Government Operations Committee on Oct. 31st, 2022

[The Chair, Conservative, Kelly McCauley]

Good morning everyone.

We have meeting number 37 of the House of Commons Standing Committee on Government Operations and Estimates, a.k.a. the mighty OGGO.

Today we have witnesses from the Office of the Parliamentary Budget Officer. George Martin was famously the fifth Beatle; I think the PBO is the twelfth OGGO member. It's wonderful to have the four of you with us.

Today we have Mr. Yves Giroux, the Parliamentary Budget Officer; Carleigh Busby, adviser-analyst; and Albert Kho, analyst.

Welcome, Albert, to your first OGGO, I think.

We welcome back Mr. Christopher Penney, adviser-analyst.

Mr. Giroux, I believe you have an opening statement.

[Yves Giroux, Parliamentary Budget Officer, Office of the Parliamentary Budget Officer]

Good morning, Mr. Chair and members of the committee. Thank you for the invitation to appear before you today.

We are pleased to be here to present the findings of our report entitled "The Life Cycle Cost of the Canadian Surface Combatants: A Fiscal Analysis", which we were honoured to prepare at the request of this committee.

With me today I have the lead adviser and analysts for the report, Christopher Penney, Carleigh Busby and Albert Kho.

Consistent with the PBO’s legislated mandate, at the request of this committee, my office prepared an independent cost analysis of the Canadian surface combatant program, including estimates for the development, acquisition, operations and sustainment, and disposal phases of the fleet’s life cycle.

The total life cycle cost of the Canadian surface combatant program, or CSC, is estimated to be $306 billion, with an estimated $4.3 billion for the development phase, $80.2 billion for the acquisition phase, $219.8 billion for the operations and sustainment phase, and $1.7 billion for the disposal phase.

Our latest estimate of $84.5 billion for the development and acquisition phases represents a 9% increase over the $77 billion cost estimate presented in our 2021 report. This increased cost is reflective of changes to protect assumptions and timelines, including an increase in the planned weight of the vessel and a later delivery schedule.

We would be pleased to respond to any questions you may have regarding this report or other work of the Parliamentary Budget Office.

[The Chair, Conservative, Kelly McCauley]

Thank you, Mr. Giroux,

We'll start with six minutes for Mrs. Kusie, please.

[Stephanie Kusie, Conservative, Calgary Midnapore, AB]

Thank you, Chair.

Thank you very much to the PBO and his officers for being here this week on such short notice. It's truly appreciated.

As we go into this week and next week, which is our break week, it's a time, as we consider the significance of Remembrance Day, to think about the capacity of our armed forces and our military. What concerns me the most regarding this study—recognizing that I am new to the committee—is what these delays mean for our capacity as a nation to protect ourselves from a domestic standpoint, but also what we can offer the world, as we've seen most recently with the war in Ukraine. When I think about this study, this is my concern.

As the shadow minister for the Treasury Board, I'm always concerned about funds being used with the greatest of care and giving the most scrutiny for the Canadian taxpayer. It gets to the point where, if you need a roll of toilet paper, you need a roll of toilet paper, and you're willing to pay $10 even though you would rather pay $5.

I come here today with concern with the delays in procurement in regard to our capacity as a nation for both protecting ourselves in a domestic capacity as well as our ability to contribute to the world stage.

We've heard consistently from our Prime Minister that Canada is “back”. I think we've seen repeatedly that this is not the case. It's certainly not the case with the capacity we have to protect ourselves as well as helping the world.

Also, we see a time where enlistment for the armed forces is suffering significantly. I have here an article from the Canadian Press. It indicates:

Recruitment cratered during the first year of COVID-19 as the military shuttered recruiting and training centres. The result: only 2,000 people were enrolled in 2020-21—less than half of what was needed.

...the military is getting about half the number of applicants it needs per month to meet the goal of adding 5,900 members this year.

The shortfall is expected to exacerbate the current personnel shortage, with about one in 10 of the military's 100,000 positions unfilled.

I also believe it is a result, frankly, of Canadians being hesitant to put their lives at risk for their nation without being properly equipped to do so.

I'll point to other nations that have had significantly more success in doing that; in particular, if we do a comparison to the U.S. and the procurement process for the Constellation FFG-62 ships.

I come here today certainly concerned about the significant increase—a 9% increase over the $77-billion estimate—to $84 billion, acknowledging that the $60-billion budget initially set in 2017 was not enough.

Please, can you enlighten the committee, as far as you can, on the fundamental reason for these delays? I'm always worried about the money, but I'm more concerned about what this means for our protection domestically and our ability to contribute internationally at a time when the world increasingly needs it.

[Yves Giroux]

That's an interesting question. We looked at the impact of the delays on the cost of the program, and we found that every year of a delay, roughly speaking, adds about $2.5 billion to the total cost of the acquisition phase—development and acquisition.

However, with regard to the causes of the delays themselves, we don't have a clear answer to that. We focused on the costs and we rely on data that is provided to us by DND. We don't have a clear answer as to the causes of the delays.

I think that DND officials or the minister would be in a much better position to explain in greater detail the causes for these multiple delays.

[Stephanie Kusie, Conservative, Calgary Midnapore, AB]

Building on that, based upon your assessment of the costing, can you see any way that these delays could be mitigated? That's based upon your evaluation of the costing.

