Parliamentary Budget Officer Yves Giroux has warned that the cost of the Canadian Surface Combatant continues to climb. (CSC IMAGE COURTESY LOCKHEED MARTIN)
By David Pugliese
IN LATE OCTOBER, Parliamentary Budget Officer Yves Giroux had more bad news for the Canadian Forces. The cost of the Canadian Surface Combatant, which is to replace the Royal Canadian Navy’s Halifax- class frigates, had increased once more.
Over a one-year period the projected cost had jumped by $7 billion, putting the estimated construction price tag for the 15 ships at $84.5 billion.
“This new evaluation takes into account revised production schedules and amended inflation projections,” Giroux said.
That cost is more than three times the actual $26 billion price tag that was officially approved for the CSC project by Treasury Board.
Giroux also outlined the entire life cycle cost for the ships, putting that at $306 billion. That last figure is a significant leap in cost for taxpayers; in 2013 the Auditor General’s office noted that figure would be $64 billion over 30 years.
“Every time we look at this (project), the costs go up,” Giroux noted.
The Canadian Surface Combatant (CSC) project — the largest single expenditure in Canadian history — has become the poster child for the country’s troubled military procurement system. Concerns have been raised about a lack of accountability and oversight of the program as well as secrecy surrounding the initiative.
Construction of the first CSC warship isn’t scheduled to begin until 2024. The first ship is expected to be operational sometime after 2031. Lockheed Martin Canada has been selected as the main subcontractor with the CSC design based on the BAE Type 26 warship. The first of the Type 26-class being built for the Royal Navy is currently under construction in the United Kingdom.
More costs for CSC could soon emerge in 2023. Irving’s Halifax shipyard was selected in 2011 as the winner to build new fleets of warships for the navy, including CSC. Among the requirements for winning the bid was that the yard had the capability to build the vessels and taxpayers wouldn’t need to contribute funding to outfit the facilities for the task.
But Irving lobbied the federal government for additional money so it can modernize its facilities to build the CSC. Industry sources say the Liberals are considering providing at least $300 million to the shipyard owned by one of Canada’s richest families.
Conservative MP Kelly McCauley, a member of the Commons government operations committee that requested Giroux examine CSC, said he and some fellow MPs believe just the construction of the CSC alone will eventually cost more than $100 billion.
CSC was originally started by the previous Conservative government but by the summer of 2015, it was talking about limiting the increasing project costs by reducing the number of ships to be built. But the incoming Liberal government dismissed that notion and committed to all 15 warships.
Alan Williams, a former Assistant Deputy Minister for Materiel at the Department of National Defence, has outlined three potential options for the CSC. The first is that the federal government ignores concerns and continues with the status quo; number two is the purchase U.S. frigates which are now under construction; and the third is to conduct a new and proper competitive procurement process for a renewed CSC project. As Williams has pointed out, the Canadian government appears to be opting for ignoring the various concerns about the project and forging ahead. “I feel for the Royal Canadian Navy,” said Williams. “They need new ships but if they continue down the current path with CSC they might not get any.”
As costs continue to rise and delays increase, National Defence is steadfast that it will not be altering course. Previously, National Defence officials claimed they didn’t expect the CSC price tag to increase.
In response to Giroux’s Oct. 27 report, National Defence acknowledged it does not yet have an idea how much the ship purchase will ultimately cost taxpayers. “The full cost for the project will continue to be refined” it noted. “Project costs will evolve throughout the duration of a project,” the department added.
The political leadership has shown no interest in making changes in the procurement. Defence Minister Anita Anand and deputy minister Bill Matthews have overseen the CSC project since early 2019, first when they were at Procurement Canada and now at National Defence. Anand has downplayed concerns about problems in the country’s military procurement system, instead stating that there are many success stories.
Giroux also told Esprit de Corps that he has seen no evidence that National Defence and the Royal Canadian Navy will make any changes. “I haven’t seen any significant change of path or course. There is no indication of that,” he added.
Equally worrisome is that neither National Defence nor the RCN have done a life-cycle costing for the Type 26 ships, or at least one they were prepared to share with the PBO. “I’m not aware they did a life cycle cost for the Type 26 or the surface combatants themselves,” Giroux explained. “The only number we saw was came from the Auditor General in 2013. But we haven’t seen anything since.”
There are several problems emerging with the CSC that are driving costs. There are the delays in beginning construction. Each year of delay will add billions of dollars to the price tag.
In addition, the weight of the ship has significantly increased since the original plan; the PBO now estimates the vessel will be 7,800 tonnes. That increase in weigh, in turn, boosts operating costs, Giroux told Esprit de Corps.
Another cost driver is technology. “It’s weapon systems that are more sophisticated,” Giroux pointed out. “It could also be size differential, the number of personnel.”
Another cost driver is the insistence of the federal government to build the ships in Canada. That adds a significant amount to the process but any change to that policy is for politicians to decide, Giroux said. “That’s a decision that the government has to make and parliamentarians have to debate as to whether this is the best value for money, taking into consideration the benefit of having a domestic building capacity or domestic shipyard capacity to build warships, as well as the benefits of of having the expertise domestically, as opposed to purchasing the ships from abroad, based on foreign designs,” he said.
As far as how much could be saved by building the CSC in an overseas shipyard, that depends on the actual design. “There are many unknowns,” Giroux explained. “But it’s clear that it would be significantly cheaper to have them built abroad.”
The increased maintenance and operations costs for the CSC will also have a ripple effect as it will draw money from the overall DND budget. At this point the PBO estimates that the operations and maintenance for the CSC will be twice the cost of what the RCN is now paying for O and M. “So that will eat a good chunk of DND’s operational budget,” he explained. “And if the Army also has tanks and other equipment they need to buy and operate and maintain and the fighter jets will have to be replaced, and if they have higher operating costs, that could be tough for DND.”
The BAE Type 26 Destroyer is Canada’s choice for our new CSC fleet.
With the rising CSC costs, the Canadian Forces and a future government will be facing some hard decisions. In addition to CSC, Canada has committed to the F-35 stealth fighter, which comes with a high maintenance and flying cost, as well as a major modernization of NORAD radar systems. In addition, there will be the other future modernization and re-equipment programs for the Army, Navy, Air Force and Special Forces.
“Either somebody is going be faced with a decision of reducing the number of ships or increasing the budget allocated to National Defence,” Giroux explained. “Every time we look at the estimate of the cost it goes up. There is delay after delay. And every time there is a delay the costs go up. So something has to give.”
“But who knows what decisions will have been made regarding the operating budget of DND and whether the government will stick to the decision to procurement 15 of the surface combat- ants,” Giroux added. “Maybe they’ll decide it is too much and it will lead to some trade-offs.”
