Military supply ships $1.5B over budget, watchdog says

It's unlikely the Harper government has set aside enough money to replace the Royal Canadian Navy's aging supply ships, the parliamentary budget officer warned Thursday.

The $2.6-billion joint support ship program is severely under-funded in light of escalating costs and all the uncertainty associated with the design and required capabilities, Kevin Page warned in his latest report.

At least $4.13 billion should be set aside, perhaps more, Page estimated.

The report uses the capabilities and dimensions of the existing two supply ships — HMCS Protecteur and HMCS Preserver — as the baseline to calculate what a replacement would cost.

The government is faced with two choices — either scale back the ship's requirements or put more money into the program.

"We think it's a very, very low probability that they'll get anything near the replacement of the Protecteur for anything like $2.6 (billion)," Page said.

"If I had to guess, this looks like a budget constraint. You make the requirements fit within the budget constraint."

Page's latest report on military procurement could spell more political trouble for the Conservatives, who've been hammered over delays and cost overruns in a series of military equipment projects.

Nonetheless, Public Works Minister Rona Ambrose remained steadfast Thursday as she defended the government's estimate and said appropriate safeguards have been put in place to ensure affordability.

"Let's remember, these ships are in the design phase, but as we move forward we have the independent oversight and expertise in place to protect taxpayers," Ambrose told the House of Commons.

Budget seems set

Government officials conceded on Wednesday that the final design must be reviewed for cost before the program proceeds to the construction stage.

Both the NDP and the Liberals demanded to know whether the government would choose to reduce the scope of what the ships can do or add more cash. Ambrose signalled the budget is fixed.

"If any adjustments need to be made, they will be made with the Navy and the coast guard," she said.

That left opposition parties and a defence analyst wondering what sort of ships the Navy will be left with at the end of the day.

"What is the real cost of these ships?" NDP procurement critic Matthew Kellway asked. "They're already scaling back on their promises about these ships and what they are able to do. With their stated budget are we going to be left with nothing more than two tug boats painted grey?"

Dave Perry, an analyst at Carleton University and the Conference of Defence Associations, said the Harper government is putting the navy between a rock and a hard place.

"Based upon what the government has said, the only option is going to be to reduce the capabilities and reduce the requirements that go into whatever ship they build," he said.

"The budget seems to be fixed, and I think if the PBO's model is accurate, and it seems it's been thoroughly scrubbed by a number of people, there's no way they can do an exact replacement for the existing fleet of Protecteur ships."

The budget officer's staff say they used a couple of different models in their calculations and cut government officials some slack in terms of delivery dates, but essentially came up with the same numbers.

The analysis says $3.2 billion would be needed to replace the navy's 45-year-old replenishment ships.

But it adds that a contingency cushion of almost $900 million should be added in, given the engineering complexity of the project and the fact that shipyards haven't built such vessels in decades.

That's an idea backed by American naval construction experts at the Government Accountability Office in Washington.

Building in a buffer for decision-makers "conveys the level of confidence in achieving the most likely cost and also informs them on cost, schedule, and technical risks," U.S. officials were quoted as saying in the budget officer's report.

Replacements long delayed

The support ship program has travelled a long, convoluted path.

It was first proposed in 1994, but the Liberal government didn't get around to ordering replacements until 2004.

The shipyard proposals were deemed non-compliant and too expensive by the Harper government in 2008 and the project went back to square one, with a drastic scaling back of the capabilities the navy wanted.

When the government was considering re-launching the program a year later, the navy made clear it needed a budget $2.9 billion, but that figure was pared back to $2.6 billion.

The program is now not expected to deliver replacement ships until 2018.

Page's analysis shows that had the government stuck with the original plan, it would have delivered more capable ships to the navy at less cost than what is now projected.

The budget officer's report says one of the factors driving the higher cost is the insistence that the ships be built entirely in Canada, something that runs contrary to the defence practices of many other nations.

Made in Canada shipbulding more expensive

Among Canada's major allies, only the United States and Britain design, build and launch their own warships. Britain, however, is expected to use foreign sources for some future construction.

European countries, notably France and the Netherlands, outsource some of their naval construction to lower-cost builders such as Romania and South Korea.

Building in Canada will come with a cost, one that the government doesn't seem willing to acknowledge, the report suggests.

Liberal defence critic John McKay said the report draws into question the government's often-celebrated national shipbuilding strategy, which promised to deliver at total of 28 warships and coast guard vessels.

"Today's report from the parliamentary budget officer reconfirms this government's fiscal incompetence when it comes to military procurement; incompetence that directly jeopardizes Canadian jobs as well as the capabilities of our navy," he said.

"Huge delays and inaccurate costing estimates have produced this latest failure. While the Conservatives continue to cut ribbons and fund self-promoting publicity stunts, it is increasingly clear that the government has hidden the real cost of this project from Canadians."