Vanguard Magazine

14 AUGUST/SEPTEMBER 2017 www.vanguardcanada.com A CH-146 Grion helicopter lowers a Search and Rescue Techni- cian during a simulated evacuation on the HMCS Fredericton o the coast of Miami, Florida during Exercise SOUTHERN BREEZE on February 14, 2017. Image by: Corporal Gary Calvé Bagotville I INTERVIEW to the CPF to estimate the CSC cost. Some of the heuristics we used were the cost of the ninth ship, 2 per cent inflation a year to account for non-obvious capability, increasing cost linearly with the increase in LSW and power density, inflating at 1.2 per cent above GDP inflation when in program plus 0.4 percentage points between programs, and taking into account tax rate differences between the two programs. The other heuristic-based methodology is based on an idea tak- en from the RAND paper Australia's Naval Shipbuilding Enter- prise. We used the idea of the difference between U.S. and Cana- dian labour rates to convert the cost of building a ship in the U.S. to building it in Canada. This was done by comparing the cost of the ninth ship, using GDP inflation plus 1.2 per cent, using the current U.S./Canadian exchange rate, adjusting the cost for the difference in LSW, and adjusting for the difference in labour costs between the U.S. and Canada. Q: The original budget for the CSC program was $26.2 billion, which based on today's dollar value is not enough. What's the estimation of the total cost to build 15 ships for this program at this current time? It's important to point out that when we state these numbers, these are nominal dollars, or as-spent nominal dollars. The as- spent nominal dollars that we project the cost to be now is $61.82 billion dollars not $26.2 billion. With the $26.2 billion budget, the cost per ship was $1.7 billion in then-year dollars. Today, we estimated that it will cost $4.1 billion in then-year dollars per ship, which is a cost of roughly 2.4 times more than originally bud- geted. Q: So, you are saying $61.82 billion dollars to build 15 ships. If the government should stay within the original budget of $26.2 billion dollars, how many ships could be built? We estimated that they can only build six ships if they were to stay within that budget. Q: Inflation is a critical factor in costing; how did you account for inflation in your report? How was this calculated? There are different inflation factors depending on what you're looking at. For inflation on the government side of things, like government project management, government facilities, and things of that nature, I used the standard GDP inflation, which has been around 2 per cent since the early 1990s. But when it comes down to the ships, we used the inflation rates of the Congressio- nal Budget Office, which is GDP inflation plus 1.2 per cent. Due to the basket of goods used in naval shipbuilding, which are more expensive than the general economy, inflation for those items are at 3.2 per cent. But the most expensive item for inflation is the combat system, which has an inflation rate of 6.5 per cent because of its increasing size and complexity and ability. Q: The PBO report states that Canada would save 25 per cent, or $10.22 billion, if the ships are built at a foreign shipyard using an original ship design rather than in Canada. Can you elaborate further on that? Just to be clear, the numbers we spoke about before are as-spent or nominal value. This one is based on 2017 dollars. If you spent all the money exactly today, the total budget for CSC would be $39.94 billion, not $61.82 billion. So, this $10.22 billion is in real numbers, or you can say 2017 dollars. So two things are driving that cost difference. One, it's built in a foreign shipyard that has already built at least nine of the ships. So they are no longer needing to go through a learning curve. In ad- "Basically, learning curve is the primary challenge. We have not built surface combatants since the finishing of the Halifax frigates in 1996. All that knowledge has been lost; it has to be relearned."

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