Vanguard Magazine

22 AUGUST/SEPTEMBER 2017 www.vanguardcanada.com SHIPBUILDING S 1.13 1.00 Build in Europe Build in Canada Relative cost Relative cost the "Build in Europe" scenario becomes higher by some 13 per cent. A further benefit of a "Build in Cana- da'" strategy is the additional tax revenues that will be collected by the Federal and Provincial governments over the lifetime of the build. From the Canadian Govern- ment's perspective, this could be viewed as a discount on the cost of the build, further reducing the cost of the "Build in Canada'" scenario. Taking this approach, we estimate the overall "Build in Canada'" scenario to be around 29 per cent (at high end of esti- mates) – 42 per cent (at low end of esti- mates) cheaper than the "Build in Europe" scenario. Another important consider- ation is foreign exchange risk: nearly half of the build costs under the "Build in Europe" scenario (45 per cent), in areas such as wages and overheads, would be incurred in foreign currencies rather than Canadian dollars. This adds significant risk for a contractor in the "Build in Europe" scenario which it would look to pass on to the Government of Canada. What if "Build in Europe" cost less? Our results reflect our Base Case cost es- timates. However, they are sensitive to a number of key assumptions such as the productivity of the shipyard and wage rates. Detailed sensitivity analysis can be found in the full report, but to demonstrate the potential effect of different assumptions, we look at the effect of applying Spanish wage rates and productivity (the lowest in Europe and the biggest low end sensitivity in the cost modelling). Using the estimated Spanish wage rates, but keeping all other assumptions con- stant, the estimated costs would be less than the "Build in Canada'" Base Case by some 13-14 per cent. However, the bene- fits would in turn be lower by some 50-80 per cent. This loss of benefits to Canada is estimated to exceed the cost to the Gov- ernment of financing the additional costs of the "Build in Canada'" scenario. Therefore, it is more favourable for Can- ada to "Build in Canada'" as it delivers greater value for money, as reflected in the revised BCRs, which for "Build in Europe" is 0.6-1.3 and for, "Build in Canada," is 1.8-1.9. Other scenarios considered In deciding our comparator scenario, we considered the "Build in Europe" scenario along with two other scenarios: "Joint Canada-South Korea Build" and "Build in USA." The 'Joint Canada-South Korea Build' was ruled out on the basis that any cost savings from using a South Korean ship- yard would be offset by increased costs associated with the added complexity of a two location approach. In addition, to qualify as a supplier for the CSC program, bidders must be from NATO countries or Australia or New Zea- land. The "Build in USA" scenario was rejected because of the limited cost differ- ential between Canada and the USA. This is driven by higher estimated average wage rates in the USA compared to Europe and similar upgrade costs to Halifax to build the 15 ship program for Canada. The Executive Summary of the report: Value for Canada, The cost versus benefit to Canadians of the National Shipbuilding Strategy is reprinted with permission from PricewaterhouseCoopers LLP (PwC). For every CAD $1bn spent on building modern frigates in Canada about 8,000 person years of employment are created. Photo: Irving Shipbuilding Scenario 1 ('Build in Canada') Scenario 2 ('Build in Europe') Cost of build 0.98 1.00 Cost to deliver offset obligation 0.02 0.07 Subtotal 1.00 1.07 Additional financing cost – 0.06 Total cost to build frigates relative 1.00 1.13 Taxes collected (0.48) – (0.56) (0.24) – (0.51) Cost net of taxes 0.44 – 0.52 0.62 – 0.89 Source: PwC analysis Table 1: Comparing the build costs (Base Case indexed costs)

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