Canada's new warships could cost taxpayers $30 billion

31 December 2015 Authored by Consulting.ca

Military spending is set to cost the Canadian tax payer dearly, as the construction price of 15 navy ships has doubled from an initial $14 billion to $30 billion. The cost overrun was found following an audit by independent professional services firm A.T. Kearney. One probable route forward from the budget crunch is to reduce the number of ordered ships.

The Canadian government, in response to continued geopolitical uncertainty and its stake in the increasingly disputed Arctic region, has sought to upgrade its navy. 15 newly designed combat ships were ordered in the late 2000s for a price of $14 billion, as part of a wider navy budget of $26.2 billion. Yet the announced navy budget seems to have been too conservative.

To develop a clearer picture of the total cost of the program, A.T. Kearney was called in to audit the program and develop a projection of total costs. The consulting firm was hired to provide an analysis that examines “the relationship between the project requirements and feasibility, and affordability to provide a solution that allows [the Navy] to fully realize its mission.” The firm’s completed report estimates that it will actually cost $30 billion to build the new warships – $16 billion above budget – pushing the total navy budget to $42 billion.

Canada's new warships could cost taxpayers $30 billion

The cost overrun for the project is the result of a mismatch between expectations, cost, and requirements. There were already initial concerns about the $14 billion agreement when it was agreed to. “We had concerns all along,” said Vice-Admiral Mark Norman, Commander of the Royal Canadian Navy, in an interview with the CBC. “Obviously the concerns were less acute in 2008 and 2009, when the locking-down process, if you will, was fresh, the ink was drying on that. But as we've gone forward, you know, we've had real concerns.”

Concerns about the costs blowout associated with the construction program were further raised in 2013, when the Auditor General of Canada Michael Ferguson warned that there were considerable unknowns involved in the project – including labour and equipment, inflation, and other project uncertainties – raising criticism about the originally decided budget cap of $14 billion.

The cost explosion has been attributed to the fact that the new ships are supposed to be among the most capable in the world. As such, they have many cutting-edge technological requirements that are yet to be developed. Developmental tech costs are hugely expensive and incredibly difficult to estimate, as it is hard to know exactly how much it will cost to create and make feasible a new technology. Even today, the final costs produced by A. T. Kearney remain projections, as the ships are still only in the design phase.

The program was put under pressure by Minister of National Defence Jason Kenney, when he suggested in October that, given budget constraints, the number of ships ordered may need to be lowered to 11. “Based on the expert advice that we received from the Royal Canadian Navy after exhaustive analysis by the Department of Public Works, following the most exhaustive and transparent major procurement process in Canadian government history, we believe it’s possible with a $26 billion budget to build between 11 and 15 surface combatants,” Kenney explained.

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