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Warship-replacement plan 2.4 times over budget: PBO

Jean-Denis Frechette, parliamentary budget officer, in Ottawa on Sept. 20, 2013.

Dave Chan/The Globe and Mail

The federal government's multibillion-dollar effort to replace the navy's warship fleet could cost taxpayers 2.4 times more than first expected, Ottawa's budget watchdog warned Thursday in a new report.

And the longer a process tripped up by delays drags out, the more it's going to hurt the public piggy bank, the analysis found.

The parliamentary budget officer estimates Ottawa will have to spend nearly $61.8-billion to replace 15 ships — more than twice the original 2008 budget of about $26.2-billion.

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Looking at a per-ship price tag, the cost is likely closer to $4.1 billion, rather than the $1.7-billion estimate released in 2008 by the then-Conservative government.

At that higher rate, the office believes the government would only have enough cash to buy six ships, if it still expects to keep the program on budget.

"There's a gap there and if the government wants to build 15 ships, then they have to, obviously, set aside more money for that," assistant parliamentary budget officer Mostafa Askari said in an interview.

"We don't really know what the original budget estimate was based on because there was no detailed costing provided... So, we don't really know on what basis they had $26-billion."

Askari said there is no detailed documentation available that breaks down the federal government's original estimate.

The PBO did acknowledge its calculations were based on assumptions it made about the specs of the future warships, which could differ from the blueprints that are ultimately selected by the government. The number-crunching models it employed also have a range that could mean the eventual price paid by taxpayers will be 20 per cent above or below the PBO estimate.

The Trudeau government launched a competition last fall asking some of the world's largest defence and shipbuilding companies to design a potential replacement for the navy's 12 frigates and three destroyers.

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The chosen designs will be constructed by Irving Shipbuilding in Halifax, and delivery of the new vessels is expected to start in the mid-2020s.

The massive program has faced delays, including a recent announcement that gave competing firms another deadline extension to submit their designs.

The PBO pointed to several factors that can really drive up the price of naval vessels. They include the weight of the ships, their increasingly complex combat systems, ammunition in the form of missiles —and time.

"The more you delay, the more you have to pay," said Askari, who added that, at over a year in the making, this latest PBO report likely took longer than any other study released in the past by the office.

The costs of building sophisticated warships can increase significantly as time passes, he said.

U.S. studies have shown the rate of inflation associated with defence projects, and shipbuilding in particular, is considerably higher than the average rate of inflation for goods and services across the whole economy.

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For example, Askari noted that the costs of combat systems on warships rise by 6.5 per cent per year.

The PBO model predicted the $61.8-billion price tag for the 15 ships would grow to $64.4-billion after a one-year delay and to $69.9-billion after a three-year delay.

When asked about the PBO's findings, the parliamentary secretary to Public Services Minister Judy Foote said the Liberals are aware the previous Conservative government was "low-balling" the price of replacing the warships.

Steven MacKinnon said the public will find out in the coming weeks and months whether Ottawa will stick with its plan to build 15 ships.

MacKinnon was also asked if he had concerns that a bigger price tag could leave Canadians with sticker shock.

"First of all, you have a number that extends over many years, you have a navy that has depleted hardware," MacKinnon said.

"Canada and Canadians see themselves as a seafaring nation, a lot of our history is built on that. So, I think Canadians very much support the re-establishment and sustainment of a Canadian shipbuilding industry.

"I think Canadians also understand that we have some big choices to make in that area and that if we're going to have Canadian jobs, with Canadian technology, steel from Canada built by Canadians, that's going to cost money."

Tory MP Kelly McCauley said the gap between the original 2008 cost estimate made by his party and the PBO projection is likely a lot narrower than what was in Thursday's report.

For example, he said the PBO numbers accounted for development and ammunition costs, even though it's unclear whether the original estimate did the same.

"So, it may not exactly be an apples-to-apples issue," said McCauley, adding that the Conservatives are far more concerned about delays by the Liberal government that could cost the treasury several billion dollars per year just for inflation.

"All we see is delay, after delay, after delay from the current government... To me, that's taxpayers' money going out the door."

The budget office estimate included costs for development, production, spare parts, ammunition, training, government program management and upgrades to existing facilities. It did not factor in the costs for the ships' operation, maintenance and mid-life upgrades, except for spare parts that will be purchases at the time of construction.

— With files from Mike Blanchfield

Video: Harjit Sajjan says is Canada extending its maritime security commitment (The Canadian Press)
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