An artist's rendering of the Type 26 Global Combat Ship, Lockheed Martin's proposed design for Canada's multi-billion fleet of new warships. (BAE Systems Inc. / Lockheed Martin Canada)

Canada’s new warships to cost up to $14B more than projected, says PBO

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The new generation of Canadian warships is expected to cost the federal treasury up to $14 billion more than the government projected in 2017, according to the latest report by the independent Parliamentary Budget Officer.

The updated cost estimate of the Canadian Surface Combatant (CSC) program, which will become the backbone of the Royal Canadian Navy’s fighting force, comes after the government selected BAE Type 26 design for its new warships last year.

The new estimate released Friday pegs the total cost of the CSC program at $69.8 billion over 26 years, including $5.3 billion in pre-production costs; $53.2 billion in production costs; and $11.4 billion in project-wide costs, said the PBO report.

In comparison, the 2017 PBO report estimated a total program cost of $61.8 billion, $8 billion less than the updated estimation.

The report says the difference in these estimates is due to the fact that ship construction will begin later than previously estimated, thus increasing inflation costs, and the new ships will be larger than assumed in the previous report, which also drives up production costs.

The previous Conservative government had estimated the cost of the CSC program at $26.2 billion.

In 2017, the Liberal government of Prime Minister Justin Trudeau nearly doubled that estimate to anywhere from $56 to $60 billion for 15 warships.

That means there is a difference of $9.8-$13.8 billion between the government and the updated PBO estimates, the report said.

Defence officials welcome the report

An artist’s rendering of the Type 26 Global Combat Ship (Copyright © 2019 BAE Systems. All rights reserved)

In a statement released on Friday, officials at the Department of National Defence (DND) said they welcome the PBO report.

Since selecting a design for the CSC, DND officials have recalculated their cost estimates based on certain weapons and support systems which are now known to be part of the CSC design, the statement said.

“After an initial review of the PBO report, we find that the vast majority of the difference comes from their decision to include taxes in their costing,” the statement said.

DND’s practice is to not include taxes in its budget or cost estimates because DND is not required to request funding for taxes from Parliament, it added.

“Essentially taxes flow immediately back into federal coffers at no cost to Canadian taxpayers,” the statement said.

“If you remove taxes from the PBO’s costing, our estimates are within 10 per cent of each other.”

DND officials said this variation is normal and expected when comparing independent cost estimates on a complex multi-decade project.

Cost estimates from other allied navies building ships based on the Type 26 design are also within a similar range, the statement said.

“While we remain confident in our estimate of $56 to $60 billion for the CSC project budget, we also recognize that even small differences in a project of this size represent hundreds of millions of dollars of taxpayer money,” the statement said.

Lockheed Martin and Irving Shipbuilding team up

In October of 2018, the Liberal government awarded a consortium led by U.S. defence giant Lockheed Martin the first crack at inking a contract to design Canada’s fleet of next generation warships.

Government officials said the group’s proposed BAE Type 26 Global Combat Ship design beat out two rival submissions in what has been a long and extremely sensitive competition to design replacements for the navy’s ageing fleet of 12 Halifax-class frigates and three decommissioned Iroquois-class destroyers.

In February 2019, the federal government formally announced that Lockheed Martin Canada is the design team and Halifax’s Irving Shipbuilding Inc. is the project’s prime contractor.

The CSC program is currently in the development phase, the PBO report said. The government projects the acquisition phase to begin in the early 2020s with deliveries to begin in the mid-2020s. The delivery of the 15th ship, slated for the late 2040s, will conclude the procurement program, the PBO report said.

Adam P MacDonald, deputy director of the Centre for the Study of Security and Development at Dalhousie University in Halifax, said cost estimates are likely to continue to be in flux for the foreseeable future, specifically given the fact Canada has not conducted a large warship procurement process for almost two decades.

“With that said, I think that the range of estimates should be narrowing as we approach the start date of the program and it would be highly unlikely to see another major increase in estimates for these ships on the order of magnitude we’ve seen since the original 2008 estimate given that the life cycles of these assets has been included in these numbers,” MacDonald said.

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