The Hidden Cost of Canada’s Shipbuilding Ambitions: Double the Cost for Twice the Risk
(Source: Defense-Aerospace.com; posted June 11, 2019)

By Giovanni de Briganti
Canada selected the Royal Navy’s Type 26 frigate, a paper design whose construction only began 10 months ago, as the basis for its new-generation CSC frigate, risking cost escalation and technical flaws as the design matures. (BAES image)
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**UPDATE:

On June 21, Canada’s Parliamentary Budget Officer updated his report on the cost of Canada’s Surface Combatants. He found that the program’s cost had increased by C$9.8 billion in two years, and has now increased to C$69.8 billion.

This obviously increases the price of each ship by approximately C$666 million, further degrading their affordability, and increasing their cost differential compared to other similar ships ordered by Australia and the United Kingdom.

We have not upgraded the original story below to reflect the conclusions of the PBO's report.

Canada's DND has issued a reponse to the PBO's report, and it is reproduced at the foot of the page.

Click here for the report (25 PDF pages), on the PBO website.

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PARIS --- Launched with much fanfare by the Liberal government in June 2017, shortly after it took office, Canada’s defense strategy is intended to boost the armed forces’ capability by renewing their equipment thanks to an increase in spending from C$18.9 billion in 2017 to C$32.7 billion in 2026-27, with the biggest jump planned for 2020-21.

That increase, officials said at the time, will notably allow the government to order 15 new Canadian Surface Combatants, whose estimated cost more than doubled to C$60 billion compared to the previous estimate of C$26 billion, without any clear explanation.

Yet, this very large outlay will not bring Canada a proportionally increase in capability because the ships selected by Canada will cost well over twice as much as some other countries are paying for comparable ships.

In fact, for the CSC frigates as for its Joint Support Ships, Canada will end up paying twice as much as other Western countries for twice the risk, while only getting part of the capability.

Canada’s troubled acquisition record

In the past quarter-century, Canada has stood out in NATO for its protracted, ill-fated and unduly expensive defense procurement programs. These range from the EH-101 helicopter procurement of 1987, cancelled in 1993 and for which Canada paid a C$458 million penalty, only to buy the very same helicopter, re-christened Cormorant, in 1998 to replace its elderly Boeing-Vertol CH-113 Labrador SAR helicopters.

Other Canadian procurement failures include the acquisition of second-hand Victoria-class submarines from the UK, the CH-124 Cyclone frigate helicopter, the shenanigans of former Prime Minister Stephen Harper when he tried to sign on to the F-35 program while hiding it from Parliament, and others still.

Yet, the procurement of its new frigates, known as the Canadian Surface Combatant, and of its Joint Support Ships has already demonstrated cost blowouts that risk setting new records.

Canada’s future CSC frigates will break the bank

Like Australia and the United Kingdom, Canada was faced at the beginning of this decade with the need to replace its fleet of frigates. Like Australia, it professed it would only consider ships that were already in service to avoid design, development and teething problems yet, like Australia, its “competition” to select a new frigate was won by the BAE Systems’ Type 26, a paper design on which first metal was only cut in July 2018.

Yet, both Canada and Australia have agreed to pay very high prices to build their Type 26 variants in their national shipyards -- for an untested design that will not enter Royal Navy service before the mid-2020s.

BAE Systems’ record on warship construction is mixed at best, and with an untested, paper design it is more than probable that costs will increase further, especially as construction will take place in a shipyard with no previous experience of complex systems.

Britain’s Ministry of Defence on July 2, 2018 awarded a £3.7 billion order for the first three Type 26 frigates, which will be known as the City-class in the Royal Navy. The contract for the second batch of five ships is expected to be negotiated in the early 2020s, MoD said at the time.

The cost of each City-class frigate can thus be roughly estimated at £1,233 million, or about €1.42 billion at the current rate of exchange.

The Canadian Surface Combatant program

At the conclusion of a competition to select a new frigate – and for which a joint offer by Fincantieri and Naval Group was disqualified for late filing – Canadian Procurement Minister Carla Qualtrough announced on Feb 8, 2019 that the Canadian government had awarded Lockheed Martin Canada a C$185 million contract to design a fleet of 15 warships based on the Type 26, with a total program cost of C$58 billion to C$60 billion.

