CNR Fan, 16 December 2021.
According to The Canadian Press, the federal government’s plan to build new ships for Canada’s navy and coast guard has been impacted by more skyrocketing costs.
The latest news came in a report released Thursday by parliamentary budget officer Yves Giroux, who estimates Ottawa’s decision to build two new polar icebreakers for the Canadian Coast Guard will cost $7.25 billion.
Partially it is tied to the decision to build two of the heavy icebreakers instead of one. The Liberal government announced in May the addition of another ship.
Giroux’s report on the polar icebreakers is only the latest to show rising costs in Ottawa’s plan to build new navy and coast guard ships, which was first launched in 2010 to keep costs under control and maximize the benefits to Canada’s economy.
Read more:
Skyrocketing shipbuilding costs continue as estimate puts icebreaker price at $7.25B
This report by The Canadian Press was first published on Dec. 16, 2021.
Credit: Lee Berthiaume, The Canadian Press.
5 thoughts on “Shipbuilding costs continue to rise – PBO”
$7.25B CAD for two polar class icebreakers for the Coast Guard does seem to be a great deal of money. However my only question is why does the PBO not include taxes with these ships, whereas they do include taxes with the naval CSC Frigates? “What’s good for the goose” seems to come to mind. Perhaps the RCN was correct after all with their cost estimates. Does not the CCG come under the same ship building cost estimates as the CAF does or is it because the CCG is a separate department from DND. What gives here and whose figures are correct?
Hello,
This PBO is light on numbers. Two parallel acquisition cost estimate approaches were used: an analogue one using the costs of 3 similar vessel classes (JSS, AOPS, Lewis and Clark-class cargo ship), and a parametric one using a multivariate regression analysis based on US data, adjusted to reflect 2019-2020 Canadian fiscal year dollars.
The analogue method is pretty standard, and “consists of identifying a historical procurement program for a ship class similar to the ships planned to be produced and for which costs are fully known. This approach uses the cost per metric tonne of the analogue ship, and then adjust for differences in weight, labour costs, productivity and other characteristics and capabilities”.
The multivariate regression is based on three variables, where the cost of 9th ship is a function of the lightship weight in tons, and power density in kW per lightship weight ton. The regression analysis covered data over 35 vessels of different types. An 95% learning curve was used to adjust the cost from the 9th ship estimate to the single ships that would be built by each shipyard. No long-term benefit of the learning curve here, unless the two shipyards keep building after the initial two ships are delivered.
The final acquisition cost estimate is calculated as the average cost across all four models. I would have liked to see more details on the calculation of each cost model, and seen them together to compare across all four. As it stands, it is impossible to tell their relative correspondence. What’s the spread?
PBO Report:
https://distribution-a617274656661637473.pbo-dpb.ca/d8c1cae885be92c964a0216e28e5ff1867e56bc0d63d14af361d24a6ef94cd81
Parametric Methodology:
Arena, M.V., Blickstein, I., Younossi, O., and Grammich, C.A. (2006). Why Have Navy Ship Costs Risen?. https://www.rand.org/content/dam/rand/pubs/monographs/2006/RAND_MG484.pdf22.
Correction, that would be an 85% learning curve, not 95%. Incidentally, the PBO’s CSC cost estimates had assumed an 80% learning curve.
Hello Curious Civilian. What you say may all be well-and-good, however you have not answered my question as to why taxes are not included in the Polar Class Ice Breakers for the CCG where as they are included in the PBO CSC Frigate class in their previous report? All I hear is what the PBO did to come to the 7.25B costs for the Ice Breakers, but doesn’t answer the question.
Hello David,
The PRICE TruePlanning costing software used for the CSC estimate breaks down all costs, including taxes, which can then be reported. The Icebreaker estimates were not done using this software, so it would be more difficult to calculate the taxes on the individual cost components.
Furthermore, it is unclear if the US data was reported inclusive or exclusive of taxes. As far as I can tell, the capital costs in the Congressional Budget Office reports include taxes, but there is no way to confirm how costs were provided to the PBO.
In any case, the PBO noted that the TruePlanning software was calibrated within 20% of benchmark data; for the Icebreaker, they reported costs up to 80% percentile, so overall the margin of error is wide enough to include the 15% tax.
Naive of me to ask, but are there no tax exemptions for this type of procurement? I know municipal and provincial departments may waive fees on services provided internally or to partner agencies, but is there a similar mechanism for taxes?
Happy new year!