Government Operations Committee on Oct. 31st, 2022

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

Thank you, Mr. Chair.

I'd like to welcome the witnesses and thank them for being with us.

Even before your report was released, Allan Williams, a former assistant deputy minister at the Department of Defence, warned that the costs of this program alone exceed the total funding available within the Department of National Defence to acquire and maintain capital equipment for the combined army, navy and air force, with the risk that the purchase of these ships will come at the expense of other acquisition projects, thereby mortgaging military operations.

What do you think about it?

Allan Williams added that it would be foolish not to start the process again, since Canada can't afford to buy these 15 surface combatants.

What do you think of his analysis?

[Yves Giroux]

I think these are very legitimate concerns. In fact, the cost of acquisition and development is not considered likely to exceed $84 billion. So there may be some tough decisions to be made. There could be painful trade-offs over the acquisition of major pieces of equipment such as fighter jets, the cost of which hasn't yet been determined, and other types of equipment such as tanks, which will have to be purchased or replaced in the coming years.

We also know, given what we know about the current budget of the Department of National Defence and the combatants, that maintenance and operating costs are likely to consume well over half of the budget. It is likely to be three quarters of the Royal Canadian Navy's budget, if not more.

If the 15 combatants alone consume a very large portion of the Royal Navy's operating budget, there won't be much left for other ships and other types of defence operations.

So I think Mr. Williams has raised some very legitimate concerns.

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

Thank you, Mr. Giroux.

We have a columnist in Quebec named Pierre-Yves McSween. A question he often asks is, “Do we really need it?”

Does Canada really need 15 surface combatants?

[Yves Giroux]

Military strategists, government officials and the Minister of National Defence would probably be in a better position than I to answer this question. That said, given that Canada is the second-largest country in the world and is bordered by three oceans, the fact that we need ships to protect and defend our coasts seems obvious. However, do we need the current or proposed combination? Military experts are in a better position to answer that question.

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

Fine, thank you.

Suppose tomorrow morning the surface combatant program is dropped. What economic impact would this have on the regions involved in developing and building the program, and on Canada as a whole?

[Yves Giroux]

This would obviously have a negative impact on the shipyards responsible for developing and building the vessels. It would have a negative impact on jobs and economic benefits. It would also negatively affect our defence capability, the military capability of the country. That suggests that if we were to abandon the program, we would probably have to replace it with something else.

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

Okay.

Page 3 of the report talks about the life cycle stages. Ideally, when should the development phase and the acquisition phase be restarted so that the end of operations is consistent with the start of operations for the next fleet?

Over a 65-year cycle, at what point, approximately, is the development process restarted?

[Christopher Penney, Advisor-Analyst, Office of the Parliamentary Budget Officer]

I'm sorry, but I'm going to answer in English.

National Defence officials we spoke to said we would have to start a new procurement program pretty much from the time these ships entered the water, in order to assure there is no further gap.

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

Okay.

So, if I understand correctly, development costs will have to be added to the operating costs in order to be ready to replace the vessels at the end of their lives and to avoid a shortfall of a few years.

[Christopher Penney]

In principle, yes, but that would be under another program. So it's not part of our estimate.

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

Thank you.

How many people do you think each vessel will need per shift to be able to operate?

[Yves Giroux]

It is estimated that there are approximately 200 crew members in total. In terms of the number of people per shift, it depends on how things are organized within the crews and the Royal Canadian Navy. However, it's estimated to be about 200.

Since no one is revolting, I gather that my answer is correct.

[The Chair, Conservative, Kelly McCauley]

I'm afraid that's your time, Ms. Vignola.

Go ahead, Mr. Johns.

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

Thank you.

Thank you again for being here and for the important work you all do.

I was just at the Mount Arrowsmith Legion in my riding on Friday. I got to be there for the flag-raising on another poppy campaign, and I thanked the men and women who serve in our military and RCMP, and the veterans there, as well. I ran into our base commander from CFB Nanoose Bay. He highlighted how important it is that they have the right equipment to do their job.

I looked at your report and did some numbers on it. It's 12.5% over one year. That's way beyond the rate of inflation. Can you explain what the different costs are that have made it even more than what everything else going up, when you look at your analysis?

[Yves Giroux]

You mentioned inflation, which is running at 7% or 8% in this country. It is obviously an important contributor to increased costs.

Also, every time you delay the program by a year, it adds costs because you have to maintain project management for an additional year. It also means that, not only is the first ship coming into service delayed, but all the other ships are delayed as well. In fact, the one-year delay in having the first ship translates into up to four years' delay in getting the last 10 ships. A one-year delay at the beginning of the period means a four-year delay for the last 10 ships, which significantly adds to the cost.

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

I appreciate that you cited our having three coastlines—the longest coastline in the world. It's critical that we have the right equipment for our men and women. I didn't have a chance to say, on record, how much I appreciate their sacrifice and service to our country.

At the same time, we need to make sure we're looking at these costs, which have skyrocketed since the initial time frame. The life-cycle costs of this project continue to expand. Upon hearing that the latest estimate exceeds $300 billion, many Canadians are thinking about what could have been achieved if some of that total were put towards other urgent needs, such as our health care system, including mental health, climate action or the housing crisis.

Since the project's original budget was set in 2008, how much of the increased cost could have been avoided and how might those increases have been mitigated?

[Yves Giroux]

That's a difficult question to answer because I don't know whether the original cost was, in fact, a solid estimate at that time. Assuming it was a very solid cost estimate, making the decision early and starting early with the development and acquisition of these ships would certainly have been a good way to avoid incurring these ever-increasing additional costs due to delays.

As I said before, the delays might have been totally justified. They may have been justified by design changes necessary to meet the Royal Canadian Navy's needs, or they could be things deemed to be desirable, as opposed to indispensable. For these reasons, the reasons behind the delays are probably better explained by National Defence.

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

Speaking of DND, what information did DND provide to your office in terms of assisting with the report, and did DND withhold any information? If so, what impact did that have on your report?

[Albert Kho, Analyst, Office of the Parliamentary Budget Officer]

No, we can say that DND has been forthcoming with all the information that has been requested. We have been notified that there are delays to procurement, specific to certain ships. That can be detailed as needed. The specifications other than that have not changed at this time.

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

Do you disagree with any of the information that they provided? If so, why?

[Albert Kho]

We don't have any disagreements because we're agnostic about the reasons. We take the data as given, and we provide a cost estimate, as per our mandate.

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

What level of confidence do you have in this latest estimate? If you look at this project again in a year, do you expect the costs will have increased further? I understand that with inflation it's pretty hard to gauge where we're going right now, but....

[Yves Giroux]

We're confident that the cost is an accurate cost as of now, but if we look at this in a year from now, I'm confident that the costs will have gone up, especially if there are further delays, as has been the experience so far.

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

Can you explain the difference between DND's and the PBO's cost estimates for this project?

[Yves Giroux]

It's hard for us to determine exactly what the source of the difference is because we don't have a very clear window as to how DND determined its cost estimate. The most recent one that it released publicly is a couple of years old, so it's very difficult to determine why DND's cost estimate is so much lower than ours. Time is an important factor, contributing to the difference. Besides that, DND is in a good position to determine what's different between its cost estimate and ours, because our methodology is very well known to DND. It's pretty open and transparent, but we don't have the same window into DND's methodology.