Brian Stewart: How not to rebuild Canada's navy

If you thought the F-35 fighter jet procurement was a mess, brace yourself for the navy's massive construction program, Brian Stewart writes. The harsh options are a much more expensive fleet, or many fewer ships.
Was it just a year ago? Prime Minister Stephen tells workers at Halifax Shipyard in January 2012 that the government has agreed in principle to a $25 billion revitalization program for Canada's navy, which they will undertake. (Reuters)

If you thought it hard having to deal with the bizarre budgetary twists and turns of the F-35 fighter jet procurement, with its stratospheric cost overruns, brace yourself for even wilder turbulence over the navy's massive construction program.

Not what anyone wants to hear, I know. After all, for years now the Harper government has been promising that this $33 billion plan to rebuild our navy's aging fleets would be a model of how to handle big, complex procurement programs.

It was going to be the largest peacetime defence contract in our history, and would create a jobs bonanza on the East and West coasts, the political value in votes from such largesse need hardly be stressed.

Rather than buying cheaper vessels offshore, Ottawa was gambling that in turning to our own industries — despite their inexperience in naval work in recent decades — we would jump-start a vast new Canadian shipbuilding capacity.

So, $25 billion would go to building 23 surface warships, including eight new Arctic patrol craft, on the East coast, while $8 billion would go to a B.C. firm to see the launch of new non-combat support ships.

But brace yourselves, for the first cold shocks of reality have started to rock the program even as the future hulls are still only on the drawing boards.

As with the turbulent F-35 cost figures, there's evidence that the government has been playing with quite illusionary numbers here as well.

In what looks to be huge oversight, according at least to Parliamentary Budget Officer Kevin Page, the government has underestimated these future naval costs by failing to take into account that the inflation rate for military construction runs between 7 and 11 per cent annually,  rather than the civilian rate of around 2.7 per cent.

The 40-year-old supply ship HMCS Preserver sits in dry dock at the Halifax Shipyard in July 2010, when Defence Minister Peter MacKay first announced the replacement JSS program. (Reuters)

Ships are particularly hard hit by inflation as they're built in much smaller numbers than planes, tanks or trucks. They are also built for unique purposes, and require highly sophisticated weapons, sensors, communications equipment and operating systems built to withstand exacting ocean wear over decades.

A highly specialized work force and frequent construction delays inevitably drive up costs.

So a failure to factor in defence-specific inflation likely means that any naval program will cost far more than originally promised if it's to meet the original standards.

That means that, if Page is right, and he's not the only one saying this, Canada is faced with two harsh options: A much more expensive fleet, or a much smaller one.

The navy's future

Within the military, the debate has already started over two of the most important future ships, the large Joint Support Ships (JSS) said to be "integral" to future naval operations.

Part re-supply ships, part floating command headquarters for overseas operations, part helicopter platform, and part humanitarian emergency vessel, these JSS are strategic vessels capable of giving Canada more options and influence at sea.

The ships are also beyond desperately needed to replace the two decrepit supply vessels, HMCS Preserver and Protecteur, whose keels were laid down at the time of Expo '67, almost 46 years ago.

After years of delay, the federal government set aside $2.6 billion in 2010 to see these new JSS built in Vancouver's Seaspan yards by 2018 and 2019 respectively.

But that simply can't be achieved at today's dollars, according to the parliamentary budget officer. Using independent analysis of the program, Page slapped a new price tag of $3.28 billion on the two ships.

In fact, just to be safe, he urges the government to set aside 60 per cent more than planned — $4.13 billion.

Back at the drawing board

In the brouhaha that followed, Public Works Minister Rona Ambrose immediately denounced Page's projections and stood by her department's forecasts.

Public Works Minister Rona Ambrose, flanked by business executive Tom Jenkins, after releasing a report outlining new policies for military procurement, in February 2013. (Reuters)

"If adjustments need to be made, they will be done in partnership with the shipyards, the navy and the coast guard," she said.

Well, maybe. But after the F-35 debacle such statements don't carry as much weight as concerned taxpayers have a right to expect. 

There seem to be several basic problems with naval procurement in Canada, one of the main ones being that our lack of national expertise means the learning curve inevitably imposes delay after costly delay.

But as governments don't want to be seen raising the ceiling on projects like the Joint Support Ship program, naval architects are left struggling to reshape these vessels according to ever-tightening limitations.

They get tasked with having to drop capability, size and function, which inevitably leads to more delay, higher costs, and then a new round of squeezing and so on.

At this rate, the NDP's procurement critic Matthew Kellway jokes, all that will come out of the naval budget in the end will be "nothing but two tugboats painted grey."

Working backwards

The parliamentary budget director says Ottawa works back to front when it comes to military procurement on this scale.

It doesn't start with a core design, but with a simple budget number "as opposed to the folks in the military saying, 'Let's build a bottom-up set of requirements and let's put numbers against those requirements.'"

The budget office is now looking into the far bigger program in Halifax, the one to build 15 warships along with Arctic patrol craft. But already stories that the current East coast program is seriously underfunded are rampant in defence circles.

Writing in the Canadian Naval Review, veteran defence writer Sharon Hobson says the word among her naval sources is that the East Coast construction will be closer to $30 to $40 billion all in, as opposed to the $25 billion budgeted.

That's a big jump for taxpayers to swallow, especially if austerity is being called for elsewhere.

David Pugliese, one of the country's best informed defence journalists, writes that bureaucrats are already reducing the capability of future navy vessels, and sources warn the number of surface warships may be cut from 15 "to 12 or even 10."

What's more, this kind of speculation was making the rounds well before the recent leaks pertaining to tomorrow's federal budget, which is expected to continue three successive years of cutting defence spending.

The central question that always surrounded the Conservative's boldly named National Shipbuilding Procurement Strategy was whether realistic funding would eventually support all the ballyhoo, or whether drift and delay would undercut it.

The current gloom suggests that unless the government can seriously reassure the navy that ship numbers and capability will not be sacrificed, the ballyhoo will soon be swept away by the bitter recriminations our defence debates are so prone to.