Government may have underestimated cost of new resupply ships

OTTAWA — A new wrinkle appears to have emerged in the Harper government’s $35-billion national shipbuilding plan following revelations planners may have underestimated how much it will cost to build new resupply ships.

Successive federal governments have been planning to replace Canada’s fleet of 45-year-old support vessels for the better part of a decade.

The first replacement was supposed to have been delivered last year, but design and money problems have kept the $2.6-billion joint support ship project on the drawing board.

Now an internal Defence Department audit has raised concerns the project may face even more difficulties as military planners budgeted for the new supply ships using an inflation rate lower than the industry standard.

According to the audit, National Defence is using a 2.7 per cent inflation rate “versus the 3.5 to 5.0 per cent factor acknowledged to be prevalent in the shipbuilding industry.”

The issue may seem trivial, but the difference could result in a funding shortfall of millions of dollars, which would force the government to either put more money into the project, or cut back on the number of ships it can buy.

This has already happened once as the initial plan was to build three new resupply ships, a figure industry said was impossible.

The current plan is to spend the $2.6 billion on two joint support ships.

Public Works Minister Rona Ambrose, who is responsible for managing the shipbuilding plan, defended the 2.7 per cent inflation rate under opposition questioning in the House of Commons on Wednesday.

“The cost estimates . . . come from military planners,” she said. “Of course, they have the involvement of auditors, cost estimators and are overseen by the Treasury Board Secretariat.”

The audit says National Defence planners have asked for a different inflation rate, but an official confirmed the 2.7 per cent rate remains in place.

Interestingly, the issue of defence inflation is expected to figure prominently in an upcoming Parliamentary Budget Officer report on the joint support ships, which are to be built by Seaspan Marine in Vancouver.

It’s unclear what inflation rate was used for the remainder of the vessels the government plans to build through its massive shipbuilding strategy.

However, inflation is a major threat because it decreases the purchasing power of the $35 billion set aside by the government with each passing day.

Insiders have already expressed concern about the impact of a three-year delay in plans to build between six and eight armed Arctic vessels, and warned plans to build 15 ships to replace the navy’s frigates and destroyers may need to be scaled back.

Opposition parties said the issue highlights the Harper government’s continued problems with properly managing billions of dollars in military procurement projects.

“We support the program to replace the ships of the Canadian Navy,” said NDP leader Tom Mulcair, “but we are concerned that the Conservatives are repeating the same mistakes as with the fighter F-35.”

Liberal public works critic John McCallum warned underestimating the inflation rate could leave the Royal Canadian Navy with insufficient funding to acquire the vessels needed to protect Canada’s coastlines.

The National Shipbuilding Procurement Strategy has been regarded as a godsend for the Royal Canadian Navy and the Coast Guard, which operate fleets of destroyers, icebreakers, frigates and other vessels that are nearing the end of their lifespans and must be replaced.

The strategy is seen also as a huge winner for Irving Shipyards in Halifax, Seaspan Marine in Vancouver and their respective communities after a panel of federal bureaucrats announced in October that these companies had been selected as the main production centres for $33 billion in work. (The other $2 billion will go to a number of other shipyards across the country on smaller projects.)

And amid problems with the F-35 stealth fighter program and other military purchases, the Conservative government has held up the shipbuilding strategy as an important success for military procurement and a means to leverage tax dollars into massive economic spinoffs.

But there have been repeated indications that the strategy is in danger of running aground — which would have military, economic and political ramifications far greater than those associated with the F-35.

National Defence reported late last year that biggest challenge facing the navy in 2012 was when its two support ships, the HMCS Protecteur and Preserver, went into maintenance at the same time.

The report described the supply ships as “integral” to the navy’s ability to do its job, and said the repairs were essential to keep them operational.

But because of their absence in late 2011 and early 2012, the navy was forced to turn to allies for help replenishing other Canadian vessels at sea until the re-supply ships came back online.

Any delay in replacing them on the new schedule would likely have a major impact on the navy’s ability to do its job properly.

Original Article
Source: canada.com
Author: Lee Berthiaume