Estimated cost of warship fleet rises to $84B thanks to delays, inflation: PBO

Parliamentary Budget Officer Yves Giroux waits to appear before appearing at the Senate Committee on National Finance, Tuesday, October 25, 2022 in Ottawa. Giroux says delays and inflation are adding billions to the cost of building a new fleet of warships for the Royal Canadian Navy. THE CANADIAN PRESS/Adrian Wyld

OTTAWA — Parliament's budget watchdog is predicting another increase in the cost of a new fleet of warships for the Royal Canadian Navy as delays and inflation add billions to what was already the most expensive military procurement in Canada's history.

In a report released Thursday, Yves Giroux pegged the estimated cost of designing and building the 15 vessels at more than $84 billion -- a nine per cent increase from the $77-billion estimate that the budget officer released in February 2021.

The latest estimate continues a trend that has seen the cost of the warships grow exponentially in recent years, setting the stage for fresh discussions about whether Canada should push ahead with the project or change tack.

"It's clear that Canada is paying significantly for each of these ships, and there would be alternatives where the costs would be lower," Giroux told reporters. "But that's a decision that the government has to make and parliamentarians have to debate."

He later added: "Our mandate is to provide a cost estimate, and every time we look at this, the costs go up."

The new fleet of so-called Canadian surface combatants is supposed to replace not only the 12 Halifax-class frigates that are currently serving as the navy's primary workhorse, but also three already retired Iroquois-class destroyers.

The government initially estimated the cost at $26 billion when it selected Irving Shipbuilding in Halifax to build the fleet more than a decade ago. That number was revised up to $60 billion in 2017, but officials have since acknowledged they are reassessing that figure.

Giroux attributed much of the latest cost increase to a one-year delay in the planned delivery of the first ship to 2031-32 and a four-year delay in the delivery of the last. That vessel now won't arrive until 2048-49.

Inflationary pressures were also cited as a factor in driving up the cost of the fleet, which the budget watchdog estimated will cost more than $300 billion to purchase and operate before it is retired around 2080.

The warships are based on the British-designed model called the Type 26. The vessel is also being built by Britain and Australia, but Canadian officials have been making numerous changes to meet Canada's unique military and industrial requirements.

Those changes have been made more complicated by attempts to pack all the capabilities from the navy's now-retired destroyers and existing frigates into one type of ship. The destroyers provided air defence while the frigates specialize in hunting submarines.

Giroux said the rising costs of the warship program will be a "significant draw" on the military's budget at a time when it is facing a number of fiscal pressures, including the planned purchase of new fighter jets and other equipment.

"So if it turns out that this keeps on increasing, and the fighter jet project is also significantly more expensive than what's available in the funding envelope, it's clear that decisions will have to be made," he said.

Giroux's previous report in February 2021 included a number of potential scenarios designed to provide a clearer picture of what options are available to the government should it decide to go in a different direction -- and how much each would cost.

Those included scrapping plans to base the entire fleet on the Type 26 and building a fleet of smaller, less-expensive vessels, or having a mixture of Type 26s and smaller ships.

While the federal government has repeatedly defended its plan to build a Type 26 fleet, the escalating costs have nonetheless prompted questions and discussion around whether Canada should change its approach.

That includes building a fleet of less-expensive ships, outsourcing the work to foreign countries, or buying fewer ships.

Navy commander Vice-Admiral Angus Topshee in an interview last month defended the need for 15 warships, noting his force is already stretched following the retirement of the three destroyers.

"Fifteen is the requirement," Topshee told The Canadian Press. "We're seeing that right now with the limits that we have when you have only 12 frigates."

While the government says it is reassessing the cost of the warship program, a senior procurement official at a conference this week complained about the logic of trying to nail down specific costs when the first ship won't arrive for another nine years.

"Once we get going and we have a design and we are on our way to number 1, we'll give you the price for the first three," Public Services and Procurement Canada assistant deputy minister Simon Page said. "And then we'll go on and tell you."

This report by The Canadian Press was first published Oct. 27, 2022.