“The amount of the contract will increase as the design work increases,” according to a backgrounder by Public Services and Procurement Canada.

Taking an average of C$58 billion cost for the 15 ships suggests that each of Canada’s future frigates will cost about C$3.86 billion, or €2.59 billion. This is much higher than it should be.

As Canada is buying 15 CSCs, their unit cost should be lower than what Australia expects to pay for its nine Hunter-class frigates, like the CSC derived from the Royal Navy’s Type 26 design. Yet, each Australian ship will cost €150 million less than those built by Canada.

Australia’s Hunter-class frigate

In October 2018, Australia awarded BAE Systems Australia an interim covering initial work on its A$35 billion program to procure nine Hunter class frigates and associated support system components.

Like Canada’s, the future Australian frigates will be derived from BAE Systems Type 26 design, with modifications and components to adapt them to Royal Australian Navy requirements.

The Australian program of nine frigates for A$35 billion translates into a unit price of A$3.88 billion per ship, or €2.44 billion euros each.





Unsolicited offer for FREMM

In November 2017, France’s Naval Group and Italy’s Fincantieri made a direct offer to the Canadian government for 15 frigates based on their joint FREMM multi-mission frigate design.

This was the first joint offer ever made by the two companies, which chose not to follow the Canadian competition’s rules because offers, together with a large package of proprietary information, were to be submitted to Irving Shipbuilding, a small Canadian shipyard which according to the French website La Tribune had heavily recruited British and American engineers and advisers to manage the Canadian contract.



France’s Naval Group and Italy’s Fincantieri made an unsolicited, fixed-price offer to Canada of their FREMM design, but it was ruled out because it was submitted a few days after the deadline. (US Navy photo)


Ignoring the Canadian requirement that the ships be built locally, the unsolicited bid offered a fixed-price contract worth C$30 billion for the 15 frigates – about what Canada had originally budgeted for the program. Industry sources say the joint offer actually priced the Fremms at €850 million each, but the price of the official offer is generally quoted as C$30 billion, or about €1.34 billion per ship.

At the time, reservations were being expressed about Ottawa’s selection of Irving, a small, family-owned company which was already building the Arctic and Offshore Patrol Ships (AOPS) for the Royal Canadian Navy, while the Fincantieri and Naval Group were both concerned that their intellectual property might find its way to their American and British competitors.

Priced at about €850 million per ship, the joint French-Italian offer to Canada was substantially higher than what the French and Italian governments are paying for the FREMM frigates they are building for their own navies (€670 million for France and €598 million for Italy). The difference presumably includes inflation as well as the cost of integrating specific Canadian requirements, particularly electronics and sensors.

Yet, the ships offered by France and Italy were still less than half the cost of the CSCs that Canada will pay for each of its CSCs.

Paying twice the price to build the ships in Canadian shipyards, from which Canada will obviously be unable to claim offsets, does not seem to make much economic sense, and the money that Canada will recoup in payroll and other taxes will not make up the difference.

Joint Support Ships: Half the capability at twice the cost

If Canada will end up paying twice the going price for the Type 26 frigates it will build under license, its planned acquisition of Joint Support Ships will obtain half the capability of similar ships recently bought by the UK and Norway, but at twice the price -- an even bigger waste of taxpayer dollars that the Canadian Surface Combatant.

The Canadian government is procuring two Protecteur-class Joint Support Ships (JSS) for C$3.4 billion (excluding taxes), or C$1.7 billion each. In euros, this amount converts to €1.14 billion each.

Derived from the German Navy’s Berlin-class fleet replenishment ships, the JSS will also be built by Seaspan’s Vancouver Shipyards Co. Ltd. to a design provided by ThyssenKrupp Marine Systems Canada. The first ship is to be delivered by 2022, and a second one will follow at an unspecified later date.

The timing of the Canadian order allows direct comparisons between the JSS and three European logistic support ships ordered by the France, Italy, Norway and the UK. Just like for the frigates, Canada will end paying far more than its allies for ships that are considerably less capable.

European replenishment ships

The British Tide-class ships, which are now entering service, were built in South Korea by Daewoo Shipbuilding and Marine, as was the Royal Norwegian Navy’s Maud, which was built to the same design and arrived in Norway earlier this year.