[Yves Giroux]

One way of shortening the delays or stopping them would probably be to buy off-the-shelf ships—ships that have already been designed and built elsewhere. It would be taking the same types of ships and minimizing the Canadianization or the number of adjustments to existing ship designs.

We could take something that already exists elsewhere. However, that would also mean forgoing some specifications that the Royal Canadian Navy might deem necessary or essential, or sometimes desirable. That's up to the Royal Navy to decide whether that would be a feasible approach.

[Stephanie Kusie, Conservative, Calgary Midnapore, AB]

In your assessment, do you believe that these changes in cost are coming more from changes made by the government, or are they necessary changes from the contractor?

[The Chair, Conservative, Kelly McCauley]

I'm afraid I'm going to have to interrupt you, because you have about five seconds.

You can perhaps continue in the next round or provide it in writing. Thanks very much.

Mr. Kusmierczyk, you have six minutes, please.

[Irek Kusmierczyk, Liberal, Windsor—Tecumseh, ON]

Thank you, Mr. Chair.

Thank you very much, Mr. Giroux, for coming here once again and providing your testimony and insights.

When you look at the overall life-cycle cost of this project, $306 billion, that number is obviously eye-watering, no matter how you look at it.

At the same time, can you explain the actual life cycle of this project? This is not a one-time, one-year expense. This is over a period of time. Can you tell us how many years that life cycle encompasses?

[Yves Giroux]

The life-cycle costs span a period of 65 years. They start from when the design of the program started, so the development phase. These costs end when the last ship is finally disposed of and dismantled, with the resulting steel sent for recycling, if it's feasible at that time.

They span a very long period and include every cost, as I mentioned—from the development phase, which includes the design and project management; to, of course, the acquisition, so building and purchasing the ships; and their operation and maintenance over their expected lifetime of 30 years, including a mid-life refit and the disposal of the ships. They span a very long period of time.

[Irek Kusmierczyk, Liberal, Windsor—Tecumseh, ON]

You mentioned that there's a 30-year operations time frame. What goes into calculating the actual operations? Where does that number come from—the 30 years?

[Yves Giroux]

It comes from the expected lifetime of the ships, which is based on DND information as well as the lifetime of similar ships built and in operation elsewhere. The operations and maintenance costs include personnel, so the crew that will be on the ships, the fuel to propel the ships, lubricants, munitions and arms systems, as well as the mid-life refit of the ships.

[Irek Kusmierczyk, Liberal, Windsor—Tecumseh, ON]

In the defence industry, when you have the expected lifespan of a piece of equipment, is that equipment typically retired at that lifespan? Do you normally see in defence, for example, that the lifespan is extended beyond the expected life cycle?

[Yves Giroux]

It's usually built with a certain lifespan in mind. They're built towards lasting about 30 years. Of course, depending on their usage over time, they can last longer or for a shorter period of time. Their lifespan can be extended with significant maintenance or expenditures when they're nearing the end of their useful lifespan.

[Irek Kusmierczyk, Liberal, Windsor—Tecumseh, ON]

There is even a possibility that this could be extended beyond a 65-year life-cycle time frame. Is that correct?

[Yves Giroux]

Yes. It's quite possible that the ships themselves could last more than 30 years, if, for example, they're used less than we anticipate them to be used, or there is significantly more investment towards the end of their 30-year lifespan to extend their useful life.

[Irek Kusmierczyk, Liberal, Windsor—Tecumseh, ON]

Is it reasonable to say, as well, that if you purchase or design a warship made for Canada, that the chances of extending the life cycle are probably better than if you took a ship off the shelf that isn't made for a Canadian environment? Is that reasonable?

[Yves Giroux]

I wouldn't make that assumption right off the bat. I think we would need to look at what alternative designs were to be used.

Where they are used will matter a lot. However, I don't think it would make a big difference whether they're made in Canada or abroad, if they're made to the same specifications.

[Irek Kusmierczyk, Liberal, Windsor—Tecumseh, ON]

Okay.

You mentioned, for example, that the costs in general increase about $2.5 billion for every one year of delay.

Could the Department of National Defence find ways to move the timelines up, in your estimation? Are there additional things that could be done to keep those costs in line as well? Do you have any recommendations in this report on both of those things?

[Yves Giroux]

It's difficult to determine that, because we don't have a clear understanding of what causes the delays. It could be design refinements. It could be specifications that change. It could also be the shipyards that are not fully ready to build these ships and require changes to what the department has in mind.

Without having a clear idea as to the root causes of the delays, it's more difficult to make recommendations as to how to avoid further delays.

[Irek Kusmierczyk, Liberal, Windsor—Tecumseh, ON]

We've seen, for example, COVID causing delays in other projects. Is it fair to say that the COVID pandemic and some of the issues with the supply chain and labour shortages had an impact on the delays on this project? Is that fair to say?

[Yves Giroux]

It's quite possible because we have taken data from DND and COVID delays presumably have been incorporated into the latest estimates. It's quite possible.

[Irek Kusmierczyk, Liberal, Windsor—Tecumseh, ON]

Thank you very much.

[The Chair, Conservative, Kelly McCauley]

Thank you, sir.

Ms. Vignola, you have six minutes, please.