include the life-cycle costs, the disposal costs or the development of the program. However, it gives you an idea of costs that are incurred by allied navies elsewhere.
Liberal
Parm Bains Liberal Steveston—Richmond East, BC
Thank you for that.
On page 9, the report includes a section on costs that are excluded from the estimate, such as the cost of “civilian personnel associated with the service combatant”. Does this indicate that the salaries of the military personnel are included in the operations and sustainment estimates?
Advisor-Analyst, Office of the Parliamentary Budget Officer
Yes. All of the salaries of military personnel are included in the ops and sustainment phase.
Liberal
Parm Bains Liberal Steveston—Richmond East, BC
Okay.
The report then factors into the estimates “several docking periods” for each vessel. Has the PBO broken down the cost of the docking period?
Advisor-Analyst, Office of the Parliamentary Budget Officer
With regard to operations and sustainment costs, and in particular maintenance, there are three lines of maintenance: on board, alongside and depot level. This docking period refers to the depot level maintenance. Those costs are calculated for the entirety of its life cycle and then spread over its life, so that you can have the inflation applied to properly account for the real cost.
Liberal
Parm Bains Liberal Steveston—Richmond East, BC
Again, thank you to our witnesses for providing all of that information. I'll leave it at that.
Conservative
The Chair Conservative Kelly McCauley
Thanks, Mr. Bains.
Ms. Vignola, you have two and a half minutes, please.
Bloc
Julie Vignola Bloc Beauport—Limoilou, QC
On page 2 of your report, under “Background”, it says that costs aren't indexed.
What would they be, approximately, if they had been?
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
It's hard to give you a quick cost estimate.
Actually, the amounts are indexed. These costs are based on the assumption that inflation will continue according to our office's projections. So the question you're asking would be what the costs would be if they were put in today's dollars, in real dollars. I don't have those numbers off the top of my head. What you see is the total ongoing costs through the end of the program.