France’s four AORs will be built in France and Italy to the same Vulcano-class design that Fincantieri is building for the Italian Navy.

The British Tide-class tankers displace 39,000 tonnes, the French and Italian Vulcano tankers about one-third less, at 27,000 tonnes, but Canada’s JSS are much smaller, at 20,200 tonnes.



Built in South Korea like the Royal Navy’s Tide-class replenishment tankers, the Norwegian Navy’s Maud cost about €5,000 per tonne to build, while Canada’s future joint Support Ships are budgeted to cost 11 times as much, or about €56,000 per tonne. (RNoN photo)


Yet, the Canada’s two smaller JSS tankers are projected to cost €2.3 billion, while France will pay just €1.7 billion for the four Vulcano-class ships that are about one-half larger -- and thus much more capable.




Notes:
- The Tide-class ships cost £452m to build in South Korea and £150m to customize in the U.K., for a total of £617 m for the four ships, or £150.5 million for each ship.
- The Italian Vulcano-class originally cost €346 m, but this was increased to €375m when it was lengthened by 12 meters.
- The cost of the French AOR is extrapolated from that of the original Italian Vulcano-class;
- Canada’s JSS is based on the German Navy’s Berlin-class support ship.
- Tonnages vary according to sources.


The above table shows that the fleet replenishment ships recently procured by Western European navies can be divided into two categories: those built in South Korea, which cost about €4-5,000 per tonne, and those built in Europe, which cost about €13,000 per tonne, or more than twice as much.

And then there are Canada’s Joint Support Ships, with a cost per tonne of over €56,000 -- 12 times as much as Britain’s Tide-class tankers and four times as much as the French-Italian fleet tankers.

So, in both new shipbuilding programs, Canada will end up paying unnecessarily high prices for ships that either provide inferior capabilities or far higher financial and technical risk, as the CSC design matures and is built at shipyards with no previous experience of complex warships.

There is thus a very high likelihood that the CSC and JSS will ultimately take the prize for Canada’s greatest acquisition failures and that, once again, the Canadian taxpayer will end up paying for another procurement failure.


Statement by the Department of National Defence on the Parliamentary Budget Officer’s Report on the Canadian Surface Combatant

(Source: Canadian Department of National Defence; issued June 21, 2019)


OTTAWA, Ontario --- The Department of National Defence (DND) welcomes the report of the Parliamentary Budget Officer (PBO) on the Canadian Surface Combatant (CSC).

As the PBO uses similar tools to our own analysts, their report represents a valuable and independent corroboration of our work. Since selecting a design for the CSC earlier this year, we have recalculated our cost estimates based on certain weapons and support systems which are now known to be part of the CSC design.

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. DND’s practice is to not include taxes in our budget or cost estimates because DND is not required to request funding for taxes from Parliament. Essentially taxes flow immediately back into federal coffers at no cost to Canadian taxpayers.

If you remove taxes from the PBO’s costing, our estimates are within 10% of each other. 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, which helps to validate our approach.

In conclusion, 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.

As we work to finalize the CSC’s design, we remain focused on ensuring we provide the right ships to the Royal Canadian Navy at the right price for Canadian taxpayers.


(EDITOR'S NOTE: DND's reponse above is both disingenuous and misleading.
It is disingenuous because taxes should always be counted when estimating investment costs, as they are effectively paid by the customer, even if they are later repaid to the Tresury.
It is also misleading because, and clearly shown by our analysis, Canada will end up paying over twice what the British Royal Navy will pay for its Tyoe 26 frigates, and now about C$1 billion more for each ship that Australia will be paying for its Hunter-class frigates, which like the CSC are derived from the Type 26 design.)



Story history:
-- June 14, 2019 @ 07:00 CET: Corrected the cost of the C$458 million penalty paid by Canada for cancelling the EH-101 order in the fifth paragraph.

-- June 22, 2019: Added an update at the top of the page on the June 21 publication of a revised estimate increasing the estimated cost of the CSC program to C$69.8 billion.

-- June 25, 2019: Added the DND's reponse to the Parliamentary Budget Officer's report on CSC costs.

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