The National Shipbuilding Strategy and the Canadian Surface Combatant

Naval Association of Canada, 10 February 2021

In anticipation of the forthcoming Parliamentary Budget Officer (PBO) report on the Canadian Surface Combatant (CSC), the Naval Association of Canada (NAC) has prepared a report on the complex processes of costing and building warships. (“The National Shipbuilding Strategy and the Canadian Surface Combatant,” available at CSC Report (navalassoc.ca)) This highlights both the strategic and economic value to Canada of the National Shipbuilding Strategy (NSS) and the pitfalls of comparing the CSC to other ‘comparable’ ships. The intent is to add nuance to what are often purely economic comparisons of similar but unequal warships while suggesting a more holistic way of understanding Canada’s approach to the CSC project.

The NAC report explains that building ships in Canada entails more than just joining steel – it involves rebuilding the complex system of project managers, designers, maritime engineers, and other human capital. In the early years of the NSS it became obvious that Canada’s shipbuilding capability had withered, as had the government’s capacity to execute major projects. That lack of capacity led to a poor ability to cost major projects and, since 2008, the estimated price of the CSC project has increased from the original placeholder budget set by DND of $26.2 billion to $62 billion in 2017, and perhaps more in 2021.[1] The huge cost increase is one of the main reasons for the scrutiny the project is facing. Yet, that initial $26.2 billion costing was never intended to be a definitive estimate.[2] With CSC, lengthy procurement options analyses, inter-departmental consultation and industrial growing pains caused these costs to grow. Timelines were also extended because it was decided that the Harry DeWolf-class AOPS should be built first as a way of developing skillsets and processes on an easier build.[3] While this strategy was logical it caused delay and eroded buying power as inflation ate away at Canada's buying power.

The report makes the point that, while it may be difficult to ascertain the precise economic impacts of the NSS, they will be considerable. The strategic value of the program, which is commonly overlooked, is immeasurable. Canada is a maritime state that must protect global freedom of the seas and its own interests on the oceans at a time of growing great power competition. The need to retool the Canadian shipbuilding industry may have increased costs in the short and medium term, but the overall economic and tax benefits compensate the government for that premium. Without the shipbuilding industry and industrial supply chain that is being resurrected by the NSS, Canada would be unable to maintain and refit these ships, leaving Canada with high-end warships, but no ability to sustain them in a crisis.

With only limited information publicly available, comparing costs of different ships with different capabilities is an extraordinarily complex exercise. Commonly cited foreign ship costs are often the ‘sail-away’ prices – which is the cost to purchase a single ship. What that price excludes is program management, tests and trials, initial spares, tools, weapons, fuel, government procurement salaries, software, facilities to support the ship, training, technical data, and a host of other incidentals.[4] In a sense this is comparing apples to oranges, as the CSC project includes all of these added expenses as well as significant modifications to meet Canadian requirements and new infrastructure, such as a land-based test facility, a complete combat system provided for testing before installation, and training simulators and jetty upgrades to accommodate the ships.

As a result, Canada’s program acquisition costs will make up 40% to 50% of the cost of the project.[5] Even if Canada were to build the ships offshore, program costs would remain sizable.

The CSC will be a large and expensive multi-purpose frigate, with an average sail away price of roughly $2 billion CAD.[6] Additional program costs are expected to add $30 billion. The UK has ordered five Type 31 frigates for an announced price of £250 million per ship ($435 CAD) while the US Navy is building its new Constellation-class for $800 million ($1.1 billion CAD) each.[7] The price gap is the result of differing capabilities but also the different costing methodologies. Many of these publicly available prices are aspirational.

In the CSCs Canada is acquiring a high-end multi-purpose frigate for strategic reasons rooted in Canadian force structure, defence requirements, national geography, and fleet size.[8] On the other hand, Canada’s European and American allies are procuring both high-end and low-end warships as part of their fleet mix, allowing their frigates to specialize. Canada cannot afford to have a large fleet of specialists ships and the CSCs must be capable of multiple roles.

Canada builds its ships to the highest standards to ensure that the Navy can maximize their service lives. This approach results in higher short-term costs, but Canadian ships serve much longer than those of many other navies. Canada is aiming to secure more than 30 years of life from each CSC and given the RCN’s operational history, that is likely an understatement.[9] Canada’s intent to extend the CSC build schedule to maximize employment and spread the cost over many years will also impact the overall cost. While a slower build will maximize some cost savings as lessons are learned and efficiencies incorporated, there will be few economies achieved through the bulk purchasing of equipment.

The full NAC report explains how and why CSC project costs increased in the years since the program was announced while also showing that a clear price comparison to foreign equivalents is difficult, and too frequently over-simplified. Unfortunately, the government has not provided clear communications about the project’s price tag and this information vacuum has been filled with criticism – some of it legitimate but much misguided.

The NSS was conceived of not only to capture the maximum economic benefit from shipbuilding, but to ensure that the future Navy will be supported effectively. The cost of rebuilding infrastructure and human capital is high but must also be balanced against the significant economic stimulus from the billions of dollars injected into the Canadian economy. Ensuring that Canadians get the best value for their money is an important task and PBO costing analyses are necessary and indeed welcomed for ensuring transparency. Canadian decision makers must consider the PBO analysis within the complex framework detailed in this NAC paper.[10] In the final analysis, not all frigates are created equal and understanding Canada’s requirements and what each ship class offers is vital to understanding the overall value of the project. The full NAC report can be found at CSC Report (navalassoc.ca).

Notes

1. Parliamentary Budget Office, “The Cost of Canada’s Surface Combatants: 2019 Update,” 2019, 5.

2. Tom Ring, “How did we get to where we are now?” CGAI (March 2016), 1.

3. Public Services and Procurement Canada, “Status of Large Vessel Projects – Canada’s National Shipbuilding Strategy: 2018 Annual Report” (2018).

4. Eric Lerhe, “Fleet Replacement and the ‘Build at Home’ Premium,” Vimy Paper no. 32, CDAI (July 2016), 4.

5. Public Services and Procurement Canada, “Update on the Canadian Surface Combatant Request for Proposals” (December 5, 2017).

6. This assumes a total project cost of $60 billion. The ship itself will likely be roughly half of that.

7. Tom Cotterill, “Royal Navy: 'Good progress' being made Type 31 frigate industry chiefs insist,” The News (December 29, 2020) and Megan Eckstein, “Fincantieri Wins $795M Contract for Navy Frigate Program,” USNI News (August 30, 2020). The US costing is based on ships 2 through 20.

8. Capt(N) Christopher Nucci, “The Future Canadian Surface Combatant,” Proceedings 146/11/1,413 (November 2020).

9. Lockheed Martin, “Seven Things You Should Know About the Canadian Surface Combatant.”

10. See for instance: Eric Lerhe, “Fleet Replacement and the ‘Build at Home’ Premium,” Vimy Paper no. 32, CDAI (July 2016); Ian Mack. “A Basic Primer on Naval Shipbuilding,” Canadian Global Affairs Institute (February 2018); Ian Mack, “Launching the Canadian Surface Combatant,” CGAI (December 2020); Christopher Nucci, “The Future Canadian Surface Combatant,” Proceedings 146/11/1,413 (November 2020).